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). 
 
¶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