Nuclear dispute, purge to hit EU exports to Iran

European Union diplomats said other EU states could expect sales of their wares to the Islamic republic to plummet too as Tehran stepped up its punishment of countries that oppose its plans to develop a full-scale nuclear programme.

Germany is the leading exporter of goods to Iran, and had exports worth 3.6 billion euros ($4.43 billion) in 2004 and an estimated 4 billion euros in 2005, according to the German Chamber of Industry and Trade (DIHK).

"For 2006, we expect a significant decline of exports," Jochen Clausnitzer, head of the DIHK's Near and Middle East Department, told Reuters.

Since he took office in August last year, Iran's hardline President Mahmoud Ahmadinejad has taken a defiant stance against the West, calling for Israel to be "wiped off the map" and vowing to forge ahead with Iran's nuclear fuel programme.

Ahmadinejad has been purging officials in state firms and ministries and replacing them with people who are expected to close fewer deals with German firms, Clausnitzer said.

"As a result, there will be very few orders won (by German companies)," Clausnitzer said.

The West accuses Iran of developing nuclear weapons under cover of a civilian energy programme, a charge Iran vehemently denies. Western countries are now considering taking steps against Iran that could lead to U.N. sanctions.

"Given the current political situation, this business (Iran) will be less and less interesting for German companies in the medium and long term," Clausnitzer said.

Iran has threatened to punish countries that back the U.S. and EU drive to shut down its uranium enrichment programme. Last year, diplomats and industry sources said Tehran banned British and South Korean imports in order to punish those countries.

Iranian media reports last year included the Czech Republic and Argentina on Tehran's black list.

In 2004, Germany accounted for 12.8 percent of Iranian imports, followed by France with 8.3 percent and Italy with 7.7 percent. Other important exporters of goods to Iran included China, United Arab Emirates, South Korea and Russia.

EU EXPORT FEAR

Exports to Iran from the 25 European Union countries totalled 30.5 billion euros in 2004, up from 17.7 billion in 2000, according to Eurostat, the EU statistics bureau.

Italy was Europe's top overall trading partner with Tehran, with imports and exports adding up to 4.3 billion euros, according to Italy's Institute for External trade. Oil provides the bulk of Italy's imports from Iran.

European exports to Iran are mostly machinery, transport equipment and chemical-related products. After oil, Iran's main EU export is pistachios -- 401 million euros worth in 2004.

Germany, France and Britain have been leading an EU effort to persuade Iran to give up its uranium enrichment programme in exchange for economic and political incentives.

But Iran has repeatedly rejected the offer, saying it will never give up its right to produce enriched-uranium fuel.

Now the "EU3" have joined Washington in demanding that the Vienna-based International Atomic Energy Agency (IAEA) refer Iran's case to the U.N. Security Council, which could impose economic sanctions, when the IAEA board meets next week.

EU diplomats say Italy and other EU exporters to Iran like Austria and Portugal fear they, like Germany, will be penalised by Tehran and will not get lucrative contracts if they support referral of Iran's case to the U.N. Security Council.

"Iran is turning to China and elsewhere in Asia to replace European suppliers," one EU diplomat said on condition of anonymity.

Clausnitzer said the DIHK had told the German government that sanctions would not be effective and that only a negotiated solution would solve the problem.

"The DIHK fears that U.N. sanctions would result in binding the Iranian people and the Iranian government together, which is a dubious political goal," he said.

"The case of Iraq showed that sanctions are ineffective. We have explained this to the German government. We have also informed our contacts in Iran of our concerns about developments there and will continue to do so," Clausnitzer said.

(Additional reporting by Silvia Aloisi in Rome)

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