Exclusive-VW investor Qatar complicates plant deal talks with Israeli arms maker, sources say

By Christina Amann and Andreas Rinke

BERLIN, June 17 (Reuters) - Volkswagen's plans for a deal with Israeli arms maker Rafael to use its struggling Osnabrueck plant are being complicated by Qatar's sovereign wealth fund, the German carmaker's third-largest investor, three people familiar with the matter told Reuters.

Qatar, which holds 17% of voting rights in Europe's biggest carmaker via the Qatar Investment Authority, has raised issues over the talks between the two companies, pointing to the Gulf state's complicated relationship with Israel.

That risks delaying one of Volkswagen's key projects in its ongoing turnaround, including attempts to offload idling plants via deals with defence firms as low auto sector demand across the continent bites.

Spokespeople for Volkswagen, the group's supervisory board and the QIA all declined to comment on the matter, which has been previously unreported.

RAFAEL INTERESTED IN MAKING IRON DOME SYSTEM PARTS AT PLANT

Volkswagen has been in talks with defence companies over future prospects for Osnabrueck, where production is currently scheduled to end next year.

State-owned Rafael is interested in manufacturing components for Israel's Iron Dome missile defence system at the plant, and has signed a letter of intent to buy the site, sources told Reuters in late April.

The prospect of Qatar's sovereign wealth fund facilitating a deal with an Israeli defence company would place Doha in an uncomfortable position at a time of escalating conflict in the Middle East.

Qatar has no formal diplomatic relations with Israel, and has instead carved out a distinct role as a back-channel mediator between Israel and Hamas, which maintains a political office in Doha.

There is also deep and widespread public support in Qatar for the Palestinian cause, and Doha has long made any normalization of relations with Israel conditional on a credible pathway to Palestinian statehood.

QIA HAS TWO SEATS ON VW SUPERVISORY BOARD

The QIA is Volkswagen's third largest shareholder after the Porsche SE investment vehicle of the family owners and the state of Lower Saxony. It has two seats on the carmaker's supervisory board.

Two sources said that Lower Saxony, home to Osnabrueck and Volkswagen's headquarters in Wolfsburg, could be brought on board via a joint venture between Volkswagen and Rafael in order to reach a solution.

State premier Olaf Lies, who sits on Volkswagen's supervisory board, declined to comment directly on the Qatar issue, urging Volkswagen to find a long-term solution for the Osnabrueck plant, which employs 2,300 workers.

"I expect the company to live up to this responsibility and present the announced decisions in a timely manner. The state will provide constructive support wherever it is appropriate and possible," he told Reuters.

(Reporting by Christina Amann and Andreas Rinke; Additional reporting by Andrew Mills and Rachel More; Editing by Christoph Steitz and Jan Harvey)