Cuba Dollar Tax Reveals Complexity of Trade Embargo
By MARC FRANK
HAVANA, Cuba, May 15, 2009
If you stand lookout from the housing projects along the back highway to Havana's Jose Marti International Airport, you will eventually witness a motorcade of Transval (Cuba's Brinks) armored vehicles speeding toward the airport, surrounded by the flashing lights of police cars and motorcycle cops.
Cuba's government is moving cash, mainly U.S. dollars, to somewhere on the planet where a bank has agreed to process the bills for a few percentage points above normal exchange rates.
Americans, unlike tourists from other countries, cannot use credit cards drawn from U.S. banks in Cuba. Americans must use cash, because Cuban banks are prohibited from any banking relations with their U.S. counterparts. The catch 22: Under the U.S. trade embargo, it is also illegal for Cuba to use dollars or for anyone anywhere to do business with the country in U.S. currency.
"The U.S. embargo prohibits Cuba from using dollars for any reason. Therefore, remittances come here, American travelers come here, it doesn't matter who it is with dollars, they change them into Cuban money," said Kirby Jones, president of the Washington-based Alamar Associates, which consults on doing business with Cuba and the embargo.
"Cuba can't use these dollars, they have to change the dollars somehow into other currencies, and that costs money."
The White House has expressed concern about a 10 percent tax on U.S. dollars entering Cuba ever since President Barack Obama last month lifted restrictions on Cuban-Americans visiting the island and sending funds to relatives. If legislation in Congress allowing all Americans to travel to Cuba becomes law, the dollar tax no doubt will become even more of an issue.
"They could reduce charges on remittances to match up with the policies that we have put in place to allow Cuban-American families to send remittances. It turns out that Cuba charges an awful lot, they take a lot off the top," Obama said at the close of the Summit of the Americas last month in Trinidad and Tobago.
"That would be an example of cooperation where both governments are working to help Cuban families and raise standards of living in Cuba," he said.
The U.S. Embargo Is Like "A Big Bowl of Spaghetti"?
If only the life and the trade embargo were that simple. … The dollar motorcade holds the key to why it is not.
The dollar became legal tender in Cuba alongside the peso back in 1993 after the fall of the Soviet Union plunged the Communist-run island into economic crisis and forced it to open up to Cuban Americans, tourism and foreign investment.
Dollars became the dominant currency and were used to buy many consumer goods in state-run dollar stores.
The Clinton administration apparently looked the other way. The Bush administration decided to enforce the rules.
In May 2004 the U.S. Federal Reserve fined UBS, Switzerland's largest bank, $100 million for illegally dealing in dollars with Cuba, after congressional embargo proponents leveled charges of money laundering, and the Bush administration threatened to pursue Cuban dollars wherever they might find a new home.
The Cuban dollars did not come from drug trafficking, gambling or other criminal activity. They came mainly from Americans, mostly of Cuban descent, who visited or sent funds to family and friends.
Cuba retaliated by replacing the dollar with its own currency, called the convertible peso, which it said was worth $1.08. It then slapped a 10 percent exchange tax on dollars entering the country. That meant a whopping 18 percent exchange charge for convertible pesos, plus a processing fee, or around 20 percent.
The issue, according to the White House, was discussed during informal talks with Cuba in Washington, but it is hard to imagine Havana dropping the tax unless Washington allows it to use U.S. dollars. Government sources report the flow of dollars into the country has declined significantly in favor of euros, Canadian dollars and other currencies.
Housing project residents confirm there are fewer armored trucks and motorcades these days.
Maite, a 28-year-old housewife, was one of a group of women last Sunday cleaning house, watching the kids and chatting together.
"I love Obama," Maite, of African-Cuban descent beamed, to nods all around.
"But I think it is going to be very hard to undo everything that has happened over the last 50 years," she said, the smile becoming a pout. "Everything has become so tangled. It is like a big bowl of spaghetti."
When Will the Embargo Loosen?
Indeed, loosening the embargo piece-by-piece is better than nothing, said Alamar's Jones, who opposes the embargo. But it sure can get complicated.
"When Carter lifted the travel ban in 1977 they didn't realize it raised other issues, for example credit cards, insurance, all sorts of issues associated with travel that had nothing to do with a person going from A to B," Jones said.
So if travel opens up how do people pay? Not with their Visa card or Mastercard if they were issued by U.S. banks. So there will be a need to allow direct banking relations, and that means the dollar tax, which is only on cash, will not apply. But if for travel, why not for U.S. food sales that now must go through third country banks?"
Under a 2000 amendment to the embargo, Cuba can purchase food for cash, and bought than $700 million worth last year. But embargo rules on direct bank relations and dollar use remain.
The Cubans therefore must first turn dollars into another currency and put them in a third country bank, which then changes the money back to dollars to pay cash for the food, absorbing the exchange fees.
"Any measure raises other issues related to the embargo, which raises other issues and then more issues," Jones said of the dollar tax squabble.
"It's like a sweater. You pull a thread and stuff just begins to unravel."
Economist Intelligence Unit, Cuba Country Report, November 2004 pp 18-19
The most important development in economic policy during the past quarter
has been the ending of the use of US dollars in the domestic economy. News of
the change came on October 25th in a televised announcement by the
president, Fidel Castro, that dollars were to be withdrawn from circulation.
Banco Central de Cuba (the Central Bank) legislation setting out the new rules
was dated October 23rd, but before the decision was made public the news
was communicated, in confidence, to the staff who would need to manage the
transition in banks and retail outlets.
Since the legalisation of the holding of US dollars in 1993, dollars have been the
medium of exchange for most retail sales outside the ration system. In 1994, a
Cuban currency, known as the peso convertible (PC, the convertible peso), was
introduced at par with the US dollar, and this has circulated freely alongside the
dollar since then. The announcement stated that from November 8th only the
convertible peso would be accepted in dollar retail outlets. For dollar-holders,
the move would not change the value of their money nor restrict access to
goods sold in the dollar shops if dollars were exchanged for convertible pesos
by November 8th, but any exchange of dollars for convertible pesos after that
date would carry a 10% commission. The deadline for changing currencies
before the imposition of the 10% charge was subsequently extended by one
week, to November 14th.
The move came as a surprise to the Cuban public, although it appears to have
been carefully planned. It was presented as a direct response to US measures,
referring to the US administration’s drive to strengthen the implementation of
US sanctions legislation that forbids the use of US dollars for transactions with
Cuba. This provision of US law has been in place since 1963, but Cuba has
found ways to convert its dollars for other hard currencies by exploiting the
difficulties of policing it. However, the US authorities have stepped up efforts to
enforce its sanctions, and in May the Federal Reserve (the US Central Bank)
successfully prosecuted a Swiss bank, UBS, for providing exchange services
involving US dollars to Cuba and three other countries subject to US sanctions,
Libya, Iran and Yugoslavia: a fine of US$100m was imposed. This has served to
deter other banks from exchanging US dollars held by Cuban entities, evidently
making it more difficult for Cuban entities to use their dollars and so increasing
the cost of Cuba’s international transactions. By encouraging tourists and
senders of remittances to use currencies other than the US dollar, the Cuban
banking system is therefore circumventing the US restrictions and reducing costs.