Germany's Pivotal Role in the Iranian Nuclear Standoff

Proliferation Analysis
Summary
Presidents George W. Bush and Nicolas Sarkozy have called for greater coercive measures against Tehran for its continued uranium-enrichment activities in defiance of legally binding UNSC resolutions. Unless Iran faces stricter sanctions or other clear costs for pursuing its nuclear program, Tehran will not change its nuclear course and implement the requirements of UNSC Resolutions 1737 and 1747.
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In recent months, Presidents George W. Bush and Nicolas Sarkozy have called for greater coercive measures against Tehran for its continued uranium-enrichment activities in defiance of legally binding United Nations Security Council (UNSC) resolutions. Unless Iran faces stricter sanctions or other clear costs for pursuing its nuclear program, no expert believes that Tehran will change its nuclear course and implement the requirements of UNSC Resolutions 1737 and 1747—namely, to suspend uranium enrichment and reprocessing activities, cease heavy water projects, implement the Additional Protocol, and clear all outstanding concerns of the International Atomic Energy Agency (IAEA). For some, the choice is stark: accept a growing Iranian capacity that could someday provide Iran with a nuclear weapons “break-out” capability or take military action against it. 

Part of Tehran’s strategy has been to divide key players to avoid full political and economic pressure to comply. Many experts believe that the West must be politically united to gain Russian and Chinese support; however, the West can only be united if major European powers such as Germany also support sanctions. Yesterday, the five Permanent Council members of the UNSC (P5) plus Germany were scheduled to meet in Brussels to discuss the possibility of imposing a third round of sanctions against Iran. However, the meeting did not take place because China, which opposes sanctions, would not attend. 

As difficult as it is to gain consensus within the P5, there are still other avenues for progress. At present Germany, one of Iran's top trading partners, has a pivotal role to play.  However, Berlin has been reluctant to impose sanctions on Iran outside of the UNSC. As this analysis shows, Germany should recognize that the benefits of European Union sanctions may outweigh the costs for Berlin. 

German-Iranian Economic Ties

According to the German Federal Statistical Office, German exports to Iran surpassed €4.1 billion in 2006. Though substantial, this figure constituted only 0.46% of total German exports—less than one half of one percent.[1] These exports were primarily plant and machinery, motor vehicles parts and components, hardware and metal products, and chemical products.[2] Over 1,700 German companies, including Siemens and BASF, are involved.[3] Export credit insurance coverage has facilitated such trade by insuring enterprises and investments against political and commercial risks in Iran.[4]  

Iranian exports to Germany in 2006 were far fewer—just over €410 million, or a miniscule 0.057% of total German imports.[5] They included mostly agricultural and traditional goods (e.g. carpets, fruits, and pistachios), some industrial products, and small quantities of crude oil.[6] In 2006, Germany imported an average 5,000 barrels of crude oil per day from Iran, which was only 0.2% of total German crude oil imports.[7] Iranian assets in Germany’s Central Bank last May totaled €6.55 billion, roughly equivalent to the amount of deposits Japan has in Germany.[8]  

Iran’s technical sector—including the controversial nuclear program—depends heavily upon German products and services. For example, Tehran originally contracted Kraftwerk Union (a subsidiary of Siemens) to build the Bushehr nuclear power plant, and the company finished 75-85% of the first reactor and 45-70% of the second reactor before the Iranian Revolution of 1979.[9] Despite a German export control ban on military and dual-use equipment to Iran, Tehran has attempted to acquire critical German technologies and nuclear know-how through Russia, the blackmarket, and espionage on German soil. The most startling case occurred in 2006, when German authorities raided 41 small- to medium-sized domestic firms under suspicion of supplying Iran with €3 million worth of dual-use technologies—pumps, electronic components, transformers, and steel cables—through direct trade or by way of Russia.[10] 

The US has urged Germany to take action against Iran by curtailing financial ties and export credit insurance. Washington has mostly pressured German banks, as they help companies access the Iranian market and process payment transactions for many businesses. For this reason, US officials such as Under Secretary of the Treasury Stuart Levey have visited Berlin and Frankfurt in recent months to pressure politicians and businessmen to cut financial ties. To ensure compliance, the US has required that Germans banks obtain certification from US law firms stating that business ties to Iran were severed.[11] If not, the US has claimed that companies’ US interests could be jeopardized.[12] In fact, the US Securities and Exchanges Commission (SEC) even went so far as to list several prominent German companies such as Siemens on a list of firms that engage with state sponsors of terrorism (this list was later removed from the SEC website). 

Consequently, German firms have been quietly scaling back business with Iran, including Deutsche Bank, which announced last July that it was ending business with several Iranian clients. In the first seven months of 2007, German exports to Iran fell 18% compared to the same period last year.[13] Decreases in export insurance coverage has helped cut such trade. While German banks gave $2 billion in credit to firms trading with Iran in 2005, the German government has announced that this figure will only be $700 million for 2007.[14] As a result, China will take the lead as Iran’s top trading partner this year.[15]

Berlin’s Foreign Policy Quandary

From a foreign policy standpoint, Berlin appears to be torn between strong ideological commitments and financial considerations. Germans generally favor multilateralism, oppose state use of force, and support nonproliferation efforts.[16] These values place a premium on exhausting diplomatic options, particularly through the UN, before considering military options. This current German government has taken an increasingly tough stance on Iran as part of a broader, value-oriented foreign policy strategy that Chancellor Angela Merkel has adopted and promoted on issues ranging from climate change to transatlantic relations.[17] 

Economic and financial concerns, however, have complicated efforts to cut trade with Iran. German businessmen and politicians have argued that if Germany cuts economic ties to Iran outside of mandatory global sanctions through the UNSC, Chinese and Russian firms will fill in the exports gap, while other foreign banks will handle Iran’s finances.[18] Some observers have suggested that continuing Western trade with Iran justifies weak German Foreign Ministry support for EU sanctions (French firms such as Peugeot and Renault have not reduced trade with Iran, while American companies circumvent the boycott on Iranian trade through front companies in Dubai).[19] 

The Need for German Support of European Sanctions

Currently, European leaders are considering a range of potential sanctions to implement against Iran. One measure under consideration is a sanction against new investment and business dealings with Iran, particularly in its oil, gas, and financial sectors. On November 12, UK Prime Minister Gordon Brown declared that he would push this measure at both the UN and EU level.  Such a financial clampdown would render it difficult for Iran to receive loans, acquire foreign currency, or hold offshore assets; in addition, EU sanctions would make it harder for Iran to complete oil transactions in euros.[20] There are three reasons why Berlin should support such EU sanctions.

First, EU sanctions could help delay or prevent a military strike against Iran if stricter UNSC sanctions fail. Many European officials worry that the Bush administration wants to move ahead with the UN sanctions process because Washington anticipates that either Iran will refuse to comply with UNSC resolutions 1737 and 1747 or key countries will not agree to sanctions, allowing the US to claim that it exhausted diplomatic options and the only alternative is a military attack against Iran.[21] This concern is based on the perception that the US is seriously considering military force.[22] Whether or not this is all true, it does not make sense to stop increasing non-military pressure on Iran to comply with legally binding UNSC demands, because giving up on the sanctions strategy would raise the prospects of military alternatives.  And if sanctions are the preferred strategy, adopting them through the EU is the next-best alternative to the UNSC.

Second, full German support for tighter EU sanctions would demonstrate to Washington that Berlin is a reliable partner in countering nuclear proliferation threats.  This could help repair transatlantic relations damaged by former Chancellor Gerhard Schröder over the 2003 invasion of Iraq.  German support for EU sanctions is particularly critical for their success; unity within the EU on this issue could have the added benefit of enhancing Europe’s leadership in the international community.
      
Third, despite vocal opposition against sanctions from the German business community, public opinion polls show that Germans are increasingly concerned about an Iranian threat.  Actions to mitigate that threat, even at considerable cost, may be widely supported or at least not provoke significant political backlash. The 2007 Transatlantic Trends survey shows that if current diplomatic efforts fail, 59% of Germans would like to increase diplomatic pressure on Iran but rule out the use of military force, whereas only 11% would like to maintain the present level of diplomatic pressure and only 5% are willing to accept Iranian nuclear weapons. In addition, the following percentages of surveyed Germans agreed that these threats were likely: Iran will supply nuclear weapons to terrorists (75%), Middle Eastern countries will develop nuclear weapons as well (71%), Iran will attack other countries in the region (68%), and Iran will threaten Europe with nuclear weapons (56%).[23] While German businesses often oppose EU sanctions, loss of trade due to tougher EU initiatives would be insignificant on the macroeconomic level, as German exports to Iran constituted only 0.46% of total exports in 2006. Loss of this share of foreign trade cannot be as grave a strategic matter for the majority of Germans as a nuclear-armed Iran or military strike against Iran. 

Recently, Merkel has publicly expressed greater interest in EU sanctions and has discussed taking additional steps to clampdown on business ties, but the challenge is to go beyond rhetoric and take stronger action. Though Iran is still a few years away from a nuclear bomb, now is a critical time for Berlin to exercise leadership and pressure Tehran. Last Thursday’s IAEA report on Iran and the canceled P5 plus Germany discussions show that there has been little progress in the Iranian nuclear standoff, as Iran still has not complied with UNSC resolutions 1737 and 1747 and China and Russia continue to complicate sanctions efforts. Germany can help the West achieve a breakthrough by imposing enough isolation and hardship through sanctions that Iran’s leadership begins to reconsider its production of fissile material.  And hopefully, full Western backing of sanctions will eventually help pave the way for greater cooperation from China and Russia in the future. 

Georgina Jones is a Junior Fellow in the Nonproliferation Program at the Carnegie Endowment for International Peace.

Endnotes
1. German Federal Statistical Office [Statistisches Bundesamt Deutschlands], “Atlas of Foreign Trade Statistics” [“Atlas der Außenhandlesstatistik”]. Available at . Information in German.
2. “Islamic Republic of Iran,” German Federal Foreign Office [Auswärtiges Amt], June 2007. Available at .
3. Mark Landler, “Germany’s Commercial Ties with Iran Prove Hard to Cut,” The New York Times September 21, 2007. Available at .
4. Such export insurance is also known in Germany as Hermes credits, named so after the firm that primarily manages the credits, Euler Hermes Kreditversicherungs-AG.
5. German Federal Statistical Office.
6. “Islamic Republic of Iran.”
7. Carnegie calculation, based off the statistic that Germany imported an average total of 2,366,500 barrels of crude oil per day in 2006. Organization of the Petroleum Exporting Countries, OPEC Annual Statistical Bulletin 2006 (Vienna: OPEC, 2007), pp. 83, 94. Available at . In 2005, approximately 75% of crude oil imports to Germany came from Russia, Norway, the United Kingdom, and Libya. Energy Information Administration, “Germany: Oil,” December 2006. Available at .
8. Ralf Beste, Christoph Pauly, and Christian Reiermann, “Twisting Arms: US Pressures Germany to Cut Iran Business Ties,” Spiegel Online July 30, 2007. Available at .
9. Nuclear Threat Initiative, “Iran Profile: Nuclear Chronology, 1957-1985,” Center for Nonproliferation Studies/Monterey Institute of International Studies. Available at . See entry titled “August 1979.”
10. “Nuclear Standoff: Germany Nuclear Parts Smuggled to Iran,” Spiegel Online March 27, 2006. Available at .
11. Ralf Beste, Konstantin von Hammerstein, Ralf Neukirch, et al., “Can Merkel Stop Bush? Iran Crisis to Top Agenda of US Trip,” Spiegel Online November 8, 2007. Available at .
12. David Gow and Ewen MacAskill, “Washington tells EU firms: quit Iran now,” The Guardian November 9, 2007. Available at .
13. Hugh Williamsonin, Daniel Dombeyat, and Ben Hall, “Germany hits back over stance on Iran,” The Financial Times September 26, 2007. Available at .
14. Yossi Melman, “Inside Intel / The race against the bomb,” Haaretz.com November 9, 2007. Available at .
15. Steven Mufson and Robin Wright, “Iran Adapts to Economic Pressure: Oil Market Could Help It Weather U.S. Sanctions,” The Washington Post October 29, 2007, p. A01. Available at .
16. An overwhelming amount of literature supports these claims. See for example Paul Belkin, German Foreign and Security Policy: Trends and Transatlantic Implications, CRS Report for Congress, October 3, 2007, < http://opencrs.cdt.org/rpts/RL34199_20071003.pdf >; and Harald Müller, “Germany and WMD Proliferation,” The Nonproliferation Review, vol. 10, no. 2 (Summer 2003), pp. 1-20. Available at .
17. Henning Krumrey, “Germany’s Merkel Determined to Make Foreign Policy ‘Value-Oriented’: This Woman is Serious,” Focus October 3, 2007.
18. See for example Landler, “Germany’s Commercial Ties with Iran Prove Hard to Cut”; and Beste, Pauly, and Reiermann, “Twisting Arms: US Pressures Germany to Cut Iran Business Ties.”
19. “Iran Sanctions: Berlin Says US and France Guilty of Hypocrisy,” Spiegel Online September 24, 2007. Available at .
20. For this logic, see Jeffrey Donovan, “Iran: Top U.S. Official Says Financial Clampdown Is Working,” Radio Free Europe/Radio Liberty October 17, 2007. Available at .
21. An example of such a European interpretation of UNSC resolutions can be found in Sophie Walker, “War fears complicate sanctions moves on Iran,” Reuters November 6, 2007. Available at .
22. For example, see Beste, von Hammerstein, Neukirch, et al., “Can Merkel Stop Bush? Iran Crisis to Top Agenda of US Trip.”
23. The German Marshall Fund of the United States, Compagnia di San Paolo, with others, Transatlantic Trends: Key Findings 2007, pp. 37-41. Available at .

End of document

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Source http://carnegieendowment.org/2007/11/20/germany-s-pivotal-role-in-iranian-nuclear-standoff/4b6f

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