IRAN/GERMANY - MINISTRIES FOLLOWING CHANCELLOR

C O N F I D E N T I A L SECTION 01 OF 03 BERLIN 002083

SIPDIS

SIPDIS, P, T, E, ISN, NEA, EUR, EEB

E.O. 12958: DECL: 11/15/2017
TAGS: PREL ECON EFIN KNNP MNUC ETRD PGOV IR GM
SUBJECT: IRAN/GERMANY - MINISTRIES FOLLOWING CHANCELLOR
MERKEL'S LEAD

REF: A. BERLIN 2077


B. BERLIN 2037

C. BERLIN 2007

Classified By: Charge d'Affaires John M. Koenig for
reasons 1.4 (b) and (d).


1. (C) SUMMARY: German Government officials in the MFA,
Economics Ministry, and Finance Ministry have taken note of
Chancellor Merkel's strong public statements in support of a
third UNSCR resolution and renewed efforts to encourage
German business to cut or curtail ties with Iran following
last week's meetings with President Bush and French President
Sarkozy. While officials from these ministries fully intend
to follow the Chancellor's lead, they confide that the
Chancellery has yet to issue formal marching orders or
provide a blueprint for any new initiatives. Economics
Ministry officials indicate press reporting on potential next
steps is, for the most part, accurate. The German Government
will likely target high-tech, machine engineering, and power
plant construction industries. While the Chancellery and the
MFA agree on the big picture, the MFA continues to resist
bold public action in advance of a third UNSCR. END SUMMARY.


2. (C) Following the November 9-10 U.S.-Germany Summit in
Crawford and the November 12 French-German Ministerial
Council meeting, we have engaged German Government contacts
in the Economics Ministry, Finance Ministry, and MFA. While
all indicate they have heeded the strong tone of Chancellor's
public call for a third UNSCR and further cuts to business
ties, most admit they are still waiting for guidance from the
Chancellery on next steps. (COMMENT: We, too, await replies
from Chancellery contacts to similar queries. END COMMENT.)
Most also admit they are not aware of any new German
Government initiatives - contrary to reporting in the German
and international press - to pressure German exporters. Most
insist that Chancellor Merkel's strong public statements are
consistent with the Government's "informal, low-key" efforts
already underway to urge business to lower their exposure and
cut business ties. Still, they acknowledge, the assertive
tone of Merkel's public remarks has sent a strong signal to
Iran and to the German business community that now is not the
time for "business as usual" with Iran. (NOTE: Comments by
most interlocutors were made largely before the release of
IAEA DG ElBaradei's report on the Iranian nuclear program.
Ref A describes German reaction to the DG's report. END
NOTE.)

MFA ECONOMIC DIVISION: MERKEL'S TONE CONSISTENT WITH EFFORTS
UNDERWAY


3. (C) In a November 15 discussion with EMIN, MFA Director
General for Economic Affairs Ruediger von Fritsch reiterated
the German position that no EU country has done as much as
Germany to impose sanctions on Iran. Germany pushed this
issue during its EU presidency, he said, and played a key
role in the development of sanctions implementing measures
that went far beyond UNSCRs 1737 and 1747. He noted
bilateral trade is down 18 percent (albeit from an all-time
high in 2005). In the meantime, Ingo Karsten, MFA's chief of
the international economic policy division, added, Germany
had cut its HERMES export credit guarantees from about 500
million Euros per year "to the single digits" (i.e., less
than 10 million Euros). Germany is committed to keeping Iran
from developing nuclear weapons, von Fritsch noted, but it is
also very cognizant of the price German industry is paying.
He speculated that much of the future effort to curtail
business with Iran would focus on technology-related exports,
a measure that would disproportionately affect Germany's
small-and-medium sized companies ("Mittelstand"),which up to
now had faced less government scrutiny than the big firms.


4. (C) Nonetheless, von Fritsch contended, the most important
aspects of any sanctions must be international unity. It
makes no sense for Germany to curtail its ties only to see
Chinese companies step into the market. In order to be most
effective, sanctions must focus on trade that cannot readily
be substituted.


5. (C) In a November 15 conversation, MFA International
Economic Policy Desk Officer Claudia Schuett told Econoff
that Merkel's strong statements were consistent with an
ongoing effort long underway to encourage business to cut
ties with Iran. While unaware of any specific, new
initiatives toward that end, Schuett said, the fact that
Merkel made such a strong, public statement was itself
noteworthy and represents a slight departure from the
"low-key, informal" approach taken thus far (see ref C). The

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public statement, Schuett said, sent a strong signal to
German exporters and to the regime in Iran that this is not
the time for, in her words, "business as usual."


6. (C) As for additional formal and informal measures by EU
member states, Schuett said that the German Government still
hopes to convince China and Russia to agree to more than a
"watered down" UNSCR but, regardless of the outcome, the EU
is prepared to go beyond UN sanctions. Regarding a November
15 Financial Times article quoting unnamed German legislators
on a German plan to work with France, the UK, Italy, Austria,
and Spain to urge European exporters to cut business ties,
Schuett said the MFA has not been party - at least not at the
working level - to such discussions.

MFA NONPROLIFERATION DIVISION NOTICES CHANGE IN TONE


7. (C) A working level contact in the MFA Non-Proliferation
section told Poloff November 14 that Merkel's comments in
Crawford and on November 12 with Sarkozy were quite clear,
and that his section (and the MFA at large) had taken note of
this change in tone. When asked if the German Government was
unified on its Iran policy, the contact admitted there were
differing opinions, and commented that leadership in the
Chancellery had done a poor job of giving a "heads up" to the
MFA in anticipation of Merkel's more forward-leaning
statements.

ECONOMICS MINISTRY WAITING FOR GUIDANCE


8. (C) Bernard Schroeder of the Ministry of Economics
Division for North Africa, Near and Middle East, said his
Ministry is still seeking instructions from the Chancellery
on what if any actions Merkel's comments in Crawford imply.
He indicated he had seen the November 15 FT article and said
he too was trying to ascertain its accuracy. He thought more
details may come in Chancellor Merkel's upcoming address to
the German Federation of Industries (BDI) in the near future.


9. (C) Although Germany's large exporters may find
withdrawing from Iran "a little bitter," they can absorb the
loss of the Iranian market without too much difficulty,
Schroeder said. In contrast, medium-size companies producing
small machinery, machine tools, and similar goods are highly
specialized in their trade with Iran and would not be able to
quickly develop alternative markets. He also indicated that
the German government would likely target high-tech fields,
as well as machine engineering, tunneling, and power plant
construction sections. He ruled out the possibility that
Germany would target all trade, citing humanitarian concerns.


10. (C) What remains unclear, Schroeder said, is how the
German government would tighten trade further. Decisions
were taken six months ago not to extend HERMES export credit
guarantees in a way that would further increase Germany's
overall liabilities. German authorities set a ceiling for
issuing no more than 50 million Euros in credit guarantees
during Q4 2007, even though they expect roughly 100 million
Euros in payments from the Iranians this quarter. So far
receiving payments from the Iranians has not been a problem.
However, if Iranian companies do not pay on the outstanding
liabilities of 5.5 billion Euros, it "will be very difficult
for us." Schroeder said he knows of no other legal means by
which the German government could further discourage trade
because companies will argue such commerce is not prohibited.
He was uncertain if further steps would require EU action or
could be done solely on the national level.


11. (C) Schroeder said Germany still views Iran as a market
of the future because Germany needs the energy. Germany is
very concerned about China moving into this market to capture
the energy there and said the Chinese and Koreans "know how
to deal with the Iranians." He said China is bartering
machines and building plants with Iran in exchange for gas
and oil. Upon delivery, China receives a voucher that it can
submit to an Iranian oil producer. This system eliminates
the need for a banking presence in Iran and will enable China
to avoid the consequences of any more banks being listed in a
third round of sanctions, he said. He also noted that an
Iran-China bank recently opened in Beijing to process
payments from Iran.

FINANCE MINISTRY: MERKEL SETS THE TONE


12. (C) Finance Ministry Terrorism Finance/Money Laundering
Division Director Michael Findeisen told Econoff November 13
that, on the basis of "new signals" from the Chancellery, it
was clear the German Government would support another round

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of EU sanctions, regardless of whether or not there is a
third UNSCR. If there is no third UNSCR, Merkel and Sarkozy
were agreed on the need to push for autonomous EU sanctions.
Even if there is a third resolution, Findeisen said, EU
implementing measures will again go beyond the scope of that
UNSCR, only this time they would be announced "nearly
simultaneously."


13. (C) Similarly, Findeisen said, German Government internal
chatter reveals a growing consensus that Merkel has decided
on a course of action and that ministries will have to follow
her lead. Findeisen did indicate the MFA thought only weeks
ago that it had succeeded in setting forth a clear,
integrated government position on the need for sanctions in
the UN framework, but this, Findeisen said, "has changed."
He alluded to ongoing "quarrels" (not on the big picture,
only on the details) between the Chancellery and the MFA.

KOENIG