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