German Foreign Policy Towards Iran Before World War II

Political Relations, Economic Influence and the National Bank of Persia

Rashid Khatib-Shahidi

• Publisher: I.B. Tauris
• Year: 2013
• Print ISBN:
  9781848853249
• Edition: 1
• eBook ISBN:
  9781786724687
• Topic: History
• Subtopic: Middle Eastern History
• Index: History

Early twentieth-century Iran had been dominated by the competing influences of the two great imperial powers of the time - Russia and Britain - making it difficult for a third power to establish a foothold. But an emergent, highly industrialised and assertive Germany in the 1930s became an attractive ally through which Iran could cut loose from domination by Britain and the Soviet Union, allowing it to seek modernity outside the constraints of old imperial interests. This led to the development of close commercial ties between Reza Shah's Persia and Hitler's Germany in the interwar period, an aspect of German foreign policy that is often overlooked. It was the National Bank of Persia, established in 1927 under German management, and with Kurt Lindenblatt as its governor, that was to be the vehicle for Germany's commercial expansion into Iran. The Bank was a vital engine driving industrialisation, even after Lindenblatt retired and was followed by Gholam Reza Amir-Khosrari and a board of directors including Hossein Ala and Abdul Hossein Hazhir.
By the mid-1930s, a new German foreign policy approach of active diplomacy fortified initial inroads into the Iranian economy, building upon the foundations laid by individual entrepreneurs, the National Bank and the construction of the Trans-Iranian Railway. Iran evolved into an attractive country for international trade and, at the outbreak of World War II, Germany was Iran's largest trading partner - surpassing both the Soviet Union and Britain. These close ties reveal a complex relationship between Germany and Iran, and an admiration of the Nazi's brand of industrial, scientific and organisational progress. It was, however, a relationship that came to an abrupt end with the Allied invasion of Iran in 1941 that deposed the Shah. Khatib-Shahidi delves into previously untapped German primary sources to explore the nature of German involvement in Iran between the wars, examining how it came to be moulded by a handful of individuals. This book is a revealing resource on the historical ties between Iran and Germany, making it indispensable for students and researchers of European Imperialism and Colonialism in the Middle East as well as of Iranian Political and Economic History.

1

PERSIA, THE INTERNATIONAL ENVIRONMENT, AND THE GERMAN ECONOMIC APPROACH

Before 1921, two factors operated to encourage German involvement in Persia. The first was Germany’s desire to become a major player on the world stage, partly to distract attention from its domestic difficulties. The second was Persia’s realisation of being squeezed between the rival interests of Britain and Russia. Russia wished to extend its influence in Persia, primarily to gain access to the Persian Gulf and Indian resources;¹ Britain, on the other hand, was anxious about forestalling what it saw as a potential Russian threat to India.

As a result, from the turn of the twentieth century both powers became more heavily involved in the region to the detriment of Persia’s autonomy. Persia therefore looked to a third power to counterbalance these two. Ideally, it needed a major power that had no direct interests in the region and would therefore pose no threat to Persia’s desire for independence, while contributing to its economic development. From a Persian point of view, Germany appeared to fit the bill perfectly. However, Germany’s defeat in 1918 in the interim limited its potential to exercise any real influence in the Middle East.

In the formation of Germany’s relations with late Qajar Persia, German foreign policy was motivated by economic objectives. This chapter will cover the political background of German foreign policy towards Persia and conclude by mapping out Reza Khan’s motives for involving Germany.

British and Russian National Interests in Qajar Persia

How Persia came to find its sovereignty surrendered to foreign powers becomes evident when looking at one example of a strategy that enabled Britain and Russia to pursue their national interests in the country. This strategy can be described as one of ‘economic dependency’. With respective diplomatic support, British and Russian entrepreneurs, aware of Persia’s economic plight, sought mining concessions and other privileges from its government. By the turn of the century Britain and Russia were exploiting Persia’s major resources. In addition Russia tried to increase its influence in Persia by intensifying trade, while Britain tried to counterbalance Russian efforts by taking an interest in the development of communications and the oil industry. To this end the British, who had initiated the Indo-European Telegraph Company, started developing ambitious railway construction plans which, for strategic reasons, included Persia.

All this points to the fact that Russia and Britain had a genuine interest in the economic exploitation of Persia. However, there is a further factor that should not be ignored: both also had a political agenda that brought them into conflict. Clearly, Britain and Russia were competing with each other in a race for a dominant position or at least for the preservation of a balance of power in Persia. With the visits of Naser ad-Din Shah (1848–96) to St Petersburg in 1873, 1878 and 1889 the Russians had been given an opportunity to step ahead in the race for influence. Russia’s hidden agenda becomes clearer when considering Russian financial support for the Shah’s third trip to Europe.²

Further evidence for Russia’s game plan in Persia emerged in the guise of a 22.5 million ruble loan offer. During the late 1890s the Persian government was suffering from a major financial crisis. It required capital to serve its debt and maintain the government’s budgetary expenditure. Britain and the Imperial Bank of Persia were reluctant to raise financial resources for the Persian government, but by 1898 the British were contemplating a conditional loan of more than £1.25 million. Simultaneously they were blocking foreign loan offers to Persia especially if they presented a threat to British interests.³ With the return of Amin al-Soltan to power in 1898 the success of Russian endeavours towards political influence in Persia by means of government loans became apparent.

In December 1899, the Russian foreign minister Count Mikhail Nikolaevich Murav’ev proposed the final conditions for a 22.5 million ruble loan to Persia – a negotiation that took place without British consent.⁴ The terms of this loan called for repayment over the next 75 years. By accepting this loan Persia played into Russian hands. On the one hand, one of Russia’s conditions was that Persia should not accept any other foreign loans without its approval. On the other, Russia intended to secure its repayment by means of revenues from Persian custom duties except those of Fars and the Persian Gulf ports. If this did not prove sufficient to repay the loan Russia would take over the direct administration of Persian customs.⁵ It thus appears that Russia was trying to exercise influence over Persia’s domestic as well as its foreign affairs. This loan was agreed to by the Persian government, represented by General Mirza Reza Khan Arfa od-Dowleh, and the Russian Discount Bank, in January 1900, in St Petersburg.⁶ Moreover, a further loan of 10 million rubles was granted in 1902.⁷

The Russian loan of 1900 took the British by complete surprise. British Ambassador Sir Charles Scott ‘expressed his government’s “profound astonishment” that the loan had been negotiated without the exchange of views with England’.⁸ It was clear that the loan threatened British interests by allowing for the possibility of Russian control over Persian finances. Russia had secured its position as the main provider of funds to the Persian government. Britain could not allow such moves to go unchallenged. The then British minister in Tehran, Sir Arthur Hardinge, was convinced that the more the Persian government fell into debt to Britain the more would British political influence in Persia increase and Russian influence decrease.

In 1901 the British, encouraged by Lord Curzon, therefore started to negotiate a substantial loan to the Persian government, in return for, among others, all revenues generated by the Persian telegraph lines and the custom duties collected in the region of the Persian Gulf and of Seistan province.⁹ Such a loan would strengthen British influence over areas of strategic importance to India. However, the British proposal did not materialise as it failed to comply with the terms and conditions set by the preceding Russian loan. In October 1901 the Political Committee of the Indian Council rejected the use of Indian funds for loans to Persia.¹⁰ Nevertheless, in 1903 and 1904, British loans were successfully negotiated with the Persian government.¹¹

As a result, after this breakthrough the Persian government was on better financial footing, although not to an extent that would have covered all budgetary requirements originally projected by the government. On the negative side Persia had sourced out much of its control, particularly over its finances, to Russia and Britain. It is paramount to examine how Persia dealt with its ‘economic dependency’.

Persia’s Banking Concession for Germany

The loss of financial independence led Persia to believe in the usefulness of approaching a third power that ideally could rescue it from its financial dilemma. One plan of the Persian government to address its financial deficits was to offer a banking concession to Germany in July 1906.¹² From a Persian perspective Germany had many positive attributes that made it a natural choice for an economic partnership.

However, a Persian banking concession for Germany was not a strategically wise move, since it compromised British and Russian interests. The question arises about the extent to which Britain and Russia would tolerate actions undertaken by the Persian government that might ultimately threaten their national interests in Persia.

Both Britain and Russia were aware of the financial potential of German projects in the Middle East. From a German point of view a bank in Persia would have represented an essential tool for ensuring profitable trade and commerce for German companies.¹³ However, what Britain and Russia probably did not expect from a comparatively weak third power was the audacity to enter their historically claimed spheres of interest. This move could have been interpreted as German disrespect for the already established balance of power in the region. Alternatively, such a move might have signalled the rise of a bold contender determined to achieve ‘its’ objectives.

In both cases the intensity of the British and Russian reactions would have been in correlation with the level of perceived threat to their individual interests in Persia from a competing German bank. Britain feared the loss of power for the Imperial Bank of Persia due to German competition. Similar concerns also alarmed the Russian-controlled Banque d’escompte et de prêts de Perse. In the case of a third power penetrating their spheres of interest, it is reasonable to expect initial discontent and disapproval reflected by general hostility towards any German enterprises, regardless of their inherent value for Persia.

Fortunately for Britain and Russia neither the Orientbank, established in 1906, nor the Deutsche Bank showed any serious interest in expanding their business into Persia.¹⁴ At this stage the decision over a German bank was largely based on economic profitability, overriding any political motives. From the German bank’s point of view investments in Persia were considered too risky owing to Persia’s political fragility and unpredictability and to the lack of securities for the repayment of granted loans.

This circumstance gave both Britain and Russia time to take some preventive steps, first, against German attempts to establish itself in Persia, and second, in preventing Persia from transferring any control to Germany. It is patent that both powers began to recognise the first signs of a new German Middle East policy. As a consequence the need to secure their power and authority, and to protect their commercial investments in Persia became evident to Britain and Russia.

Fortunately for Britain and Russia the proposed banking project was abandoned, owing to the low commercial viability of a German bank in Persia for the investing German banks and their hostile reception by the Britain and Russia. However, this still remained a serious threat since the success of a German bank in Persia might have had wide-reaching consequences. This threat at least prompted Britain and Russia into recognising Germany as a potential contender in Persia.

In the case of commercial viability, a banking concession would have been an ideal opportunity for Germany to establish itself in Persia. This notion translates to a simple formula that was representative for Germany’s Middle East policy during the early periods of the twentieth century. Where there were commercial opportunities, there was German interest; where Germany could not gain financial benefit there may have been a will but little incentive to justify investments.¹⁵ Conceivably this rationale resulted from the controversial earlier German experiences in Africa.

It is of interest to identify what preventive measures by Britain and Russia could have resulted from a German involvement in Persia at this early stage. Both countries must have acknowledged that Persia was using Germany to drive a wedge between their established influence in Persia. As both started to address their Persian problem more intensely, the awareness of a third, rather small but threatening contender contributed to closer bilateral consultations. The German threat called for closer cooperation and provided potentially a viable motive for the division of Persia into spheres of interest, with the goal of deterring other powers from entering Persia, while safeguarding British and Russian activities geographically.

A further consequence resulting from the threat of potential German involvement in Persia was a noticeable shift in the British and Russian ‘Persia-policy’. Both powers henceforth started working toward developing Persia’s financial and manufacturing industry. The theory behind this shift of policy was that the sympathies of the Persians could be won through the generation of relative wealth. In a more substantial sense this move would provide Persia with a more solid economic base and generate much needed income for the government. Thus the requirement for loans would be less, which also meant less demand for a third power granting loans in exchange for concessions.

Germany’s Expansion into the Middle East

Historically, the visit of Kaiser Wilhelm II to the Middle East and his declaration of support, friendship and protection for the Islamic world marked a significant change from the non-confrontational, non-involvement foreign policy of Reichskanzler Otto von Bismarck.¹⁶ This shift became known as Weltpolitik or Neuer Kurs, and was intended to ensure Germany ‘ein Platz an der Sonne’ (a place in the sun).¹⁷

The main objective of Weltpolitik was to seek colonies and turn Germany into a world power by looking for new sources of raw materials, opening new markets for the sale of manufactured products and creating new opportunities for capital investments. The upholders of this colonial policy were the Kaiser and von Tirpitz, the permanent secretary of his navy, together with the organisation known as Alldeutscher Verband. This organisation was created in 1891 as a reaction to the German–British barter agreement of 1 July 1890, whereby Germany exchanged its East African colony Zanzibar for the North Sea island of Heligoland. The main goal of the Alldeutscher Verband was to promote German national interest, reduce the gap between national identity and imperialism, promote Germany as a world power and pursue a more aggressive colonial policy. But it did not take long for the German Empire to realise the marginal economic success it was having with its colonial policy.

At the turn of the twentieth century Germany’s expansion policy faced major obstacles. This was partly because by this time the majority of the world was already divided between world powers and partly because Germany’s expansion policy, used as a political tool, had created domestic expectations that did not materialise. The German experiences with colonialism and implementation of influence abroad were discouraging. Frustration in this area intensified the desire for success and resulted in more radical policies.¹⁸

Moreover, Germany’s industrial growth made the supply of raw materials progressively important. As the demand for raw materials increased, prices rose and Germany became increasingly dependent on expensive imports of raw materials. In a quest for survival, German industry needed to look for primary resources to secure future supplies for the requirements of a growing population and its overseas markets. In addition, the more German industry was able to produce, the more difficult it became to find export markets for its products. This led to fears of competition from countries that had access to cheap natural resources. Hence, countries that had the potential of supplying Germany with cost-effective natural resources where high on the agenda.¹⁹

The Middle East was an obvious choice, and one for which Germany at the time was pre...

Table of contents

• Cover
• Title page
• Copyright
• Dedication
• Contents
• List of Illustrations
• Acknowledgements
• Introduction
• 1. Persia, the International Environment, and the German Economic Approach
• 2. German Foreign Policy Towards Persia
• 3. German Foreign and Economic Relations in Persia: Their Evolution and the Role of the National Bank
• 4. Challenges for German Foreign Policy towards Persia and the National Bank
• 5. The National Bank Controversy and the End of the Taimurtash Era
• 6. The Lindenblatt Affair and the National Bank
• 7. Germany’s Political Relations Advance Economic Influence in Persia
• 8. Conclusion
• Notes
• Bibliography