IRAN - ECONOMICS MINISTRY AND MFA SUPPORT THIRD

C O N F I D E N T I A L BERLIN 002173 SIPDIS SIPDIS, P, T, E, NEA, ISN, EUR, EEB, E.O. 12958: DECL: 12/04/2017 TAGS: KNNP MNUC PARM EFIN ETRD ECON PREL IR EU GM SUBJECT: IRAN - ECONOMICS MINISTRY AND MFA SUPPORT THIRD UNSCR, EU AUTONOMOUS MEASURES, AND FURTHER TRADE CUTS REF: A. BERLIN 2159 ¶B. BERLIN 2157 ¶C. BERLIN 2140 Classified By: EMIN Robert A. Pollard for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY: Senior officials in the German Economics Ministry and in the MFA's Economic Policy Division insist Germany remains committed to a "strong, robust" third UNSCR on Iran. If there is no resolution or a watered-down resolution, Germany is prepared to support autonomous EU measures that would be announced in January. German officials insisted Germany has taken steps to dramatically cut trade with Iran by "drastically" scaling back its Hermes export credit guarantee program and through moral suasion, which they argue is more effective than employing legal mechanisms. END SUMMARY. ¶2. (C) EMIN and EconOff met December 5 with Economics Ministry Deputy Director General for Foreign Economic Policy Michael Kruse and Foreign Trade Law Division Deputy Director Ernst Roeder-Messell and, subsequently, with MFA Director General for Economic Affairs Ruediger von Fritsch and International Economic Policy Division Director Ingo Karsten to discuss German Government reaction to the new U.S. National Intelligence Estimate on Iran, ongoing P5 1 efforts toward a third UNSC resolution, and prospects for EU autonomous measures in advance of a third resolution. ECONOMICS MINISTRY - NO NEED TO CHANGE COURSE ¶3. (C) Kruse stated that the new U.S. National Intelligence Estimate on Iran would have no effect whatever on German policy toward Iran. There is no reason to change the policy, he explained, because the risk has not diminished. "The danger is still there," he said. Chancellor Merkel had met with - and will continue to meet with - the German Federation of Business (BDI) and other industry organizations to impress upon them the ethical and commercial arguments for reducing business ties with Iran. (NOTE: As reported in ref B, Merkel's Chief of Staff Thomas de Maziere is also scheduled to meet December 5 with BDI President Juergen Thumann and E.ON representatives regarding their interest in Iranian LNG. END NOTE.) Kruse stated that German trade with Iran continues to decline dramatically. (NOTE: German statistics for the first three quarters of 2007 indicate an 18 percent decline from 2006. END NOTE.) Kruse argued that there is a statistical delay in the recording of exports, because most of the exports tallied in 2007 trade statistics are based on contracts concluded in 2006 or before; hence, the last quarter numbers may be even lower. ¶4. (C) Kruse told EMIN that key German Government ministries, including the Chancellery, MFA, Economics Ministry, and Finance Ministry, remain committed to a third UNSCR. Kruse stressed that "a strong, robust resolution is essential to send a strong signal from the international community." A third resolution is the most effective way to influence Iran's behavior. If the U.S. and the EU take unilateral action, Kruse argued, Ahmadinejad will simply turn to his "new friends," e.g., China, Russia, and India. Global production chains have made it impossible for a small group of countries to affect trade. In the short-term, unilateral measures might cause harm, but Iran will adjust and find alternate suppliers. Although Iran would receive lower quality products at a higher price, this would play into the hands of the regime, which already began to diversify trade shortly after Ahmadinejad took office in 2006 as part of an effort to make Iran more independent of Western producers. ¶5. (C) Kruse explained that Germany's policy in Iran has been to use commercial ties and political engagement to influence and empower moderate business leaders. He expressed concern that significant trade cuts would result in a loss of political influence in Iran in the long-term. Nevertheless, Kruse said, Germany will support EU autonomous measures if the P5 1 are unable to reach agreement on a third resolution or if the third resolution itself is weak. If the EU does adopt autonomous measures, Kruse suggested, the U.S. and EU should encourage all OECD countries, including Korea and Japan, to adopt similar measures. HERMES EXPORT CREDIT GUARANTEES - A POLICY TOOL ¶6. (C) Turning to export credit guarantees, Kruse argued that abolishing the Hermes program -- a "central tool of Germany's foreign economic policy" -- would result in lost leverage on secondary issues, such as environmental and social standards, which are included as conditions and/or incentives in Hermes credit guarantees. Commercial ties, especially those cultivated by Hermes export credit guarantees, are an effective means of compelling Iran to "play by the international rules" and to fulfill its international obligations and commitments. ¶7. (C) While Germany has already significantly reduced new export credit guarantees and is prepared to go even further, German officials are concerned that Russia, China, and other countries that do not have extensive export credit programs will not encourage positive change in Iran because they will not impose conditions similar to those outlined in Hermes export credit guarantees. Moreover, international abolition of export credit guarantees in a third UNSCR would have an asymmetrical effect on Germany because of the wide and intensive usage that German businesses make of this tool. A more effective measure, he insisted, would be clear international restrictions on specific types of investment or on the export of specific goods and services to Iran. HOW DOES HERMES WORK? ¶8. (C) On the structure of export credits, Dr. Kruse confirmed that German Goverment's total exposure is 5.3 billion Euros (7.7 billion USD),consisting of short, medium and long-term guarantees spread over a maximum 12 years . Losses would be greater in the first years and slowly decline towards the end of the twelve-year period. The total cost to the German Government would amount to roughly 4 billion Euros if all business were lost; the remainder would be covered by the banks and the exporters themselves. Dr. Kruse indicated that depending on the way new sanctions are implemented, the insurance effect will be different due to the complex nature of the different products used and depending on when the liability case occurs (i.e. upon production, delivery, installment, etc.). MFA - GERMANY IS "IGNORING THE BROKEN CHINA" ¶9. (C) MFA Director General for Economic Affairs Ruediger von Fritsch, who has a background in Germany's intelligence community, pointed to Foreign Minister Steinmeier's strong public statement following the NIE's release as a clear indication that Germany remains committed to the P5 1 process. Steinmeier's statement was "the most immediate, far-reaching, positive, and supportive" of the EU-3 countries, he insisted. Germany "ignored the broken china" from the NIE release and came out "immediately, in full support" of a third UNSCR. Von Fritsch asked why the USG decided to release the NIE when it did and suggested it would have been better to consult with "all the major players" before doing so. GERMAN ACTION DEMONSTRATES COMMITMENT ¶10. (C) Von Fritsch said there should be no question that Germany is committed to cutting business ties with Iran. He noted that new Hermes export credit guarantees were cut by 40 percent in 2006 and probably by a similar margin in 2007. He insisted export credit guarantees will go down even further in 2008. Von Fritsch noted that Hermes had not insured the export of any UN/EU-listed goods to any UN/EU-listed entities. In addition to the political reasons for the cuts in Hermes export credit guarantees, von Fritsch said, there is also a practical reason for the decline - German businesses simply do not want to invest in Iran under the current circumstances. ¶11. (C) MFA International Economic Policy Division Director Ingo Karsten said it is not yet possible to provide clear numbers on Hermes export credit guarantees, because the total number of applications and the number of applications approved are not yet available. He did note that total numbers appear to have scaled down dramatically and that no export credit guarantees have been issued for big products or for transactions involving government entities. The purpose of the program, he said, is to help small companies. MFA - HERMES "OVERRATED" ¶12. (C) Von Fritsch argued that the effect and importance of the Hermes program is overrated. The great majority of German exports continues to be conducted on a cash basis, without any government guarantees. He insisted that the Government's "moral suasion" efforts are much more important than using legal mechanisms or technicalities to block trade. Germany has undertaken exceptional steps and has been successful in cutting business ties with Iran. However, he stressed, international diplomacy has only been successful because we have managed to keep China and Russia in board. He hastened to reassure us, however, that in the event a third UNSCR fails to go through due to Chinese and/or Russian opposition, Germany would be prepared to support further EU sanctions against Iran. GERMAN EXPORTERS' PERCEPTIONS OF U.S. TRADE WITH IRAN ¶13. (C) Continued international solidarity is key as we move forward, he said, noting that the German Government remains concerned about perceptions among German companies that U.S. businesses are using third-country subsidiaries and licensing agreements to bypass U.S. sanctions. EMIN explained that any such action by U.S. persons/entities would be a clear violation of U.S. law that could result in criminal and/or civil penalties. EMIN also offered to provide details about pertinent U.S. legislation and recent related law enforcement actions. TIMKEN JR