German trade with Iran has life of its own

Germany's emerging status as a global political power shines a light on its substantial dealings with Iran, putting its aspiration to be a diplomatic heavyweight at odds with its economic interests.

By Borzou Daragahi, Los Angeles Times

July 13, 2010

Reporting from Berlin

Chancellor Angela Merkel can warn companies all she wants to stop doing business with Iran. Yet commerce between German firms and the Islamic Republic keeps expanding, as businesses here continue longstanding relationships with Tehran.

In the first four months of 2010, trade between Iran and Germany totaled nearly $1.8 billion, up 20% from the same period last year, according to the German-Iranian Chamber of Commerce in Hamburg.

Germany and Iran "have a trading relation which is around 140 years old," said Michael Tockuss, a leading member of the lobbying group. "There are a large number of very well established business relations that go far beyond just the present."

Trade with Iran is especially sensitive given the Holocaust and Germany's post- World War II commitment to the state of Israel. Since first winning election, Iranian President Mahmoud Ahmadinejad has repeatedly predicted the demise of Israel.

"If this proclaimed special relationship [between Germany and Israel] really has any meaning, and is not just rhetoric, this is the case where this should be applied," said Jonathan Weckerle of Stop the Bomb, a Berlin-based advocacy group in favor of cutting ties to the Islamic Republic. "We can see if it's only rhetoric or if it influences political decisions, even if it brings some costs to it."

Even as some Western businesses withdrew from Iran in recent years, German industry quietly expanded business ties with the Islamic Republic, remaining in a potentially lucrative market where it can offer its specialized machinery without competition from the United States. In recent years, Washington has urged the world to give up trade with Iran as a way of pressuring it to curtail its nuclear program.

Germany's emerging status as a global political powerhouse has shined a light on its substantial dealings with Iran, putting its aspirations to become a diplomatic heavyweight at odds with its economic interests. Germany's export-dependent entrepreneurs fear that if they cut ties with Iran, they're out for the next generation, and Malaysian, South Korean or Chinese rivals will pick up the slack.

"For every lost European contract, the Asians get it," said Walter Posch, an Iran specialist at the German Institute for International and Security Affairs, a Berlin think tank funded by the government. "And we don't have the capacity to come back quickly."

In contrast to an American political consensus against trade with Iran, high-profile German politicians and industrialists regularly advocate business with the Islamic Republic. Germany sold $4.5 billion worth of goods to Iran last year while importing only about $600 million.

As major firms such as Siemens or Daimler buckle under political pressure and wind down business ties with Iran, their subcontractors and suppliers are making side deals with Iranian companies, experts say.

"It's not irrelevant," Hans-Peter Burghof, an economist at the University of Hohenheim in Stuttgart, said of the trade.

Other big German companies, including Munich-based pharmaceutical giant Bayer, are continuing to sell Iran everything from blood pressure medicine to foam for mattresses.

"Our products are aimed at the everyday needs of the population," said Guenter Forneck, a spokesman for the company.

Despite the recent net increase in trade, there are indications that many German businesses may be winding down ties to Iran. German insurance companies, banks and major manufacturers are publicly shunning business with Tehran in response to pressure by advocacy groups. The German government is refusing to offer so-called guarantees or embassy support for businesses in Iran, causing even smaller companies to think twice.

"There are some companies — small and medium-sized companies — who are very much dependent on support of the German government for engaging in businesses in countries like Iran," said Michael Bauer, a Middle East expert at the Center for Applied Policy Research, a think tank in Munich.

But others argue that discouraging ordinary trade with Iran to halt its nuclear program is pointless and that Merkel's heating up of anti-Iranian policies gratuitously antagonizes leaders in Tehran. Many German businesses would be shunning Iran anyway, says Posch, in large part because they can't stand working with those in charge since the election of Ahmadinejad.

"They saw good management replaced by sellouts and yes men," he said. "They have changed their attitude toward Iran from a country where you can do business to a country run by incompetent radicals."

Whatever Iranians have achieved in the nuclear field, they've done illegally or under the table, say some analysts and businesspeople, who argued only for strict controls over German exports specifically designed for nuclear program use.

But many technologies have double uses. The same tunneling equipment used to create the subway systems in major Iranian cities can also be used to build underground nuclear facilities.

Political analysts concede that American pressure has accomplished one thing: placing Iran's nuclear aspirations at the forefront of relations between Germany and Iran. "The nuclear issue is above everything right now," said Konstantin Kosten, of the German Council on Foreign Relations in Berlin.

But by engaging instead of shunning Iran, trade advocates say, Germany and Europe can give Tehran an incentive to eventually come clean on its past activities, perhaps halt sensitive aspects of its program and maybe even crack open the authoritarian government.

"How did we get rid of communism?" economist Burghof said. "We opened the doors to the merchants, we implemented student exchanges. Communism rotted from within. This will happen in Iran if nothing from the outside happens. That's what kept communism alive — the wars against them."

Supporters of sanctions, however, say doing business with Iran emboldens hard-liners in the authoritarian government and heavily state-controlled economy increasingly dominated by the Revolutionary Guard, an elite branch of the military.

"If you do business with Iran, you don't strengthen the middle class who grow in power and influence the government to be more pragmatic," said Weckerle of Stop the Bomb, whose organization is made up of a coalition of Iranian exile groups and pro-Israel activists. "You really support the most radical elements, responsible for both the nuclear program and the political repression."