Iran-Germany

Trump Spoils the Party

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Not OK for Europe. Donald Trump's refusal to declare Iran in compliance threatens economic ties. Source: AP Photo

German companies rubbed their hands at the prospect of new deals with Iran when the 2015 nuclear deal led to a lifting of key sanctions against the country. With their long-standing business ties to Iran and their knowhow in engineering, they were well positioned to modernize the aging infrastructure in the country of 80 million that had been cut off from Western markets for a decade.

But then Donald Trump came and spoiled the party. On Friday, he refused to formally certify to the US Congress that Tehran was complying with the accord and said he might ultimately terminate the deal. The US Senate is now drafting legislation that would enhance restrictions of the existing deal and impose new sanctions if Tehran continues to develop its non-nuclear ballistic missile program.

Now German business leaders are worried that their Iran bonanza may be over before it ever really got going. And the German government, which was heavily involved in the negotiations and regarded the agreement as one of the biggest diplomatic coups it has been involved in, is aghast at the prospect that it might collapse.

The deal's collapse could undermine efforts to halt North Korea’s nuclear ambitions – and frustrate Germany's own hopes of playing a greater role.

“I see this as a tremendous breach of trust for the USA, especially also against the European partners,” Wolfgang Ischinger, a former German diplomat and current head of the Munich Security Conference, told Handelsblatt. While the US may have had “isolated” itself with the decision, Mr. Ischinger said the EU has no choice but to keep working with Washington to make the best of it.

And so, while Europe’s companies are quaking at the prospect of a new ice age with Iran, the EU is using all available channels to try to salvage the situation. An EU foreign ministers meeting in Luxembourg on Monday reaffirmed their backing for the deal. German diplomats have already met more than 30 Senators in close coordination with the British and the French. “As Europeans together, we are very worried that the decision of the U.S. president could lead us back into military confrontation with Iran,” German Foreign Minister Sigmar Gabriel told reporters.

The deal’s collapse could also undermine efforts to halt North Korea’s nuclear ambitions – and frustrate Germany’s own hopes of playing a greater role on the global stage. Chancellor Angela Merkel remains proud of one of the few major international deals that has involved Germany and in the run-up to September’s federal elections even cited the Iran deal as a model for negotiating with North Korea.

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Frank-Walter Steinmeier, Germany's former foreign minister and current president, helped negotiate the initial Iran deal in 2015. Source: DPA

For the business community, the Iran accord was crucial to opening up Iran’s $400-billion economy and finding a new market for European investors. Unlike the United States, the EU saw relations with Iran flourish in the late 1990s until revelations about Tehran’s nuclear plans in 2002. That made Germany and Europe better positioned to take advantage when UN and Western sanctions were lifted more than 18 months ago, though Tehran is still subject to a U.N. arms embargo that is not part of the deal.

German foreign trade with Iran had already grown 20 percent this year despite continued problems in obtaining trade finance for business with the country. German machinery exports to Iran also jumped 37 percent last year to €759 million ($896 million) followed by a 26 percent rise in the first half of 2017, a “respectable result given the difficult conditions,” said Ulrich Ackermann, foreign trade expert at engineering industry association VDMA.

Many major global German firms have had high hopes for Iran. Industrial group Siemens delivered components for 50 diesel electric railway engines and signed a letter of intent to supply up to 500 high-speed high-speed trains. Carmaker Volkswagen hopes to produce cars near Tehran, though it is running the plans by US authorities, while Daimler entered a joint venture with Iran Khodro Diesel to build trucks.

“Companies need a reliable and stable environment for their business deals. The non-confirmation of the nuclear deal produces the opposite.”

Volker Treier, deputy managing director of Germany's chamber of commerce and industry

But many such companies also active in the US now face a greater risk of punitive measures, putting a “major burden” on new deals with Iran, according to Volker Treier, deputy managing director of Germany’s chamber of commerce and industry. “Companies need a reliable and stable environment for their business deals with Iran,” Mr. Trier said. “The non-confirmation of the nuclear deal by US President Trump produces the opposite.”

Chemicals group BASF, for example, has signed a letter of intent with Iran’s petrochemical industry but the project is on hold because of the current political uncertainty. “We don’t see the sanctions being lifted as quickly as expected,” said BASF Chief Executive Klaus Bock. Company sources said BASF didn’t want to put its strong US business at risk or deter US investors by pressing ahead with business in Iran.

Airbus and Boeing could also suffer major disappointments. Both companies want to sell new passenger jets to Iran Air and had agreed deals worth around $8 billion each. But if the US reinstates sanctions, the deals could break down.

Even if the accord can be saved, fresh US sanctions risk wrecking economic ties between Iran and the West. Iranian President Hassan Rouhani, under domestic pressure from religious hardliners, had announced an expansion of the missile program. The US responded by increasing its sanctions and also threatening non-Americans with punitive measures if they support Iran’s rearmament.

The existence of these sanctions, together with other EU and US sanctions that remain in place separately from the nuclear deal, complicates trade with Iran, said Oliver Wieck, general secretary of the International Chamber of Commerce Germany. US sanctions rules also apply to companies not based in the US if the trade is calculated in dollars or if transactions cross US territory or involve US citizens. “These uncertainties continue to make deals with Iran difficult,” said Mr. Wieck.

It’s the same story for businesses in Iran, said Omid Yaraghi, president of the German-Iranian Chamber of Industry and Commerce in Tehran: “They are very, very worried but of course don’t want to show that in public.”

Matthias Brüggmann, Torsten Riecke and Moritz Koch of Handelsblatt contributed to this article. David Crossland and Christopher Cermak adapted this story for Handelsblatt Global. To contact the authors: riecke@handelsblatt.com and cermak@handelsblatt.com

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