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German business in Iran

Nils ZimmermannJuly 14, 2015

Historically, Germany had strong trade and investment links with Iran. Now that sanctions are set to end, German companies are looking forward to doing business again in a familiar and welcoming market.

Petrochemieanlage im Iran
Image: AP

For Michael Tockuss, chief executive at the German-Iranian Chamber of Commerce, Tuesday's announcement that a deal had been struck over Iran's nuclear program was a dream come true.

"Today is a very good day for us, a day we've been waiting and hoping for for years," he said. "Germany is Iran's favorite business partner."

Assuming sanctions are dropped quickly, conservative estimates foresee bilateral trade expanding to 6 or 7 billion euros in 2016.

Two-way trade has already been expanding in domains not covered by international sanctions, such as agricultural products and pharmaceuticals. According to the German foreign ministry, exports to Iran grew by 30 percent on the year in 2014. Bilateral trade grew by 27 percent.

But the rapid growth rates belied the overall volume of goods being exchanged that year, which totaled 2.7 billion euros ($3 billion).

Iran KW26 Autobahn
Iranian highways and railways are among the sectors likely to see increased investment once sanctions endImage: IRNA

For economies the size of Germany and Iran, that isn't much. According to the CIA World Factbook, Germany's had a GDP of 3.27 trillion euros in 2014 in terms of purchasing power parity. Iran's GDP was about $1.18 trillion, also in PPP terms.

But trade will almost certainly rise dramatically in coming months and years.

"We expect to see a big increase in trade, especially in German sales of capital goods," Tockuss, from the Chamber of Commerce, said.

In the longer term, Tockuss said, trade volume could readily reach into the double-digit billions, provided the framework conditions are suitable.

"If oil prices are high enough or access to financing is adequate, Iran will do more business with us," he added.

Iran's advanced economy

Iran, a country of around 80 million people, has one of the most diversified economies in the Middle East and North Africa. In addition to boasting huge oil and gas reserves, Iran manufactures petrochemicals, metals and automobiles. It also produces aircraft, a wide range of agricultural products, cement and other construction materials.

A view of Teheran from a park in the north of the city
Teheran is one of the world's biggest cities, with extremely high real estate prices on the level of pricey parts of LondonImage: Theresa Tropper

But Iran's industries could benefit from modernizing their production equipment - and Germany has the goods. Suppliers of production machinery and parts for all sorts of industries, from chemicals or food processing to automotive or rail transport, are keen to do business in Iran.

"Construction machinery, chemicals, food processing, renewable energy equipment - those are some of the areas I think are especially promising for German industry," said Sasan Krenkler of Krenkler & Partner, a business consultancy specialized in helping German companies enter Iranian markets.

"Automobile production too," Krenkler added. "Iran is the Middle East's biggest car producer. It's one of many industries that needs modernizing."

Going in the other direction, Iran's exports to Germany will include crude oil, agricultural products and increasingly petrochemicals produced in Iranian chemical factories, such as one 350 million-euro complex built by Germany's Linde, at Bandar Imam.

Planning ahead

But German industrialists haven't been sitting and waiting for the final signing of a nuclear deal before reactivating German-Iranian business ties. Many mid-sized enterprises have been exploring prospective opportunities for months in the hope or anticipation that sanctions might be lifted.

Exports to Iran in $billions
German industry hopes to climb back up the ranks of the largest exporters to Iran over the next few years

"Airliners flying to Teheran have been full of German businesspeople for weeks or months," Tockuss said. "The mood has brightened considerably during the past year."

There was also a strong presence of German firms at the annual Inotex technology trade fair in Tehran in June.

The biggest German corporations have been less visibly active, according to Tockuss, in part because they're more subject to political pressures generated by the sanctions regime in Iran. They're now going to be positioning themselves to grab a share of Iranian markets.

"Realistically, I think bilateral trade could increase by as much as a factor of five over the next few years," Krenkler said. "But it depends on political developments. The end to the sanctions regime agreed today could still be reversed if things go badly."

As potential obstacles, he listed an upcoming vote in the US Congress and who the next American president is.

German and Chinese exports to Iran in $billions
China's exports to Iran have increased in tandem to Germany's sanctions-driven reductions in exports to the country

Gearing up

New deals can't be made operational instantly, Krenkler said, because the administrative and technical infrastructure for financial transactions needs to be rebooted first. He sees a planning horizon of six to nine months for projects to gear up.

That means trade volume won't really take off until 2016.

In recent years, Iranians have done a lot of business with Chinese firms because relationships with European and American firms were blocked by Western sanctions. However, both Tockus and Krenkler said that doesn't present a long-term threat to German market share.

"Iranians prefer doing business wth Europeans rather than Asians, and within that, Germans have a specially favored status," Krenkler said.

In part that's because of Germany's reputation for making durable, high-quality machines. But it goes beyond purely pragmatic considerations.

Iranians feel they have more in common culturally with Europe than with eastern Asia, and they have long-standing cultural, business and personal ties to Germany. Historically, German engineers built Iran's railways and bridges back in the 1920s.

"Quite a few Iranian engineers were educated in Germany," Krenkler said.

After the Iranian revolution in 1979, many members of the country's educated elite fled to Germany.

"German writers and philosophers like Goethe, Habermas, Nietzsche are much-read by Iranian intellectuals," Krenkler said. "There's a deep well of cultural respect."