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Business

German Companies Feel the Pain in Sanctions-hit Iran

German companies, especially hard hit by trade and economic sanctions against Iran, are worried they are losing lucrative contracts in the oil-rich region to countries such as China and Russia.

Workers of Iran Khodro work on an assembly line producing Iran's national car, the Samand, in Tehran, Iran on July 24, 2005. The Samand is built based on a Peugeot chassis.

German industrial know-how is needed by Iran but is being denied through sanctions

Reeling under the fallout of trade sanctions and international pressure to cut ties with a oil-rich nation that the West suspects of covertly enriching uranium to build nuclear weapons, many large European companies have either completely pulled out of Iran or have put the brakes on business expansion in the country.

The latest was French oil group Total which said in a statement it was withdrawing from the country. British-Dutch group Shell publicly pulled out from a gas project in Iran in May. The Iranian state is no longer a shareholder in German steel manufacturer Thyssen-Krupp and Germany's Deutsche bank ended its 40-year association with Iran.

Iran seeks to court German investment

The economic sanctions applied against Iran have sparked much criticism in the business community. German companies are among those who feel that trade restrictions with the Islamic Republic are harmful not only to Iran. However, some companies continue to work with Iran despite the sanctions and profit from the refusal of others to trade with Tehran.

Those companies which remain in business in Iran do so quietly. German engineering giant Siemens continues to operate in the country but insists that its business in Iran accounts for less one percent of its turnover.

Europe's largest carmaker Volkswagen says it still plans to expand its assembly-line cooperation in the country but insists "there's nothing big" in the pipeline, according to a company spokesman. Oil giant BP has vowed it will not be involved in Iran and says any future engagement "will be in accordance with US sanctions."

Iran relies heavily on German companies and their know-how, because a large part of the Iranian industry depends on parts supplied by Germany.

Such is the need for German expertise that Iranian Vice Foreign Secretary Mehdi Safari specifically asked for more German investment in a recent statement: "We could easily have an exchange of commodities with Germany which could total more than 20 billion euros," he said.

As way of incentive, the Iranian government has loosened investment laws and has privatized state enterprises so that foreign investors can take part. By focusing on selling its energy sector, Iran hopes to attract foreign investment in its oil and gas enterprises.

While Iran has the second largest oil and natural gas reserves in the world, the country, hobbled by a lack of refineries and creaking infrastructure, still has to import gasoline.

China , Russia picking up the slack

Grafik 3 Flaggen China, Deutschland, Iran

China has stepped in to provide the goods Germany won't

While German investment in Iran dropped by around 15 percent in the last year, China's investments in the country are booming. Germany's trade volume with Iran totals around 3.5 billion euros, in comparison to China's reported 30 billion dollars -- an increase of 60 percent as compared to the previous year.

Though the lion's share of China's profitable business with Iran comes from its strong exports of consumer goods, some say there's one overriding factor underpinning China's success in the country.

"China, just like the Russians, don't take any notice of sanctions," said Daniel Bernbeck, the head of the German-Iranian Chamber of Commerce in Teheran.

Russia has doubled its trade with Iran -- much to the annoyance of European enterprises. "If some countries abide by the restrictions of trade under the UN sanctions and others don't , then the sanction policy causes nothing but an imbalance in trade," lamented Felix Neugart of the German Chamber of Industry and Commerce.

Domestic and international pressure

Iranian President Mahmoud Ahmadinejad and US President George W. Bush

Bush has promised hardship for those dealing with Iran

It's not just the trade embargo on Iran imposed by the UN Security Council that's hurting European businesses in Iran. The direct and indirect fallout of sanctions applied by the European Union and Germany are equally responsible for the plunge in profits.

For example, German companies who continue to export to Iran can expect to have difficulties getting credit. Exports are also subject to such stringent controls that it's difficult to make deliveries on time.

German companies also suffer from the fact that the accounts of the biggest Iranian banks have been frozen and that German banks have exited Iran.

There is also the question of which market is more important: Iran or the United States? Pursuing or maintaining trade links with Iran runs the risk of angering the US, which has taken the lead in pressurizing European firms to sever trade links with Iran. European companies that continue to trade with Iran can expect a hard time in the United States.

Sidestepping sanctions

Still, experts say trade with Iran isn't entirely impossible and some European companies do find a way to dodge UN sanctions.

"The money just flows via third countries and most of the transactions take place in hard cash," said Bernbeck who lives in Teheran.

In such a secretive climate, the focus is on a discreet network of middlemen who literally accept suitcases with wads of money and smuggle it out of the country.

"They're medieval methods of doing business," said Bernbeck, who said he withdrew money from his bank in Germany to pay his yearly rent in cash to his landlady in Teheran, usually in cash in a bar.

"If a plane crashes on its way to Tehran from Germany, then the loss of the luggage would be more expensive than the loss of the plane," he said.

Change in political approach would help trade

Business federations describe the current policy towards Iran as "paranoia combined with hysteria."

Though German exports to Iran rose slightly this year, experts say in the long-run there will be a major shift in Iran's trading partners as the country looks for other investors and business players.

"Germany certainly stands to lose in such a situation," said Henner Fuertig of the Leibniz institute for Global and Regional studies.

At present, Saudi Arabia is a favorite trading partner of the Iranians. The Gulf nation has offered Russia wide-ranging arms deals if in return Moscow deepens cooperation with Iran.

The future for trade with Iran is as unstable as the international relationship with Tehran. "One should not hold on to the hope that Iran will come around through sanctions alone," said Johannes Reissner of the German Foundation for Science and Politics. A serious debate with -- and about -- Iran must be restarted without political brinkmanship, he added. Many other experts support Reissner's view that the removal of sanctions and a return to diplomatic discussion without threats would be more constructive.

Iran's chief nuclear negotiator Ali Larijani. front right, and EU foreign policy chief Javier Solana, front left on Wednesday Sept. 27, 2006 in Berlin

Face-to-face negotiations between the EU and Iran failed and have yet to be restarted

"It's not like we didn't talk to Iran," said one diplomat close to the West's negotiations who spoke to DW-WORLD.DE on condition of anonymity. "But the carrot and stick approach didn't work. Now we've worked on both levels," he said, referring to offering Iran a repreive from economic and financial sanctions in exchange for freezing its enrichment activites.

While the rhetoric increases, the hidden trade with Iran still blossoms. The industrial parts, which Germany refuses to deliver, now come from England. Asia is also scrambling to catch up with the West by exporting industrial know-how.

US trade increases as Washington pressures others

And the US isn't far behind. US exports to Iran have hugely increased during the Bush administration's two terms, showing stronger growth than under any other US government. US goods to the value of $150 million were shipped into Iran in 2007 alone. All of which rankles with European investors who feel the pressure not to deal with Tehran emanating from Washington.

Meanwhile, German companies continue to bail out of Iran. Even a German manufacturer of faucets for bathtubs has discontinued his long-standing relationship with an Iranian customer -- because of the fear that the US could find out that he trades with Iran.

This is absurd, criticizes Daniel Bernbeck. "What have faucets got to do with atom bombs?"

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