Trading with the Mullahs Germany's Risky Business with Iran

German companies have enjoyed booming trade with Iran in recent years. But with tension over Tehran's nuclear ambitions rising, the export party may be over. Deals with the mullah state are becoming an increasingly risky business.

By Beat Balzli and Sebastian Ramspeck

Iranian President Mahmoud Ahmadinejad, (center) looks at a model of an oil production platform.

Iranian President Mahmoud Ahmadinejad, (center) looks at a model of an oil production platform.

Whenever the president of the Islamic Republic of Iran, Mahmoud Ahmadinejad, wants to measure the impact of his threats and hate-filled rhetoric, all he has to do is look at current gasoline prices. Nothing measures international concern about the controversial leader better than the nervous state of the oil markets. A few days ago the price per barrel for the first time broke through $75 (€59.41). At German gas stations a liter of super unleaded costs up to €1.42. That should please Ahmadinejad and his regime, since the surging prices are filling the coffers of the world's fourth-largest exporter of crude oil. And Ahmadinejad is likely to remain happy so long as oil traders and hedge funds expect prices to remain high for the foreseeable future.

But it's not just the mullahs of Tehran who are likely in a good mood. German exporters have reason to be pleased. "We are also enjoying many, many considerable advantages from the oil price increase," said the chief economist of Deutsche Bank, Norbert Walter. "Many of our customers are the countries which have become rich as a result of the high oil price."

In 2002, the main oil producing countries booked revenues of around $300 billion from the sale of crude oil. Last year it was almost $700 billion. The countries are using that money to buy consumer and investment goods -- and they like the "Made in Germany" stamp.

It's a blessing for the world export champion. Between 2000 and 2005, German exports to Iran more than doubled. Last year they reached a new record of €4.4 billion, or 0.6 percent of Germany's total export volume. Manufacturers of machinery and equipment are the main beneficiaries because Iran is using German know-how to develop its economy.

Frankfurt-based Lurgi AG for example is currently leading four large Iranian petrochemical projects worth around €500 billion. The company's business activities there have accounted for up to 20 percent of its total sales in recent years. Despite the ongoing tension surrounding Tehran's controversial nuclear ambitions  the company is "relaxed," according to a spokesman, who said that Lurgi has had a very good working relationship with Iran for years and views the country as a reliable business partner.

Until a few days ago, Lurgi's Wiesbaden-based competitor Linde AG was also waxing lyrical about the excellent business ties and about an Iranian order intake which in 2005 rose almost five-fold from the previous year. But last Monday the company announced that Iran was abandoning a deal that would have yielded €400 million for Linde. The country has handed the contract for a petrochemical plant to domestic companies rather than to an international consortium which Linde would have headed.

Iran reducing its dependence on the West

The abandoned deal highlights the risks involved in dealing with Iran, risks which could soon start spoiling the party for German exporters. The leadership in Tehran isn't confining its policy of confrontation and isolation to the nuclear dispute with the West. It has started to lessen its dependence on the West in economic relations as well.

German firms are also worried about a possible embargo on the mullah regime, or even a war. And they are starting to feel the heat from the United States as well. Many companies are worried that they will be punished in the US market if they remain active in Iran. "The pressure is strong and is often exerted in a very subtle way," said the employee of one company that exports to Tehran. "You have to weigh your interests very carefully."

DaimlerChrysler for example owns a 30 percent stake in the Iranian company IDEM which makes engines for commercial vehicles, and also lets Iran Khodro manufacture trucks under license. The group also planned to start producing cars in cooperation with an Iranian partner but the project appears to have been shelved. On the subject of Iran, DaimlerChrysler statement is invariably: "No comment."

Companies that trade with an enemy of the United States have to brace for difficulties. Deutsche Bank is aware of that. It outlined the risks entailed in its activities in Iran in its latest annual report to the Securities Exchange Commission, the US stockmarket watchdog.

Gasoline prices are surging as a result of the nuclear dispute between Iran and the West.

Gasoline prices are surging as a result of the nuclear dispute between Iran and the West.

Doing business with partners in countries that the US government regards as supporters of terrorism "could stop potential customers and investors in the United States and elsewhere from doing business with us or investing in our shares," says the report. Deutsche Bank continues to do business in Iran, unlike its Swiss competitor UBS.

Among the most risky business partners is the obscure Iranian state holding company IFIC which controls a network of corporate holdings around the world. Alongside stakes in a Namibian uranium mine and telecoms companies in the Sudan and Yemen, the Iranians also hold an indirect stake in German steelmaker ThyssenKrupp via a Düsseldorf-based IFIC subsidiary. After the US exerted pressure, that stake was reduced to less than 5 percent three years ago, and the Iranian representative on the supervisory board had to go.

German banks Deutsche Bank, Commerzbank and WestLB have ties with the Düsseldorf IFIC unit. The Iranian business operations of German financial institutions are largely confined to export and project financing for German firms. This involves payments transactions with Iranian state-owned banks such as Bank Melli -- a fact that angers the US government.

US looks to increase pressure

Because a comprehensive UN embargo on Iran is likely to founder on resistance from China and Russia, the Americans are looking for other ways to impose sanctions.

Last December, for example, Dutch financial group ABN Amro was fined $75 million for breaching US regulations prohibiting transactions with Iran. According to German government sources, the US government has warned German banks that they could face the same treatment.

The European Union could also face pressure to slap sanctions on Iran. A confidential strategy paper drafted by EU foreign policy chief Javier Solana and discussed recently by EU foreign ministers in Brussels envisages a package of possible measures that include a halt to government loans with which EU member states promote exports to Iran by European companies.

German firms are already complaining that the cost of credit and loan guarantees for their business deals in Iran is starting to rise. Last Thursday, international finance experts at a meeting of the Organisation for Economic Cooperation and Development (OECD) in Paris heightened their risk assessment for Iran. Iran is now seen on the same risk level as countries hit by civil war like Sri Lanka and Colombia.

But the German companies are relaxed about this because they can draw on the German government's Hermes export credit guarantee scheme. If they faced total business losses as a result of an embargo on Iran or a war, the government would have to pay them compensation totalling more than €5 billion.


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