Charles Lane. Foreign Affairs. Volume 74, Issue 6. November/December 1995.
Trading with the Enemy
German-American friendship has been a pillar of the Western alliance in the post-Cold War era, even when that alliance has been strained over issues ranging from Bosnia to trade liberalization. The U.S. and German governments have worked together on aid to Russia, NATO expansion, nuclear nonproliferation, and Middle East peace. German Chancellor Helmut Kohl and U.S. President Bill Clinton enjoy a natural rapport. But when it comes to dealing with Iran, Germany and America have consistently been at odds. Although the two governments have assured each other that their objectives in southwest Asia are the same-to keep Iran from developing nuclear weapons, supporting terrorism, and disrupting the Arab-Israeli peace process—they differ radically on which means to use. The United States has tried to isolate Iran diplomatically and strangle its economy. Germany—and Europe—favor engagement (what Bonn calls a “critical dialogue”) built around a multibillion-dollar trade and investment relationship.
When President Clinton banned U.S. trade with, and investment in, the Islamic Republic in May, he was trying not only to punish the mullahs, but also to undercut the European policy, especially that of Germany. Only three months before, at a joint press conference at the White House, Chancellor Kohl had pointedly claimed that American oil companies did more business with Iran than German ones, and the charge of hypocrisy, leveled frequentl by European officials, bothered the Clinton administration. (Until the Clinton embargo was announced, U.S. oil companies and other firms did do a substantial amount of business with Iran, as Kohl charged: in 1994, U.S. companies bought $4.3 billion worth of Iranian oil, all of it for sale in Europe since imports to the United States were banned, and sold the Iranians $300 million worth of other goods.) But even after Clinton’s imposition of the embargo, Western Europe and Japan stood pat. “We do not believe that a trade embargo is the appropriate instrument for influencing opinion in Iran and bringing about changes there that are in our interests,” said German Economics Minister Gunter Rexrodt.
Clinton’s tough words notwithstanding, it is the United States, not Germany, that has wound up isolated vis-a-vis most of the world. Germany is Iran’s biggest trading partner, according to official U.S. figures, but France, Italy, Belgium, Sweden, Spain, Turkey, and, to a lesser extent, Great Britain all do hundreds of millions of dollars worth of business annually with Iran. Japan has set aside $1.4 billion in development credits for Iran, $350 million of which has already been disbursed for the construction of a hydroelectric dam. Russia and China have both made infamous nuclear deals with the Islamic Republic.
In a sense, the arguments over how to handle Iran are a continuation of a long-standing transatlantic debate about “trading with the enemy.” During the Cold War, European governments, Germany’s included, tended to be less willing than the United States to use trade embargoes and other forms of economic isolation against the Soviet Union. Diplomatically, they leaned toward detente and constructive engagement. This was a matter not only of commerce but of geopolitics and basic philosophy. The Germans, who abutted the communist East for 40 years, felt, and to a large degree still feel, that military and political containment would not have succeeded without the contribution of Ostpolitik, their policy of engaging the East on some issues of trade and diplomacy. Germans credit economic and other contacts—such as negotiations for the release of dissident East Germans—with helping open East European societies to new ideas and influences, thus hastening the downfall of communism.
These disagreements are going to become more difficult for American policymakers to control, for the Soviet Union is no longer around. In the past the United States and Europe could differ over trading with the Soviets, but containment was still a shared goal. That clear policy set limits on cooperation with the East and guaranteed that the United States and Europe would stick together in times of crisis. Now Europe and America lack a common enemy to bind them together. Potential enemies—”rogue” states such as Iran, Iraq, North Korea, and Serbia—have multiplied, and there is no agreement over how threatening they are, or to whom.
The result is a climate of opportunism and, as Europe sees it, a double standard, in which the United States sweeps Chinese human rights violations under the rug and asks for European help in financing the sale of nuclear reactors to North Korea, yet calls for the continued dual containment of Iran and Iraq. (Furthermore, past American administrations have taken advantage of German contacts with Iran, notably the Bush administration’s efforts to negotiate the release of the last American hostages being held by Iranian-backed factions in Lebanon.) As matters now stand, the United States is pursuing a morally unobjectionable policy that is failing to have much impact on either Iran or America’s allies. And Europe, led by Germany, is pursuing a morally objectionable policy that is having little positive impact on Iran.
Guess Who Came to Deutschland
Germany’s “critical dialogue” has gone beyond the realm of commerce. On October 17,1993, the glass doors of the Kanzleramt, Kohl’s office complex in Bonn, opened to receive an unusual guest: Ali Fallahian, the chief of Iran’s foreign intelligence service. Personally hosted by Bernd Schmidbauer, Kohl’s special adviser for intelligence matters, Fallahian was treated to several days of respectful meetings, including a tour of the German Federal Intelligence Agency headquarters outside Munich. Schmidbauer said at the time that the Fallahian meetings dealt with humanitarian matters. However, Iran’s ambassador to Germany, Sayed Hussein Musavian, told Die Zeit that the visit focused on the training of groups to fight terrorism, drug trafficking, and weapons of mass destruction. It is still unclear what the ambassador meant, or even if he was telling the truth, but German officials have conceded that Fallahian was given about $70,000 worth of computer software and that Germany’s secret services retain unspecified channels to their Iranian counterparts. (Der Spiegel reported last year that the German intelligence liaison relationship with Iran goes back to 1991 and has included the training of Iranian intelligence operatives in Germany.)
U.S. and, indeed, German intelligence agencies know Fallahian as the architect of an international terror organization that has carried out assassinations of Iran’s political opponents abroad—some 60 over the last two decades—and other acts of terrorism. Fallahian himself had openly boasted a year before his visit to Bonn of his ministry’s success in stalking Tehran’s opponents. “Last year  we succeeded in striking fundamental blows to their top members,” he said in a speech broadcast on Iranian television. Germany’s Federal Crime Office wanted to arrest Fallahian upon his arrival in Bonn for instigating the September 17 1992, machine-gunning of four top members of Iran’s Kurdish opposition at the Mykonos Greek Restaurant in Berlin, but Kohl’s office blocked it.
The Fallahian visit caused a furor in Germany. Opposition politicians, human rights groups, and the German press raised sharp questions about the Kohl government’s dealings with the man believed responsible for so much terrorism—and, presumably, for the ongoing efforts to carry out the death sentence fatwa Iran’s religious authorities have pronounced on British author Salman Rushdie. Social Democrats were particularly offended, since some of the Mykonos victims had been attending a Socialist International meeting in Berlin as guests of the German Social Democratic Party.”I see a distinction between Iran’s internal affairs and its will to create havoc in other parts of the world,” said parliament member Freimut Duve, a leading Social Democratic critic of the government’s policy. Perhaps we can’t muster enough economic power to enforce a decent human rights performance within Iran. But we must be very, very tough on the support by any state for terror.”
The protests by Duve and others catalyzed public awareness in Germany and led to embarrassing revelations about the degree to which Iran had used German territory and exploited the German government’s discreet toleration. Of the suspects currently on trial for the Mykonos murders, the alleged ringleader, Kazem Darabi, is a senior operative of Iranian foreign intelligence. German officials appear to have known about his work for Tehran since at least 1982, when they almost expelled him from West Germany for organizing pro-Khomeini goon squads in the country’s large Iranian exile community. But the Iranian embassy intervened on his behalf, and he was permitted to move to Berlin, where he posed as a student and later a businessman. In 1987, the West German foreign ministry helped him get a residence permit. A June 1993 report by the federal agency that monitors extremist activity in Germany said that the Mykonos hit had been planned in the Iranian embassy in Bonn. According to the report, leaked to the public, the embassy has long served as a center of Iran-backed terrorism in Western Europe.
When American officials learned of the Fallahian visit, they were amazed and angry. What could do more to undermine efforts to isolate an “outlaw state”? Even worse from the American point of view, Germany tried to carry out the meeting behind the backs of its own allies. Disturbed, Secretary of State Warren Christopher instructed Richard Holbrooke, then the newly arrived U.S. ambassador to Bonn, to meet with Schmidbauer and strongly protest Fallahian’s visit. The ensuing exchange, like many others on the subject since, was uncharacteristically testy by the standards of U.S.-German diplomacy, according to U.S. and German sources familiar with the meeting. But German officials defended Fallahian’s visit as part of their policy of attempting to moderate Iranian behavior through “constructive engagement.” The storm blew over. “We all realized it was silly to endanger our relations over this,” said a former Clinton administration official. It was later revealed that the “humanitarian objectives Germany was pursuing with Fallahian included dickering for the release of a German spy held under a death sentence in Tehran and mediating even more delicate negotiations between Israel and Iran to win the release of captured Israeli airman Ron Arad, shot down over Lebanon in 1986.
U.S. Officials say money is behind the German decision to stick to the “critical dialogue.” The Islamic Republic, still reeling from its 198088 war with Iraq, is investing billions of dollars in modernization and reconstruction, and Western firms figure prominently in Tehran’s plans. German industry, closely aligned with Kohl’s conservative government and mired in sluggish economic growth due to the costs of reunification and a weaker dollar, is eager to snap up Iranian contracts and penetrate the Iranian market of 60 million people.
The list of German firms doing business in Iran includes the cream of the Federal Republic’s industry: Siemens, Mannesmann, Krupp, Daimler-Benz. (Some key contracts have been let to firms in the former East Germany, whose growth is particularly important to Kohl’s political fortunes.) The German trade surplus with Iran, which peaked at $4 billion in 1992, has since slipped to $1 billion; Iran is Germany’s 41stlargest export market. But this decline is due more to weakness in Iran’s economy than to any diminution of interest on the part of Germany.
What irks American officials most about German deals with Iran, however, is that Germany subsidizes them. Through a credit guarantee program, Bonn has underwritten roughly $10 billion in sales and investment by German firms. Iran’s economic troubles have recently made it more difficult for that country to make payments on deals backed by the credit insurance. But instead of taking the opportunity to bring Iran to its knees economically, as the United States urged, Germany rescheduled the debt in February 1994 on generous terms. Acting on the government’s cue, German banks rescheduled another $600 million in private debt. Germany granted an additional $102 million in credit guarantees to Iran this February, brushing aside more U.S. objections.
It was no secret that Germany’s economic health, pending contracts for Siemens and other German firms, and Chancellor Kohl’s reelection chances were factors in Germany’s decision to reschedule. “With these concessions, Die Woche reported, “Bonn hoped to get back at least a part of the money over time, and to be able to continue being involved in business in Iran.” Germany’s action encouraged other European governments to follow suit; they have rescheduled some $12 billion in credit since 1994. The World Bank has extended a total of $463 million to Iran, with European countries overriding American veto efforts.
Credits from Germany and other Western nations help Iran save money that it can then use to buy arms and weapons of mass destruction. The Germans, however, have drawn the line at the sale of German weapons and dual-use technology to Iran. U.S. and German officials say privately that this is a result of not only Germany’s interest in preventing the spread of weapons of mass destruction, but also its acute embarrassment at past disclosures that German components were used by Libya and Iraq to build chemical weapons plants. After some prodding of Germany, American officials now pronounce themselves satisfied with German efforts. “They’ve shown remarkable restraint,” says one senior Clinton administration official.
The temptations have been substantial. Construction of the stillunfinished Iranian nuclear reactor complex at Bushehr, which Russia recently contracted to complete at a cost of $1 billion, was begun by Siemens in the 1970s. Work halted after the 1979 revolution in Iran because of the Khomeini regime’s initial hostility toward nuclear energy. The leaders of the Islamic Republic soon changed their mind and began courting Siemens to finish the job. Siemens showed interest but hesitated; German government officials were not eager to offend the United States or permit such a delicate project in what had become a hot war zone.
After the war with Iraq, Iranian entreaties to Siemens began anew; according to The Wall Street Journal, Fallahian even met with Siemens officials during his 1993 visit to Germany. Once again, the company was in the difficult position of wanting to do business but fearing official U.S. and German responses. Nevertheless, Iran could always use subtle threats against Siemens’ other interests in the country as bargaining chips when negotiating with Germany and the company. According to the Journal, Siemens briefly considered a scheme under which Skoda, the Czech industrial conglomerate partially owned by Siemens, would undertake the job. (Siemens denied this.) But the United States put enormous pressure on both Prague and Bonn to prevent either company from taking the contract, and the idea was eventually dropped.
Earlier this year, U.S. nuclear trade journals reported that the German government had floated a plan whereby Siemens would provide the reactor, conditioned on Iran’s agreeing to extra nonproliferation verification procedures similar to those the United States had just negotiated with North Korea. The underlying notion, says a German nonproliferation official familiar with the proposal, was that if the plant is going to be built, it might as well be built by Germany, a much more reliable partner to the United States than Russia. Moreover, the plant could be built under conditions the United States had found acceptable with North Korea. Germans also point out that Iran has been given a clean bill of health by the International Atomic Energy Agency and thus is legally entitled to obtain civilian nuclear technology from developed countries. Privately, German officials still express sympathy for the plan; however, it was apparently shot down at a low level by U.S. officials, and Germany decided the political costs of pursuing it were too high. German officials deny that it was ever formally proposed.
A Long-Time Affair
As powerfully as economics figure in German policy, reducing the German-Iranian nexus to a mere matter of buying and selling would be a mistake. If only Germany’s interests in the Middle East were that one-dimensional. Germany sincerely believes that the best way to moderate Iran is by engaging it economically and diplomatically. In part this is an extrapolation from the claimed success of Ostpolitik. In part it is a result of analyses by Germany’s Middle East experts, who disdain the Americans as naifs on matters Persian. They tend to view Iran’s ruling circles much the way America’s China hands view the Forbidden City in Beijing—as a nest of intrigue where hard-liners constantly battle more pragmatic figures. Germans believe their technology and finance can provide the rewards Iranian moderates seek for their policy, and hence the leverage to pry open Iranian society. “It is wrong to isolate a nation of 60 million people which plays a key role in the world and put it into a corner,” Foreign Minister Klaus Kinkel recently told reporters in Washington.
German policy also stems from grander, historically rooted geopolitical interests in southwest Asia. Americans are scarred by the 1979 seizure of the U.S. embassy in Tehran, the Iran-contra arms-for-hostages affair, and the fatal involvement of U.S. marines in Lebanon in 1983. But the relationship between Persians and Germans has historically been marked by more or less friendly mutual opportunism. Before World War I, imperial Germany sought influence in Iran because Germany considered it, along with the crumbling Ottoman Empire, fertile ground for German commerce. To Persia, Germany represented a source of top-quality Western technoloy and, since the Germans had no colonial record in the Middle East, a neutral foreign power that could counter the British and the Russians.
The upheaval brought on by World War I in both countries interrupted this dalliance, but by the late 1920s it had resumed: Germany’s advisers were in charge of Iran’s arsenal, its pilots flew the German-built planes of Iran’s air force, and its technocrats helped establish the Iranian National Bank. After the Nazi takeover in Germany, Shah Reza Khan turned to Berlin as a source of technology and again as a counterweight to Moscow. The Nazis, for their part, saw Iran as a key element in their strategy to isolate the Soviet Union and Britain’s Indian Empire. German influence ended when the British and Russians preemptively invaded Iran in 1941 and forced the shah to abdicate.
In the postwar era, West Germany followed the United States in cozying up to Shah Reza’s heir, Shah Mohammad Reza Pahlavi. German firms did big business in Iran. The shah’s government in turn acquired 25 percent of Friedrich Krupp GmbH, a powerhouse of German heavy industry. In deference to the shah, Bonn refused to let Amnesty International hold a conference in Germany on Iran’s human rights abuses and even gave information to SAVAK, the shah’s notorious intelligence agency, on the ruler’s political opponents.
After the 1979 revolution, however, the German-Iranian relationship cooled. During the Iran-Iraq war, Germany sold billions of dollars worth of industrial goods to Iraq. Still, Foreign Minister HansDietrich Genscher never severed his country’s channels to Iran. (When then-Prime Minister Sadegh Tabatabai was caught in the Dusseldorf airport with 1.7 kilograms of opium in 1983, West German authorities quietly arranged to drop the charges.) In 1988, as the IranIraq war was drawing to a close, Genscher traveled to Iran with an economic delegation, despite Iran’s hanging of a dissident a few days earlier. The end of that war, the end of the Cold War, and German reunification paved the way for today’s “critical dialogue.”
Has It Worked?
In the end, that dialogue must be judged on its results, and Foreign Minister Kinkel himself concedes that, so far, “they have not been phenomenal.” Kinkel and other German officials instead emphasize the intrinsic value of the dialogue. They claim, however, that their Iranian connections helped in the release of the last American hostages from Lebanon in 1992, in the Arad talks, in the apparent slight easing of the fatwa against Rushdie, and in an apparent cessation of Iranian terror attacks in continental Europe since the Mykonos attack in 1992. Following the meetings with Fallahian, German intelligence official Schmidbauer defended them to Die Welt, saying, “If you don’t cooperate internationally, you get crimes on your own soil.”
Yet the Mykonos case also raises questions as to whether Germany’s covert contacts help root out terrorism or in the long run encourage it. (Iranian-backed terrorism in the rest of the world continues, notably in the 1994 bomb attacks on Jewish targets in London and Buenos Aires.) Shortly before Fallahian’s visit in 1993, in fact, a German businessman was arrested in Iran on corruption charges, presumably to be held as a bargaining chip in the Mykonos case. Having initially denied it in public, Schmidbauer testified at the Mykonos trial last year that, sure enough, Fallahian during his visit had demanded the release of the Mykonos defendants. Germany refused. But it was hardly an unreasonable demand for Fallahian to make, given the apparent past dealings between the two governments.
Germany’s handling of Abdel Fatteh Ghadanfar and Hafez Dalkamoni, two Palestinians believed to have been involved in the bombing of Pan American Airways Flight 103 over Lockerbie, Scotland, and jailed in Germany in 1991 on separate terror charges, was another sore point for Bonn’s British and American allies. In mid-1991 German officials approached Iran, albeit with inconclusive results, about trading the Palestinians for two German hostages in Lebanon, Thomas Kemptner and Heinrich Struebig—this according to a 1995 report in the conservative London Daily Telegraph that bore all the hallmarks of a British government leak. The same report also claimed that Ghadanfar’s discreet November 1994 release (after just three years of a l2-year sentence) and deportation to Syria were payback for Iran’s release of an alleged German spy, Horst Szimkus, who had been arrested in 1989, tortured, and sentenced to death in 1992 for spying.
German relations with Iran have had an impact on Bonn’s ever-delicate relations with Israel. Eager for German military and economic aid, hoping the Germans could use their influence with Iran to reduce Tehran’s attempts to sabotage the Middle East peace process, and believing that Germany might be of some help in freeing Ron Arad, Prime Minister Yitzhak Rabin’s government initially refrained from harsh criticism of the German-Iranian connection. Indeed, amid the furor over the 1993 Fallahian visit, Israel’s official reaction was conspicuously muted, largely because Israelis knew that the meeting had to do, in part, with Arad’s fate. Kohl personally requested information on the airman in two telephone conversations with Iranian President Hojatolislam Hashemi Israeli and Iranian negotiators, speaking in Bonn through a German official who shuttled back and forth between their rooms, apparently discussed an agreement for Arad that would have involved Israel’s release of captured Hezbollah and Hamas leaders.
German-Israeli relations suddenly soured however, when the Frankfurter Allgemeine Zeitung, which is politicaly close to Kohl, broke the story of the secret talks and suggested Arad’s release was almost a done deal. Israeli officials were incensed at the report. Ori Orr, the chairman of the Knesset defense and foreign affairs committee, accused Kohl of leaking the report in order to counter criticism of Bonn’s renewal of trade credit insurance to Iran—which Israel saw as violating an understanding that Bonn would not seek political gain from its Arad role. At that, Kohl, whose government was simultaneously negotiating hundreds of millions of dollars worth of economic and military deals with Israel, became enraged, obliging Rabin to make an unscheduled fence-mending trip to Bonn. Israel remains wary of German intentions. “They definitely exploited the fact they tried to find Arad to explain away the intimate relationship they are developing with Iran,” says a senior Israeli official. “That particular episode was a very unfortunate one.”
Carrots, Sticks, and Donkeys
The United States’ policy, too, must be judged by its results, and so far, the record is mixed. Certainly, American expressions of outrage at Iranian behavior have kept the spotlight on dangerous and immoral actions that might otherwise have been ignored by Western governments. Without constant U.S. pressure, the allies might not have curtailed their trade with Iran to the degree they have, as in Germany’s decision not to allow Siemens to rebuild the Bushehr reactor or Japan’s decision to delay -though not ellliminate-a second credit for construction of a hydroelectric dam. In the main, though, Washington has failed to persuade the other major industrial nations. With European and Japanese cooperation in Clinton’s new embargo, the Iranian economy might well have been fatally crippled. But without it, the chief result of tighter U.S. trade restrictions will be to surrender business to American companies’ European and Asian competitors.
American policy, then, while morally unassailable, seems practically problematic. The European Union and its constituent nations, especially reunified Germany, are spreading their diplomatic wings. As this happens, European calculations about where, how, and with whom to engage in “constructive engagement” will give greater emphasis to national interest than to the alliance with the United States. The German dalliance with Iran typifies the kind of issue that may work to loosen, if not sever, transatlantic ties. It may become even more difficult to muster multilateral backing for sanctions if Germany and Japan achieve their goal of becoming veto-wielding permanent members of the U.N. Security Council.
Yes, it is galling when Germans snif fat American naivete about Iran, even as Bonn claims it is attempting to beat the mullahs at what is plainly their own game: the semi-secret international bazaar where deals involve hostages, secret intelligence, and nuclear reactors. But, like it or not, the Europeans have a point. It is hypocritical of the United States to condemn Germany and others for trading with Iran while America itself eagerly trades with China and then asks Europe to help buy a nuclear reactor for North Korea. And it is hypocritical of the United States to pretend that the containment of Iran is one of its paramount foreign policy objectives when clearly Washington will tolerate a certain level of trade and other relations between the mullahs and America’s European allies-if only because the United States can do little to stop it. The United States must continue to insist strongly that Germany and the other European powers not venture into forms of aid that could contribute directly to Iran’s military buildup. But beyond that, American demaraches to Bonn, though justified in principle, are likely to be futile, and they may eventually corrode a relationship that is at least as important to American interests as the balance of power in the Persian Gulf.
The Clinton administration has little choice but to evolve a more flexible containment strategy. This does not require the United States to search once again for Iranian moderates, a la the Reagan National Security Council. Rather, the United States should seek to limit, rather than abolish, German and other European economic ties with Iran and then exploit those ties, odious as they might be. If the stick of American sanctions were to be wielded in clever alternation with the carrot of European trade, both instruments might be more effective in inducing changes in Iran’s behavior. As matters now stand, the Iranians are the ones exploiting the rifts among Western countries. A rethinking of tactics by Washington could help turn the tables.