SCENE SETTER FOR TREASURY U/S LEVEY VISIT

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