Despite sanctions, ties between Iran and Germany remain strong

Reports that Siemens, the German engineering group, is refusing to supply and maintain new turbocompressors for Iran's South Pars gas field are the latest examples of how international sanctions are hitting the country's industry – but business ties between Germany and Iran remain strong.

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Reports that Siemens, the German engineering group, is refusing to supply and maintain new turbocompressors for Iran's South Pars gas field are the latest examples of how international sanctions are hitting the country's industry - but business ties between Germany and Iran remain strong.

The news about Siemens should come as no surprise after the company said two years ago it would not enter into any new deals with Iran.

Other German firms, though, continue to engage in brisk trade with the country and are finding ways of exporting goods despite mounting restrictions.

German companies have adapted to the sanctions and even the European Union's decision in January to freeze the assets of Iran's central bank and this month's move to disconnect Iranian banks from the Swift financial transfer network won't shut down legal exports of machinery, chemical products, agricultural produce, vehicles and vehicle components to Iran.

Alternative ways are being found for settling trade debts, including suitcases filled with cash, barter deals, and especially money transfers via banks in third-party countries such as Turkey, Armenia, Belarus and Azerbaijan.

German exports to Iran fell 18 per cent last year but still amounted to a hefty €3.1 billion (Dh15.05bn). They are expected to fall at a similar rate this year, with the German engineering industry association, VDMA, complaining this month that the financial sanctions will have "massive effects" on German firms. But given the West's determination to tighten the economic stranglehold on Iran, an export drop of less than a fifth this year, seems relatively minor.

Germany is the EU's biggest exporter of goods to Iran, well ahead of Italy and France. In 2010, China was the biggest source of Iranian imports, followed by the UAE and Germany, according to the CIA's World Factbook.

It may seem strange that Germany maintains such strong business ties with a nation whose leader, president Mahmoud Ahmadinejad, denies the Holocaust and wants to wipe Israel off the map. After all, denying the Nazi genocide of six million Jews is a crime in Germany, and supporting Israel is a firm part of Germany's foreign policy doctrine.

Yet German firms have gone on supplying industrial equipment that Iran not only cherishes due to its quality, but relies on to keep its industries functioning.

Some two-thirds of Iranian industrial firms use machinery and equipment made in Germany and rely on imports of German spare parts. The main reason for this is that Germany helped Iran to industrialise in the 1920s. Sectors such as the cement, paper and textile industries were built up using machinery made in Germany.

Recent trade and business exchanges, though legal and not in breach of the various sanctions already imposed on Iran, reflects Germany's long-running ambivalence towards the West's tough stance on Iran, despite its claim to be 100 per cent behind efforts to stop the nuclear programme.

For years, Germany maintained a balance between backing sanctions vigorously enough to avoid negative international headlines, and preventing the restrictions from becoming so severe that they hurt German business.

But the escalation of tensions this year, with growing expectations of an Israeli air strike against Iranian nuclear installations and an EU embargo on importing Iranian oil due to come into force on July 1, has forced Germany to position itself more clearly.

Guido Westerwelle, the foreign minister, said last month that sanctions should have been tightened much sooner and more rigorously.

Even though annual exports to Iran are worth billions, the country is virtually irrelevant to Germany as a trading partner, ranking 43rd in a list of German export destinations in 2010 and making up just 0.5 per cent of total exports.