LESS EXPOSURE IN IRAN: GERMANY DECREASES EXPORT

C O N F I D E N T I A L SECTION 01 OF 02 BERLIN 000335 SIPDIS SIPDIS STATE FOR T, E, ISN/RA, EB/ESC, NEA/IR, EUR/ERA, EUR/AGS E.O. 12958: DECL: 02/16/2017 TAGS: EFIN ETTC GM PREL IR EPET ETRD SUBJECT: LESS EXPOSURE IN IRAN: GERMANY DECREASES EXPORT CREDIT GUARANTEES REF: A. BERLIN 272 ¶B. BERLIN 273 ¶C. BERLIN 274 ¶D. 2006 BERLIN 2593 ¶E. 2006 BERLIN 1495 ¶F. 2006 BERLIN 649 ¶G. 2005 BERLIN 1745 Classified By: Minister-Counselor for Economic Affairs Robert F. Cekuta , for reasons 1.4 (b) and (d) ¶1. (C) Summary: EMIN and Econoff met with Dr. Hans-Joachin Henckel February 12 to discuss Germany's policy regarding export credit guarantees for German companies doing business with Iran. Henckel said official export credit guarantees for 2006 dropped to 900 million euro compared to 1.6 billion euro in 2005. He expects the downward trend to continue in ¶2007. According to Henckel, the tense international political situation has raised costs of doing business in Iran and has made firms more careful about doing business there. He saw no demand for increasing the current level of exposure in Iran. Henckel stated that the German government examines each application thoroughly for export credits to ensure the good will not support Iran's proliferation programs. Since November 2006, German government regulations have added additional criteria, which exporters must follow. Henckel noted the good cooperation between other export credit issuing countries, stating each has become more cautious when issuing credits for projects in Iran. End Summary. -------------- German Exposure in Iran Drops in 2006 -------------- ¶2. (C) Discussing the current state of official export credit guarantees, Henckel said the amount issued by Germany's lending institutions in 2006 was 900 million euros, a drop of over 40 percent from 2005. Henckel said the reason behind the significant decrease was the increased political risk. He noted the OECD decision to drop Iran from category 4 to category 5 last year reflected the international view that Iran's president is a destabilizing force in the region. Henckel said the increased cost of doing business in Iran -- through the rising risk premiums -- and the current political crisis have made the business community more cautious about undertaking new business in Iran. He said banks have no interest in increasing exposure at the current time, and the German government continues to examine each export project carefully. He expects the volume of German export credit guarantees to drop further in 2007, assuming there is no change in Iranian politics. ¶3. (C) Henckel said the criteria for approving export credit guarantee applications remain strict and consider a variety of factors. The good being exported, what its end-use is, and the company's track record with adhering to the list of non-exportable goods all play into whether the government approves the application. The government sends them a "Letter of Awareness" which explains the exact criteria to which exporters must adhere, according to Henckel. He noted that in November 2006, the German government increased the punitive measures associated with violating export regulations. Should German exporters chose to disregard export regulations, they risk losing the coverage provided through the export credits. -------------- Business Reaction -------------- ¶4. (C) Business reaction has been reserved on the tightening of export credit guarantees and efforts to limit commerce with Iran. Henckel stated most of the criticism comes from businesses which have existing business relations with Iran or have only begun conducting business within the last three to four years. He also thought business' criticism stemmed from concern that competitors will take contracts or projects previously held by German companies. Henckel cited Chinese companies as an example, saying the Chinese have no compunctions about financing these same projects/sales. He said the Iranians, instead of looking to Germany as a supplier, are now turning to China for cranes and manufacturing equipment. According to Henckel, the Iranian government has approved this purchasing strategy. BERLIN 00000335 002 OF 002 -------------- Transparency in the Export Credit Market -------------- ¶5. (C) Although there is intense competition among countries issuing export credit guarantees, Henckel said there also is a high level of transparency when deals concern Iran. He said he talks with his counterparts in Italy, Japan, Austria, and Britain about transactions involving Iran. The trend for issuing export credit guarantees to Iran is downward, Henckel said, as none of these countries' export credit agencies want to increase exposure there. TIMKEN JR