Identifier
Created
Classification
Origin
07BERLIN2007
2007-11-02 10:56:00
CONFIDENTIAL
Embassy Berlin
Cable title:  

GERMANY DRYING OUT TRADE WITH IRAN THROUGH

Tags:  EFIN ETRD EPET ETTC KNNP PREL IR GM 
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VZCZCXRO6410
RR RUEHAG RUEHBC RUEHDE RUEHDIR RUEHKUK RUEHROV
DE RUEHRL #2007/01 3061056
ZNY CCCCC ZZH
R 021056Z NOV 07 ZDK
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC 9675
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNFRG/FRG COLLECTIVE
RUCNIRA/IRAN COLLECTIVE
RHEHAAA/WHITE HOUSE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
C O N F I D E N T I A L SECTION 01 OF 03 BERLIN 002007 

SIPDIS

SIPDIS
PLEASE PASS TO JAMES JEFFREY AND EMILY HARDING AT NSC;
LKOHLER AT TREASURY

E.O. 12958: DECL: 11/02/2017
TAGS: EFIN ETRD EPET ETTC KNNP PREL IR GM
SUBJECT: GERMANY DRYING OUT TRADE WITH IRAN THROUGH
BUREAUCRATIC MEANS

REF: BERLIN 01745

Classified By: Acting DCM Robert A. Pollard FOR REASONS: 1.4 (B) AND (D
)

C O N F I D E N T I A L SECTION 01 OF 03 BERLIN 002007

SIPDIS

SIPDIS
PLEASE PASS TO JAMES JEFFREY AND EMILY HARDING AT NSC;
LKOHLER AT TREASURY

E.O. 12958: DECL: 11/02/2017
TAGS: EFIN ETRD EPET ETTC KNNP PREL IR GM
SUBJECT: GERMANY DRYING OUT TRADE WITH IRAN THROUGH
BUREAUCRATIC MEANS

REF: BERLIN 01745

Classified By: Acting DCM Robert A. Pollard FOR REASONS: 1.4 (B) AND (D
)


1. (C) Summary: Due to the German government's quiet
tightening of export controls and credit guarantees,
increased political risk, and banks' market withdrawals,
Germany's exports to Iran have markedly fallen. Iranian
purges of state-owned companies and regulators and rising
extortion and bureaucracy have increased the perception of
political risk and curtailed German business activity as
well. Small and medium-sized enterprises, many of whom have
had business dealings with Iran for decades, account for the
majority of the remaining exports. German energy companies
are exploring new sources of natural gas rather than
continuing to invest in Iran. German industry voices
frustration that unilaterally cutting "legitimate" business
ties with Iran -- without reciprocal action by other major
exporters -- would not achieve desired modifications in
Iranian behavior and would also permit companies in China,
Russia and elsewhere to fill the vacuum. The government is
quietly making trade with Iran so costly that many German
exporters are simply walking away. End summary.

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No Longer Germany's Biggest Middle East Export Market
-------------- --------------


2. (SBU) From 2000 to 2005, German exports to Iran more than
doubled from 1.57 billion to 4.37 billion euros, making it
Germany's largest trading partner in the Middle East.
However, in 2006 both the United Arab Emirates (5.41 billion)
and Saudi Arabia (4.65 billion) surpassed Iran (4.12 billion)
as destinations for German exports. Following the first
round of UN Security Council sanctions, the reduction in
exports deepened. The German Statistical Office's figures
for the first half of 2007 show an 18 percent decline
year-over-year from the first half of 2006. As German export

credit institutions, banks and companies continue scaling
back their transactions involving Iran during the remainder
of the year, observers expect exports to fall up to 30
percent on an annualized basis.


3. (SBU) In the first half of 2007, machinery (31 percent),
iron products and chemical products (15 percent each),and
transport vehicles and their related parts and electrical
engineering products (7 percent each) accounted for the bulk
of German exports to Iran.


4. (SBU) Meanwhile, Iranian exports to Germany totaled 225
million euros in the first half of 2007 -- most of it
low-tech stuff. Among the top categories were agricultural
products and meat (28 percent),textiles (18 percent),
nutritional products (13 percent),iron products (11 percent)
and chemical products (8 percent). Interestingly, Germany's
imports of crude oil, natural gas and services related to its
extraction only accounted for 6 million euros in the first
half of 2007.

--------------
Cloudy Investment Picture
--------------


5. (C) Ministry of Economics and industry officials reported
little new investment in Iran and implied that a major German
auto manufacturer had withdrawn from Iran. "Investment is
weak, and the statistics on investment are weak," said
Juergen Friedrich, the Ministry's Office Director for North
Africa, the Near and Middle East and former head of Germany's
trade mission in Dubai. The Ministry of Economics cited 2004
figures as the most recent available showing Iranian
investments of only $50 million in Germany and German
investments of $700-$800 million in Iran. Felix Neugart,
Director of North Africa and Middle East for the German
Chamber of Industry and Commerce (DIHK),said that despite
significant investments related to petrochemicals and other
energy-related assets in the recent past, he knew of no new
investments in this field. A Ministry of Foreign Affairs
policymaker confirmed that, like business people, German
officials are concerned about the Chinese and Indians locking
in long-term contracts for Iranian gas and requested that the
USG discourage Indian investment in this sector.

--------------
Tightening Screws and Moral Suasion

BERLIN 00002007 002 OF 003


--------------


6. (C) Federal Chancellery officials say policy adjustments
and advocacy are discouraging German business dealings with
Iran. Credit guarantees, which serve as insurance against
non-payment rather than as loans, had historically
facilitated Germany's boom in exports to Iran, particularly
for large export contracts and capital goods such as large
machinery or industrial plant construction. In an October 30
meeting, Chancellery officials told EmbOffs that Euler Hermes
Kreditversicherungs-AG, Germany's primary export credit
institution, raised the cost of credit guarantees by 30
percent in line with a political decision. Hermes'
Iran-related insurance policies carry outstanding liabilities
of roughly 5 billion euros. However, Chancellery officials
added that applications are dropping off, the German
government is refusing more applications and "no fresh money
is being added" into the credit guarantee pool. Dirk
Rotenberg, Counselor for Export Credits and Investment
Guarantees at the Ministry of Foreign Affairs, told EconOff
separately that Hermes insurance now covers no more than
one-third of German exports, and he predicts that only 400 to
500 million euros of exports will be covered in 2007 compared
to just under 1 billion euros in 2006.


7. (C) Rotenberg also noted that German officials fear that
the Iranian government could answer a complete cutoff of
credit guarantees by directing Iranians firms not to repay
German exporters. In that case, German taxpayers would be
stuck with the bill. He argued that for Germany to
unilaterally eliminate credit guarantees would have little
effect as the exports are not prohibited under any sanctions
regime and other European countries also offer credit
guarantees.


8. (C) Federal Chancellery officials argue that Chancellor
Merkel's speech to the UN General Assembly unambiguously
signaled industry leaders that the German government
discourages trade with and investment in Iran. "Asked if we
would support investment, we would say no," said Geza Andreas
von Geyr, the Head of the Chancellery's Security Policy and
Arms Control. "(Business leaders),of course, see that the
political frame has changed." Von Geyr indicated that
government officials had undertaken high-level talks to
directly discourage German industry from investing in Iran.


-------------- --------------
Firms Ask for Legal Certainty; Government "Dries Out" Trade
-------------- --------------


9. (SBU) Jens Nagel, Managing Director of the Federation of
German Wholesale and Foreign Trade (BGA),said the German
government had not attempted to dissuade industry from legal
trade or investments but had delayed export permits, cut
export credit guarantees and increased customs controls "to
dry out trade with Iran through bureaucratic means." "Some
companies are talking about the boycott through the back
door," he said. Scaling back "civilian" trade that violates
no sanctions regime would mostly hurt small and medium
enterprises who cannot easily develop new markets, he said.
Although he acknowledged that exporters oppose an
across-the-board trade embargo and believe they are
unjustifiably losing business to Chinese and other firms, he
said they will comply with multilateral sanctions and would
prefer legal certainty rather than enduring insinuations of
wrongdoing or possible negative fallout.


10. (SBU) Economics Ministry officials took a similar
position, expressing a preference for multilateral sanctions
over unilateral or autonomous EU sanctions. The latter, they
argue, would not achieve effective results because Chinese
and Russian firms would quickly fill the void. He added that
companies trading with Iran believe sanctions will only
radicalize the population. Neugart echoed the call for legal
certainty, saying it was dangerous for the German government
to offer "informal guidance" because commerce depends on
clear rules.


11. (SBU) Neugart, as well as Economics Ministry officials,
noted that exporter inquiries quickly overwhelmed staff at
Germany's export licensing office (BAFA) following the
adoption of EU regulations implementing UNSCR 1747. German
exporters expressed concern about ambiguity surrounding EU
"catch-all" controls governing exports to Iran and asked BAFA
for definitive rulings on whether the new regulations would

BERLIN 00002007 003 OF 003


still permit them to export a wide range of consumer goods to
Iran.

--------------
Comment
--------------


12. (C) Growing trade between Germany and other nations in
the Middle East make it difficult to know how much
re-exportation from third countries may have softened the
blow of reduced direct trade. Questions remain about
Germany's long-term investments in Iran, its shifting picture
on natural gas sources and the activities of leading
companies who secured large state contracts and built up
Iran's industrial base as recently as 2005. Industry regards
USG's call for an end to business as usual with Iran as
placing a cloud over legitimate "civilian" trade.


TIMKEN JR