Identifier
Created
Classification
Origin
08BERLIN1229
2008-09-08 11:19:00
CONFIDENTIAL
Embassy Berlin
Cable title:  

SCENE SETTER FOR TREASURY U/S LEVEY VISIT

Tags:  PREL GM IR AADP 
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VZCZCXRO7549
PP RUEHAG RUEHBC RUEHDE RUEHDIR RUEHKUK RUEHROV
DE RUEHRL #1229/01 2521119
ZNY CCCCC ZZH
P 081119Z SEP 08
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 2107
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCNFRG/FRG COLLECTIVE PRIORITY
RUCNIRA/IRAN COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHNSC/NSC WASHINGTON DC PRIORITY
RUEHDIR/IRAN RPO DUBAI PRIORITY
C O N F I D E N T I A L SECTION 01 OF 03 BERLIN 001229 

SIPDIS
EUR, NEA, T, P, ISN,
TREASURY FOR BURKE AND EDDY

E.O. 12958: DECL: 09/08/2033
TAGS: PREL GM IR AADP
SUBJECT: SCENE SETTER FOR TREASURY U/S LEVEY VISIT

REF: A. BERLIN 1050

B. 07 BERLIN 1450

C. BERLIN 1090

D. BERLIN 772

BERLIN 00001229 001.2 OF 003


Classified By: DCM John Koenig for reasons 1.4 (b) and (d).

C O N F I D E N T I A L SECTION 01 OF 03 BERLIN 001229

SIPDIS
EUR, NEA, T, P, ISN,
TREASURY FOR BURKE AND EDDY

E.O. 12958: DECL: 09/08/2033
TAGS: PREL GM IR AADP
SUBJECT: SCENE SETTER FOR TREASURY U/S LEVEY VISIT

REF: A. BERLIN 1050

B. 07 BERLIN 1450

C. BERLIN 1090

D. BERLIN 772

BERLIN 00001229 001.2 OF 003


Classified By: DCM John Koenig for reasons 1.4 (b) and (d).


1. (C) SUMMARY: Your visit to Germany September 11-12 is
well-timed. Your key interlocutors are now back from summer
vacation and attending to the implementation of the EU's
August 8th Common Position. Following Iran's failure to
respond to the refreshed P5 1 incentive package, EU
discussions are also underway regarding next steps. Your
visit provides a key opportunity for a candid discussion with
German officials to address and dispel their misperceptions
about U.S. trade with Iran, a topic receiving broad media
coverage over the last six months.


2. (C) SUMMARY (CONT.): We fully expect your German
interlocutors to raise media and industry assertions that
U.S. exports to Iran are growing, as well as Iran's ability
to import products from U.S. companies via foreign
subsidiaries and/or third countries. It may be helpful to
counter these criticisms by focusing on the following points:

--U.S. efforts thus far to curtail trade not exempted by the
Trade Sanctions Reform and Export Enhancement Act (TSRA);

--Examples of significant U.S. OFAC violation investigations,
prosecutions and convictions;

--Information of U.S. efforts to cooperate with Gulf States
and other states on exercising vigilance to prevent the
re-exportation of U.S. goods to Iran;

--Details of U.S. efforts to inform U.S. companies of
reputational risks stemming from their subsidiaries' and
affiliates' business relationships with Iranian entities;
and

--An explanation of the process of issuing an Executive Order
to designate entities of proliferation or terrorist concern.


Proactively sharing such information could help render moot
Germany's accusations that the stated U.S. policy of limiting
exports to Iran and media and industry reports appear to
diverge. END SUMMARY



3. (C) Following the traditional August lull, which had been
interrupted at senior levels by the Georgia-Russia conflict,
German government interlocutors will be returning to the Iran

question. Your interlocutors will likely tout the EU4's
(Germany, France, the UK, and Italy) success in pushing
through the EU Common Position on UNSCR 1803 and will be
seeking USG views on future UNSC action. Iran's failure to
respond to the P5 1's incentive package may have sobered some
German officials who had hoped for movement on the Iranian
side and shored up their resolve to increase pressure on
Iran; on August 8th, Foreign Minister Steinmeier issued a
statement calling Iran's response to the P5 1 offer
"insufficient", adding that while Germany and the P5 1 are
committed to a negotiated solution with
Iran, "should Iran not accept this, the UNSC will have to
address this issue again."

--------------
German Business Ties With Iran
--------------


4. (C) While overall German trade with Iran has decreased
over the last two years, recent statistics indicate that
trade is ticking back upwards. In the first half of 2008,
German exports to Iran increased 14% over the same period in
2007; sectors driving this trend are the machine tools
industry and, to a lesser extent, the sale of full assembly
plants. A senior Economic Ministry official told us August 27
that he considered it "quite possible" that German exports to
Iran would increase throughout 2008 and exceed 2007 levels,
but downplayed the growth compared to other countries. He
noted that when French officials delivered a demarche on a
German company's recent sale of natural gas to liquid
technology to Iran, (Ref A),he took great pleasure in
informing them that French exports to Iran had risen 31% in

BERLIN 00001229 002.2 OF 003


the first five months of 2008, whereas the rise in German
exports was below the EU average of 16%.


5. (C) On export credit insurance, the German government is
slowly reducing its Hermes export credit insurance exposure
but remains concerned that Iran could default on Germany's
approximately five billion Euro exposure, leaving German
taxpayers holding the bag. A senior Economics Ministry told
us August 27 that while export credit guarantees are trending
downward, decreasing approximately 10% since 2006, the
government is willing to occasionally offer export guarantees
on ongoing projects, up to 50% of the project's value and not
to exceed seven million Euros per project, as a means of
ensuring that the Iranians do not default. The official
added that German businesses are less interested than before
in export guarantee credits because their Iranian customers
now come to the table armed with cash.


6. (C) Large German companies are also exercising more due
diligence in their exports to Iran. Contacts at the German
export control agency BAFA have reported the 60 percent
increase in inquiries from exporters and banks over the past
four years is almost entirely Iran-related. Many German
companies now submit proposed exports destined for Iran to
BAFA for review to ensure the project violates no export
control laws or sanctions regimes. We are also told that
BAFA's processing has slowed intentionally, in an effort to
slow down business deals with Iran. Naturally, BAFA has not
advertised this fact.

--------------
Banking
--------------


7. (C) In the banking sector, Deutsche, Dresdner, and
Commerz Bank have all withdrawn from the Iranian market. We
welcome this, but remain concerned about second-tier
Germany-based banks, most importantly the Hamburg-based,
German-incorporated but fully Iranian-owned
Europaeisch-iranische Handelsbank (EIHB). A German-Iranian
businessman told us that EIHB's continued presence in the
market is viewed as a loophole the EU and U.S. governments
intentionally left open to allow some trade with Iran to
continue. German financial regulators assure us they are
closely monitoring EIHB; in addition, government officials
are willing to undertake a "fit and proper" review of EIHB if
presented with evidence that the assets of EIHB's largest
shareholder, Bank Mellat, were derived from
proliferation-related activities.

--------------
Challenges Ahead for Germany
--------------


8. (C) As we enter the next phase of UN and EU discussions
on further actions against Iran, we face three challenges in
moving forward with the Germans. First, while the German
government claims that its moral suasion efforts have
influenced large German companies to reconsider their Iranian
ties, small and medium-sized German enterprises (SME),many
of which have business relations with Iran
spanning decades, continue their dealings with Iran,
including in energy-related projects. The July
announcement of Germany-based Steiner-Prematechnik-Gastec's
100 million Euro deal with Iran cast a spotlight on how
arguments of reputational and prudential risk in dealing with
Iran often fall on deaf ears at medium-sized enterprises.
(Ref A and D)



9. (C) German government officials have tried to maintain
their moral suasion pressure, particularly following domestic
and international uproar over the Steiner deal, when a senior
Chancellery spokesman told a press conference that German
firms should consider moral, as well as legal, considerations
before making such deals. "The government is expecting some
sensitivity from businesses," said the
spokesman. (Ref C) Senior Chancellery and Ministry of
Economics officials have informed us that the Chancellor has
told Germany's large industrial exporters that they ought not
to be making deals which would contribute to Iran's LNG
capacity. Nevertheless, contacts have repeatedly told us
that there is no legal basis within the German legal system
to enforce such calls. German interlocutors have told us
that only two options will give German officials the legal

BERLIN 00001229 003.2 OF 003


basis to halt such trade: either legally binding decisions by
the EU or UN or the expansion of Germany's export control
list. The time may have come for Germany to think more
creatively -- and nationally -- about how to execute its Iran
policy. Up until now, U.S. efforts to encourage Germany to
act unilaterally to reduce trade with Iran have been resisted
by Germany government officials. In addition to legal
impediments, the common thread running through their position
is a fear that, if Germany were to act unilaterally, German
companies would
lose, perhaps permanently, business relationships and
opportunities to their European, Indian and Chinese
competition. As France and perhaps others consider more
far-reaching national measures, and against the background of
divergent opinions in the EU and Russia's potential spoiler
role in the UNSC, Germany should reexamine its capacity for
concerted action with key allies on a national (vice
multilateral) basis.


10. (C) A second challenge for the German government will be
to respond to the increasing pressure and criticism exerted
by German media and industry representatives that Germany's
actions on Iran are going "far beyond" what other countries
are doing on Iran. Both the presence of U.S. products on
Iranian markets, as well as the growing U.S. trade
relationship with Iran in humanitarian goods, feature
prominently in industry and media arguments and have become
an excuse for German companies to continue their own
"business as usual." These arguments have begun to gain
traction among mid-level government contacts: whereas
government interlocutors previously cited industry or media
reports indirectly, some have now taken these arguments as
their own when we raise our concerns about Iran.
Nonetheless, German officials are still willing to challenge
these misperceptions in their conversations with industry and
media; a Finance Ministry official recently told us that he
needed (and, more importantly, is willing
to use) better talking points from the U.S. explaining our
trade with Iran in order to deflect the constant criticism
from industry and the media.


11. (C) Finally, the Iranian government has gone on the
offensive to entice German companies to remain in the Iranian
market, demonstrated most recently by Iranian Deputy Foreign
Minister Mehdi Safari's declaration to a German business
newspaper that Iran is open for business and willing to offer
German companies, particularly SMEs, guarantees for their
investments. He called on German companies to conduct their
business deals in private and away from public attention:
"you can do the job without
advertising." Recent visits to Germany by Iranian officials,
including Safari and Iranian Chamber of Commerce chief
Mohammed Nahaviandian, have also increasingly focused on
shoring up German-Iranian trade. We expect this commercial
diplomacy to continue and we must encourage Germany to rise
above these temptations.
TIMKEN JR