VZCZCXRO6177
PP RUEHAG RUEHBC RUEHDE RUEHKUK
DE RUEHRL #1495/01 1531412
ZNY CCCCC ZZH
P 021412Z JUN 06
FM AMEMBASSY BERLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 3408
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUCNFRG/FRG COLLECTIVE PRIORITY
RUCNIRA/IRAN COLLECTIVE PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 BERLIN 001495 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR T, ISN/RA, EB/ESC, NEA/IR, EUR/ERA, EUR/AGS 
 
E.O. 12958: DECL: 05/29/2016 
TAGS: ECON EPET ETRD ETTC GM MNUC PREL IR
SUBJECT: GERMAN-IRAN TRADE: CHILL IN THE AIR 
 
REF: A. 05 STATE 1745 
     ¶B. STATE 206 
     ¶C. STATE 649 
 
Classified By: ECON Minister-Counselor Robert F. Cekuta for reasons 1.4 
(b) and (d) 
 
¶1. (C) Summary: Increased international pressure on Iran to 
halt its uranium enrichment activities may already be 
affecting Germany's trade with Iran, despite record numbers 
for 2005.  Germany enjoys a substantial trade surplus with 
Iran, but officials and business people report German 
businesses are reluctant to sign long-term export contracts, 
despite the willingness of Iranian companies to pay up-front 
for many goods, due to the uncertain prospects of the 
economic environment and recent Iranian government 
anti-foreign business actions.  Officials stress any new 
sanctions against Iran must be done multilaterally, but at 
the same time they express concerns some states may avoid 
joining sanctions efforts.  German officials also repeatedly 
state the Government closely controls sensitive exports to 
prevent Iranian entities from obtaining militarily useful 
commodities, including dual-use items for WMD programs.  End 
Summary 
 
--------------------------------------------- --------------- 
2005 Record Year for Germany-Iran Trade...but end of the 
"good times"? 
--------------------------------------------- --------------- 
 
¶2. (C) Germany and Iran enjoyed a record year for trade in 
¶2005.  German exports to Iran totaled over 4.42 billion euro 
for 2005, an increase of 24% over 2004.  Since 1999, German 
exports to Iran have grown an average of 26% year-on-year. 
Machine tools (26.9%), made-to-order assembly plants (10.7%), 
and automobiles and spare parts (14.8%) comprised the 
majority of German exported goods.  Other exports included 
chemical products, electronic goods, and steel products, 
particularly large pipes.  The sectors that experienced 
significant year-on-year growth since 2002 were made-to-order 
assembly plants (61% average growth), steel products (66% 
average growth), automobiles (40% average growth), and 
electronic goods (23% average growth).  Despite these 
figures, Klaus Ranner, the German MFA Office Director of the 
Task Force for External Business Promotion, noted German 
exports to Iran in 2005 still only amounted to 0.6% of total 
German exports.  Iranian exports to Germany totaled 462 
million euro in 2005, most of which consisted of oil imports 
worth 123.5 million euro.  Not surprisingly, the value of oil 
imports from Iran has increased sharply since 2003, rising 
from 4.3 million euro to 123.5 million euro worth of crude 
oil in 2005.  Oil from Iran, however, represented less than 
1% of total oil imports for Germany in 2005.  Other imports 
from Iran were fruits, dried fruits, and nuts, with a value 
of 100 million euros. 
 
¶3. (C) Despite the record export numbers, German officials 
are quick to point out the majority of the trade occurred 
before September 2005, i.e., when President Ahmadinejad 
became Iran's President.  Since then, trade between the two 
countries has decreased.  Ministry of Economics and 
Technology's Deputy Director of North Africa and Middle East 
Affairs, Torsten Kollberg, noted exports to Iran have 
experienced a "significant decrease" since last fall, with 
trade already down 6% for the first quarter of 2006.  Given 
the currently tense situation surrounding Iran, he did not 
foresee exports recovering this year, noting German companies 
would be fortunate to reach 2005 levels. 
 
--------------------------------------------- --------------- 
New Iranian Government, German Angst Negatively Affecting 
Trade 
--------------------------------------------- --------------- 
 
¶4. (C) German government officials and the business community 
attribute the decrease in trade to growing German reluctance 
to enter into long-term contracts with Iranian customers due 
to the current tensions over Iran's nuclear programs and 
efforts on the part of the Ahmadinejad government to make 
business transactions costlier and more difficult for Western 
firms.  Klaus Friedrich, who handles export controls at 
Germany's Engineering Federation (VDMA), noted that when 
Ahmadinejad came to power, he replaced many of the senior 
business advisors with whom German businesspeople had 
developed good working relations.  He attributed the drop in 
German contracts since Fall 2005 to this personnel shakeup in 
Iran.  Kollberg noted there have been no recent trade 
delegations nor are any currently planned.  He acknowledged 
there had been plans for a state-led delegation from Bavaria 
 
BERLIN 00001495  002 OF 003 
 
 
last winter, but the Bavarian Economic Minister Huber 
indefinitely postponed the trip. (Note: Consulate General 
Munich had pressured the Bavarian government to turn mission 
off.  End Note).  Kollberg also pointed to a recently enacted 
Iranian law that would levy a 30% tax on foreign workers 
employed by foreign companies in Iran, leading him to 
speculate the Iranian government might be rethinking its 
prior business relationship with foreign companies.  This law 
would particularly affect German companies involved in the 
expansion of the petrochemical industry as well as companies 
that create assembly plants for the Iranian market.  These 
companies send Germans to Iran to assist in initial 
construction and implementation phases of the projects and 
teach Iranians how to run the plants. 
 
¶5. (C) An important factor increasing Germany's exports to 
emerging markets, such as Iran, has been export credit 
guarantees.  Germany's federal government backed over 4 
billion euros of export credits to Iran in 2005, a 74% 
percent increase from 2004.  The OECD, which Euler Hermes 
Kreditversicherungs-AG and PwC Deutsche Revision AG, 
Germany's export credit lending institutions, use to 
determine its export credit lending policies, recently 
downgraded Iran from risk category four to five. (Note: A 
rating of seven represents the lowest grade and highest level 
of risk.  End Note).  The German Ministry of Foreign Affairs 
supported and encouraged the OECD's move, according to MFA 
State Secretary Georg Boomgaarden.  Following the OECD 
downgrading of Iran, the insurance costs for export credit 
guarantees will increase correspondingly, these officials 
said.  The increase will lead the German federal inter-agency 
committee that rules on the guarantees to scrutinize projects 
more carefully and raise the threshold of granting credit 
guarantees. 
 
¶6. (C) This downgrading of Iran's credit risk worthiness 
could hinder German exports, according to MFA and Ministry of 
Economics officials.  However, at the same time Iran's 
excellent credit rating and ability to pay in advance for 
many products, including ones for large infrastructure 
projects, could mitigate the effect of the greater risk 
rating.  Michael Pfeiffer, head of the International Division 
at the German Chamber of Commerce believes the recent 
downgrade in risk assessment is more symbolic, with little 
actual affect on business decisions.  Pfeiffer noted Iranian 
businesses, particularly in the cash-rich petrochemical 
industry, are willing to pay in advance for many export 
goods.  Still, German businesses remain reluctant to enter 
into any new long-term agreements.  (Comment: In addition to 
the petroleum-derived revenue paying for German exports, use 
of German financial institutions for Iranian business 
continues to be a concern for Germany.  Leading German banks 
recently emphasized the need for caution when dealing with 
transactions that involve Iran.  However, they were hesitant 
to cease what they consider legitimate activities, i.e., 
issuing letters of credit for small and medium size companies 
doing business in Iran.  End Comment). 
 
--------------------------------------------- -- 
Sanctions: Potential Effects on German Business 
--------------------------------------------- -- 
 
¶7. (C) Working-level German government officials were 
hesitant to discuss types of sanctions that could be applied, 
noting that thinking on the issue has gone no further than 
sanctions that would be focused on nuclear technology and 
defense equipment.  Christof Wegner at the Ministry of 
Economics said sanctions probably would be targeted at the 
Iranian regime instead of the populace.  He commented that 
Germany is afraid broad sanctions might rally the population 
around the otherwise unpopular government.  Business 
representatives also questioned the effectiveness of economic 
sanctions, noting that unless an internationally unified 
front could be maintained, other countries -- with less 
stringent export controls or which are outside the OECD, for 
instance -- would replace Germany in exporting to Iran. 
German government officials noted that the free trade zone in 
the UAE could present a particular challenge in controlling 
German goods entering Iran.  The UAE is Germany's second 
largest trading partner in the region.  German officials and 
business officials did not deny that a portion of German 
exports to the UAE were probably re-exported to Iran through 
the free trade zone, but would not speculate on an amount. 
 
¶8. (C) If it did come to sanctions, however, Ministry of 
Economics officials and business representatives thought 
large companies could bear the losses associated with 
disrupted trade better than the smaller and medium-sized 
German companies, to which larger firms direct much of the 
 
BERLIN 00001495  003 OF 003 
 
 
specialized work.  Some of these companies, such as machine 
tool firms, could experience considerable financial 
difficulties, if their business relied on only one 
Iranian-based contract for the majority of their revenue. 
Kollberg pointed out that assembly plants exported to Iran 
are made to order and cannot be "resold," something which 
would hinder a company's ability to recoup any losses by 
reselling assembly plants to other customers. 
 
------------------------------------------- 
German Government Engaged in Export Control 
------------------------------------------- 
 
¶9. (C) Foreign and Ministry of Economics officials say they 
strictly scrutinize applications for licenses to export 
controlled commodities to Iran.  The German Government 
requires licenses for dual-use commodities listed in 
international export control regimes, such as the Nuclear 
Suppliers Group Guidelines, the Missile Technology Control 
Regime Annex, or Wassenaar Arrangement Dual-Use List.  For 
licensing military exports, Germany uses the EU Code of 
Conduct on Arms Trade.  Wegner of the Ministry of Economics 
said only about five applications to export military goods to 
Iran are received per year, and these are routinely denied. 
Concerning listed dual-use goods, Alexander von Portatius, an 
Economic Ministry office director, said Germany exports very 
little to Iran.  He cited figures to show that 1.7% of the 
total volume of exports to Iran in 2005 consisted of 
commodities requiring a license.  Andreas Kauke of the MLFA 
echoed this and noted a downward trend of listed goods 
exports to Iran.  To illustrate, he said the amount of German 
exports to Iran in 2004 that required licenses was 3.4% of 
the total export volume.  Kauke and Wegner said no licenses 
would be granted for exports of any commodities to Iran that 
could be used in military or WMD programs.  When asked about 
the potential for goods which do not require a license being 
diverted to military programs, such as automobile assembly 
plants being used to produce WMD-associated vehicles, they 
acknowledged the possibility.  Germany currently lacks 
post-shipment verification procedures, such as the U.S.,s 
Blue Lantern or Extrancheck programs. 
 
¶10. (C) Licensing is a factor in determining export credit 
guarantees, according to MFA and Ministry of Economics 
officials.  The Federal Export Licensing Agency (BAFA) sits 
on the inter-agency export credit guarantee committee and 
reviews the contents of project proposals for the use of 
controlled commodities.  If BAFA determines any commodities 
in the proposal require an export license and then denies the 
license, then the committee would refuse to grant the credit 
guarantee, according to the MFA and Ministry of Economics 
officials. 
 
------- 
Comment 
------- 
 
¶11. (C) Germany has maintained a pragmatic trade policy with 
Iran over the decades, and it has seen its share of peaks and 
valleys.  Germans consider Iran commercially promising, but 
recognize the political realities present higher costs than 
other emerging markets.  Business representatives, although 
hoping otherwise, seem resigned to some type of sanctions 
regime, should negotiations fail.  Given the current 
cost-benefit construct with doing business in Iran, the 
German government could be reasonably well placed to accept 
imposing sanctions with relatively little direct domestic 
economic fall out, though the fear of higher world oil prices 
continues to haunt the sanctions discussion here. 
BAUMAN