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Effectiveness of Economic Sanctions in the Context of Globalization and Transnational Linkages: The Case of Cuba


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EFFECTIVENESS OF ECONOMIC SA NCTIONS IN THE CONTEXT OF GLOBALIZATION AND TRANSNATIONA L LINKAGES: THE CASE OF CUBA By PAOLO SPADONI A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLOR IDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY UNIVERSITY OF FLORIDA 2005

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Copyright 2005 by Paolo Spadoni

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This document is dedicated to my wife Ines.

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iv ACKNOWLEDGMENTS I owe a very special debt to Dr. Terry L. McCoy and the Center for International Business Education and Research (CIBER) at the University of Florida for providing me an assistantship from Fall 2001 to Summer 2005, which enabled me to complete my PhD program. I deeply appreciated the guidan ce of my committee members, Dr. Terry L. McCoy for his patience, inputs to the proj ect, and constant support, Dr. Philip J. Williams, Dr. Leann Brown, and Dr. Ido Oren for their suggestions and comments, and Dr. Jose Alvarez for his deep concern with my study and extraordinary knowledge of Cuban issues. I also acknowledge a major debt to William A. Messina Jr., for his enthusiastic support, kind words, and generous help. I would like to express my gratitude to the Cuban govern ment, Cuban officials at the Ministry of Foreign Investment a nd Economic Cooperation (MINVEC), economists and foreign investment analysts at several centers of investigation locat ed in Havana, and Cuban journalists and forei gn correspondents posted in Ha vana. Their generosity, willingness to help with the research, and of tentimes special friendships made it possible for me to carry out such a stimulating study. My appreciation goes al so to the librarians of the Latin American Collection at the University of Florida. I want to give special thanks to my good friend Luca Gaudenzi for nurturing my interest on Cuban issues and providing preci ous suggestions. I will always cherish our great conversations in Cattolica and Gradara (Italy) as well as our unforgettable trips to several Latin American c ountries during the 1990s.

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v I would like to thank my father Luigi no and my mother Maria Pia for their unconditional love, generosity, and understanding of my desire to study abroad, and my brother Mirco for being always supportive and good to me. A special thank you goes also to my father-in-law Dr. Alberto Av iles and my mother-in-law Lucy Aviles for treating me as their own son and for thei r generosity and matchless hospitality. Finally, I want to express my gratitude (and love) to my beautiful wife Ines for believing in me, and for being such an am azing partner and friend. Her unconditional love, loyalty, patience, and support gave me the strength to complete this work. My heartfelt thanks go to all mentione d above and to many others who provided me with help in various ways.

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vi TABLE OF CONTENTS page ACKNOWLEDGMENTS.................................................................................................iv LIST OF TABLES...........................................................................................................viii LIST OF FIGURES...........................................................................................................ix ABSTRACT....................................................................................................................... ..x CHAPTER 1 INTRODUCTION........................................................................................................1 The U.S. Embargo Against Cuba in the Post-Cold War Era........................................3 Limitations of Current Research on Economic Sanctions............................................6 Hypotheses and Contributi ons of the Research..........................................................10 Sources of Data...........................................................................................................13 Organization of This Study.........................................................................................14 2 TRANSNATIONAL LINKAGES AT GLOBAL AND LOCAL LEVELS..............17 Transnationalism From Above and From Below................................................18 Transnational Corporations and the Movement of Capital.........................................29 Migration, Family Linkages, and Remittance Decisions............................................37 Economic Impact of Remittances...............................................................................45 Conclusion..................................................................................................................52 3 THE U.S. EMBARGO AND THE HELMS-BURTON LAW...................................54 The Origins of the U.S. Embargo Against Cuba........................................................54 The 1970s: Efforts Toward Normalization.................................................................57 The 1980s: Renewal and Intensific ation of Economic Sanctions..............................60 The 1990s: U.S. Approach Toward C uba in the Post-Cold War Era.........................64 The Torricelli Law......................................................................................................67 The Helms-Burton Law..............................................................................................72

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vii 4 IMPACT OF THE HELMS-BURT ON LAW ON FOREIGN INVESTMENT IN CUBA.........................................................................................................................84 Foreign Direct Investment in Cuba.............................................................................86 Other Forms of Investment.......................................................................................101 The Effects of Helms-Burton on Po tential and Existing Investors...........................107 Application of Title IV.............................................................................................113 Withdrawals from I nvestments in Cuba...................................................................117 Reorganization and Relo cation of Activities............................................................120 The Sol Melia Case...................................................................................................124 Helms-Burton: Failure or Success?..........................................................................128 Conclusion................................................................................................................144 5 U.S. FINANCIAL FL OWS IN THE CUBAN ECONOMY....................................147 International Tourism and U.S.-Based Travel to Cuba............................................148 Remittances to Cuba.................................................................................................156 U.S. Telecommunications Payments to Cuba...........................................................175 U.S. Food Sales to Cuba...........................................................................................180 U.S. Indirect Investments in Cuba............................................................................187 Conclusion................................................................................................................194 6 TRANSNATIONAL LINKAGES IN OTHER CASES OF U.S UNILATERAL SANCTIONS............................................................................................................196 Effectiveness of U.S. Unila teral Economic Sanctions..............................................198 The Case of Sudan....................................................................................................205 The Case of Myanmar (Burma)................................................................................214 The Case of Iran........................................................................................................225 Conclusion................................................................................................................237 7 CONCLUSION.........................................................................................................239 LIST OF REFERENCES.................................................................................................249 BIOGRAPHICAL SKETCH...........................................................................................275

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viii LIST OF TABLES Table page 3-1. UN Vote on Resolutions Against the U.S. Embargo on Cuba..................................71 3-2. Ten Largest Certified U. S. Claims ($U.S. million)...................................................79 4-1. Annual Foreign Direct Investment in Cuba in $U.S. million (1994-2003)...............91 4-2. Impact of Helms-Burton on Select ed Foreign Firms Operating in Cuba................133 5-1. U.S. Visitors to Cuba, 1990-1998 (thousands)........................................................152 5-2. Tourist Arrivals by Origin, 1999-2003....................................................................153 5-3. Calculation Sample of Remittances in 2001 ($U.S. million)..................................163 5-4. Sales in Dollar Stores, Dollar Purcha ses by CADECA and Re mittances to Cuba, 1995-2003 ($U.S. Million)......................................................................................165 5-5. U.S. Telecommunications Payments to Cuba and ETECSAs Investment, 19952002 ($U.S. Million)...............................................................................................179 5-6. Cubas Food Imports from the United States in 2003 ($U.S. million)....................181 5-7. U.S. Investments in Selected Foreign Companies Operating in Cuba....................188 6-1. Effectiveness of Economic Sa nctions Against Target Countries............................200 6-2. Sudan: Foreign Direct Invest ment, Remittances, and GDP Growth.......................209 6-3. Myanmar: Foreign Direct Inve stment, Remittances, and GDP Growth..................221 6-4. Iran: Foreign Direct Investment Current Transfers, and GDP Growth..................232

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ix LIST OF FIGURES Figure page 4-1. Active International Econom ic Associations (1993-2004).......................................88 4-2. Associations with Fore ign Capital by Sector in 2003...............................................90 4-3. Associations with Fore ign Capital by Country in 2003............................................92 4-4. Number of Audits of AECEs (1997-2001)................................................................94 4-5. AECEs with Profits and Losses in 2002....................................................................95 4-6. AECEs Operating Abroad by Geogra phical Area (percentage as of June 30, 2003).......................................................................................................................... 99 4-7. Cooperative Production Agreements by Sector in 2003.........................................104 4-8. Free Trade Zones: Number of Operators and Export Values, 1997-2003...............105 4-9. Authorized and Dissolved Associat ions by Year of Dissolution (1988-2004).......130 4-10. Main Indicators of AECEs, 1993-2002.................................................................136 4-11. Exports of AECEs, 1995-2002 (as percen tage of Cubas total exports of goods and services)..........................................................................................................138 4-12. Exports and Domestic Market Sale s of AECEs, 1995-2002 (as percentage of total sales of AECEs)............................................................................................141 4-13. Cubas GDP, 1989-2004 (Annual Growth Rates).................................................143 5-1. International Tourism in Cuba, 1993-2004.............................................................149 5-2. Main Sources of Hard Currency and Possible Uses for the Cuban Population ......161 5-3. Rough Estimates of Cubas Main Sources of Hard Currency in 2001 and 2002 (net revenues in $U.S. million)................................................................................172

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x Abstract of Dissertation Pres ented to the Graduate School of the University of Florida in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy EFFECTIVENESS OF ECONOMIC SA NCTIONS IN THE CONTEXT OF GLOBALIZATION AND TRANSNATIONA L LINKAGES: THE CASE OF CUBA By Paolo Spadoni December 2005 Chair: Terry L. McCoy Major Department: Political Science This is a case study of the implementati on and effectiveness of U.S. unilateral economic sanctions against Cuba. Since the co mmunist island is subject to one of the most comprehensive U.S. embargoes in histor y, this study has great implications for the research on the role and usefulne ss of sanctions as a tool of fo reign policy. It also sheds light upon a specific aspect that has been generally neglecte d by scholars of international relations and by the literature on the Cuban embargo, the influence of transnational actors in the globalizing post-Cold War world. In an increasingly interconnected global economy, a coercer states effective use of sanctions is undermined from above by multinational capital and from below by migr ant workers remittances, mostly centered on family ties. This study challenges the idea on the util ity of unilateral economic coercion and enriches the debate on whether sanctions ar e effective by analyzing the impact on the Cuban economy of activities carried out by transnational players, which sustain huge

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xi flows of capital and finance acr oss national borders. Foreign investors and U.S.-based transnational actors, in particular, bear major responsibility for the failure of sanctions to achieve ambitious foreign policy goals with re spect to Cuba. Similar dynamics in other cases of U.S. unilateral sanctions corroborate the argument that transnational activities by multinational corporations and migrant entrepreneurs constitute one of the chief reasons why economic sanctions rarely work in todays global marketplace.

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1 CHAPTER 1 INTRODUCTION For more than four decades, the United States has maintained a comprehensive economic embargo on Cuba that severely rest ricts U.S.-based trav el to the island and makes most financial and commercial transactio ns with Cuba illegal for U.S. citizens. During the Cold War, the Castro governme nt weathered the economic impact of the embargo in large part because of generous s ubsidies offered by the former Soviet Union, mainly through cheap oil supplies in return fo r overpriced Cuban sugar. But when the special relationship between Havana and Mo scow ended abruptly in the early 1990s, Cuba became much more vulnerable to U.S. economic pressures. Since the early 1990s, Cuba has suffered deb ilitating blows that resulted from the demise of the Soviet Union and the disappear ance of the economic and financial system in which the island was inserted, the Council for Mutual Economic Assistance (CMEA). At end of the 1980s, some 81% of Cubas ex ternal commercial relations were with CMEA member countries. In 1989, Cuba expor ted 63% of its sugar, 73% of its nickel, and 95% of its citrus to these countries. Similarly, imports from CMEA countries represented around 85% of Cubas total imports : 63% of food, 86% of raw material, 98% of fuel and lubricants, 80% of machinery a nd equipment, and 57% of chemical products (Alvarez Gonzalez and Fernndez Mayo 1992: 45). The termination of traditional trade partnerships with the Soviet Bloc proved disastrous for the Cuban economy. Between 1989 and 1992, the total value of Cubas e xports fell by around 61.1%, while the same figure for imports fell by around 72.5% (Mesa Lago 1994: 223).

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2 Furthermore, Cuba lost the favorable and stable terms under which most of its trade took place. In addition to coordinated supply plans and exports, it is reported that Soviet subsidies and aid to Cuba averaged at $4.3 billion a year for the period 1986-1990 (Hernndez-Cat 2001: 4). It should be empha sized that Cubans do not consider Soviet subsidies as financial aid but simply as cred its and assistance to development. Whatever the interpretation of the C uba-USSR preferential relati onship (whose cornerstone was exports of Cuban sugar in exchange for rela tively inexpensive Sovi et oil and industrial machinery), it is clear that because the island lost the external support that had sustained its economy, it was forced to develop a new st rategy for reinsertion in to the global market economy. After 1989, the Cuban economy went into rece ssion, with the real gross domestic product (GDP) decreasing by more than 40% in the period 19901993. The beginning of what the Cuban government has called special period in time of peace (established in September 1990) stimulated a more pragmatic stance towards economic policy. Cuba has gradually moved away from strict cen tral planning to a more mixed economy and opened the door to selected aspects of capitali sm to foster a recovery, while at the same time ensuring the survival of the social system and the major accomplishments of the revolution (Haines 1997: 3). Cubas opening to foreign investment in the early 1990s was perhaps the most significant change for a socialist countr y whose economy had previously been under exclusive state control and ownership. The Cuban author ities resorted to foreign investment as a way to assure the diversific ation and promotion of exports, acquisition of raw materials, insertion into new markets, acquisition of technology and capital, and

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3 introduction of modern pract ices of management (Prez Villanueva 1998: 98). Other measures were adopted: the promotion of international tourism (1991); limited capitaliststyle reforms such as the legalization of th e possession and circulation of U.S. dollars (August 1993), featuring remittances from C ubans living abroad and state-owned dollar stores and exchange houses open to the public ; authorization of se lf-employment and the breakup of the state monopoly on land to esta blish agricultural coope ratives (September 1993); restructuring of the state bureaucracy (April 1994); and th e creation of free farmers markets (September 1994). Given the emergency situation of the C uban economy, the end of Cubas active support of revolutionary forces in Africa and La tin America, and the e nd of its close ties with the Soviet Union, one could have exp ected the beginning of friendlier relations between Washington and Havana. However, just when Cuba was trying to reactivate its economy in the wake of the events that ha d taken place in Eastern Europe, the Cuban exile community in the United States successfu lly pressured the U.S. Congress to adopt a new set of economic sanctions against the isla nd. The United States tightened its longstanding embargo by enacting first the Torri celli law in 1992 and subsequently the Helms-Burton law in 1996, in an attempt to undermine the Cuban government with additional economic sanctions. As Domingu ez observes, The Cold War had turned colder in the Caribbean. Cuba was the only country governed by a communist party whose domestic political regime the United States was still committed by law and policy to replace, albeit by peaceful means (Dominguez 1997: 49). The U.S. Embargo Against Cuba in the Post-Cold War Era At a time in which the Cuban government was struggling for survival and opening the island to foreign investment, international tourism, and remittances to stimulate the

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4 ailing economy, the United States reinforced its economic sanctions against Cuba. In October 1992, U.S. President George Bush signed the Cuban Democracy Act (CDA), also known as the Torricelli law. The bill prohibited foreign s ubsidiaries of U.S. companies from dealing with Cuba, barred a ny ship that had docked in Cuban harbors from entering U.S. ports for a period of six months, and called for a termination of aid to any country that provided assist ance to Cuba. In order to encourage democratic changes on the island, the Torricelli law also permitted a calibrated reduction of certain sanctions in response to positive developments in Cuba. On March 12, 1996, U.S. President Bill Clinton signed the Cuban Liberty and Democratic Solidarity Act, better known as the Helms-Burton law. Besides codifying the existing restrictions that co llectively formed the U.S. ec onomic embargo against Cuba, Helms-Burton aimed to halt the flow of forei gn investment into Cuba by creating a riskier and more uncertain business environment as well as to complicate Havanas access to external financing. The rationale for this legi slation was that this plan might ultimately lead to the collapse of the Cuban government or at least seriously undermine the process of slow but constant economic recovery witnessed by the communi st island since its lowest point in 1993. The attempt to undermine Cubas opening to foreign investment is linked to the possibility of lawsuits and the imposition of travel restrictions against foreign companies or other entities that t raffic in U.S. properties expropriated during the early days of the Revolution. The right to sue foreign companies is also granted to Cubans who became U.S. citizens after the expropriation occurred, in an attempt to further increase the potentia l impact of the legislation.

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5 In the last few years, economic sanctions against Cuba have been under fire in the U.S. Congress. An increasing number of lawmakers have pushed for a rapprochement with the Castro government and the lifting of restrictions on travel to and trade with the island. In October 2000, the U.S. Congress passed a resolution that allows direct commercial exports (on a cash basi s) of food products to Cuba for the first time in almost four decades. However, in June 2004, Wash ington intensified again economic pressure on its communist neighbor by implementing more stringent rules on remittances, family visits, and U.S.-based educational travel to Cuba. The White House also said it will increase financial support of antiCastro groups on the island. There has been considerable debate about just how effective the U.S. economic embargo against Cuba has been in achievi ng its main goals. On the one hand, several scholars have concluded that U.S. unilateral economic sanctions with respect to Cuba do not work. They argue that sanctions have failed to prom ote significant changes in the Caribbean island or eventually hasten the demise of the Castro regime, while imposing unjustifiable costs on American firms in terms of forfeited businesses with Cuba. They also claim that a policy that respects the right s of Americans to trade with, invest in, and travel to Cuba would more effectively se rve U.S. interests in post-Soviet Cuba by defending human rights, helpi ng the Cuban people, and spr eading the values of the American society (Peters 2000: 5). On the other hand, supporters of the U.S. policy toward Cuba justify the existing economic sanctions by arguing that engagement with the island would be unlikely to induce the Castro government to implement po litical liberalization. In their opinion, the lifting of the embargo and the travel ban w ould guarantee the conti nuation of the current

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6 totalitarian structures, lead to greater repr ession and governmental control, and delay a transition to democracy (Suchlicki 2000: 2) While recognizing that the embargo by itself would not produce liberalization, they say that economic sanctions are weakening the Castro dictatorship and call for compleme ntary measures aimed to intensify regime destabilization. In fact, in th eir opinion, the major goal of the U.S. embargo at present is not behavioral change of the Cuban lead ership, but regime ch ange (Lpez 2000: 347). Limitations of Current Research on Economic Sanctions The role and usefulness of economic sancti ons as an instrument of foreign policy have been debated for decades, especially since the League of Nations was launched with grand hopes in 1919. Although military instru ments are often thought to be the only effective means for achieving ambitious foreign policy goals, since World War I economic sanctions have come to be viewed as the liberal altern ative to war. The rationale behind sanctions is that they will produce economic deprivations, triggering public anger and politically significant pressure This in turn would lead to changes in the behavior of the target government, or its removal from powe r (Jonge Oudraat 2000). While the first major wave of research on economic sanctions, during the 1960s and 1970s, reached a consensus that they were not as effective as military force, the conventional wisdom began to change in the mid-1980s. As a sign of an increasing optimism about the utility of economic pressure, a new wave of liberal scholarship began to argue that international institutions might constrain state behavior and have a significant impact on international outcomes (Martin 1992: 250-251). Neoliberals make the case that increased interdependence in the modern world will cause states to act in a more cooperative fashion, because it increase s the costs of defection. In a world of prisoners dilemmas, states will go it alone unless they expect to be punished for

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7 defecting (Keohane 1983: 97, Oye 1985: 14). In short, neoliberals a ssume that potent sanctions provide an incentive for cooperati on (Drezner 1999: 35). As noted by Axelrod and Keohane, when sanctioning problems ar e severe, cooperation is in danger of collapse. For cooperation to be a stable outcome countries must believe that it is best to avoid being the target of sancti ons (Axelrod and Keohane 1986: 236). The aforementioned optimism among liber als has not gone unchallenged. For instance, Pape (1997: 106) hol ds that there is little va lid social science research supporting claims that economic coercion can ac hieve major foreign policy goals and that multilateral cooperation can make sanctions an e ffective alternative to military force. He claims that economic sanctions succeed in at most 5% of cases and challenges a previous work carried out by Hufbauer, Schott, and Elliot (HSE) in which sanctions had been demonstrated successful in about one-third of the cases analyzed (Hufbauer et al. 1990: 93). Pape (1997: 106-107) concludes that economic sanctions, despite the increasing multilateral cooperation of the early 1990s among superpowers, are unlikely to gain importance in the future mainly because the m odern state is not fragile. According to him, target states are able to mitigate the impact of sanctions by shifting the burden to opponents and disenfranchised groups or thr ough economic adjustments, while external pressures tend to increase the nationalist legitimacy of their rulers. Using bargaining theory and strategic interaction models, other scholars have demonstrated that sanctions have little impact on dispute outcomes and ar gued that they can seldom be effective policy instruments because the coercer and the target play against rational opponents trying to promote their own goals (Wagne r 1988: 481-483; Tsebelis 1990: 20; Morgan and Schwebach 1997: 46).

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8 It is worth emphasizing that the ques tion of whether sanctions work may be separated from the question of whether they should be used, since answering one does not automatically provide an answer to the ot her. For instance, even if sanctions work less than 5% of the time as claimed by Pape, th ey can still be a reliable alternative to the use of force. Rational decision-making re quires the comparative evaluation of policy alternatives not only in terms of favorable policy outcomes but also in terms of costs and benefits for both the coercer and the target as well as in terms of the difficulty of the undertaking. In short, sanctions might be pref erable to military force even when they are less likely to achieve a given set of goals, provided that th e cost differential is big enough (Baldwin 1999/2000: 80-86). Nonetheless, there seems to be at least a general acceptance among scholars that economic coercion is often unable to serve ambitious foreign policy goals by provoking major positive changes in the target country. Economic sanctions can be imposed either by one state acting alone or by all states (or most of them) upon which the target government relies for external support. Multilateral comprehensive sa nctions are usually thought to have a greater potential impact than unilateral ones, but they are rarely imposed due to the difficulty of reaching consensus among countries on another states behavior. On the other hand, unilateral coercive economic measures have been used frequently, especially by the United States. These foreign policy tools agai nst target countries include the withdrawal of economic, military, and technological assistance; the se izure of assets in U.S. jurisdictions; restrictions on trade, invest ment, and travel; and pressure s on international financial institutions to deny loans, credits, or grants.

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9 My research is interdisciplinary and draw s on notions of international and domestic (U.S.) law, international rela tions, transnationalism, history, and economics. It is a case study of the implementation and effectivene ss of U.S. unilateral economic sanctions against Cuba. Since the communist island is subject to one of the most comprehensive U.S. economic embargoes in history, this study has great implications for the research on the role and usefulness of sanctions as instru ments of foreign policy. It also sheds light upon a specific aspect that has been genera lly neglected by scholar s of international relations and by the literature on the Cuban embargo, the influence of transnational actors in the globalizing post-Cold War world. While many scholars evaluate the utility of economic coercion by analyzing the behavior of the target government, little a ttention has been given to transnational (nonstate) actors whose practices may aff ect economic interactions and the overall effectiveness of sanctions in an increasingl y interconnected global marketplace. This study focuses on non-state players such as multinational corporations, migrant entrepreneurs, international tr avelers, food exporters, and indi rect investors. A twofold question will be addressed: if transnationa l linkages sustain flows of capital and finance across borders, mainly in the form of foreign investment and remittances, is it possible that economic sanctions (especially unilate ral ones) might not work as a result of activities carried out by overseas investors and migrants? And even more important, what is the role played by transnational actors located in the same country that has devised sanctions as an effective tool to achieve far-reaching foreign policy objectives? This is exactly the area where my project attempts to make its most important contribution. Although one of the reasons fo r the tightening of the embargo during the

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10 1990s was to stimulate democratic reforms in Cuba, the prime objective of U.S. policy was to exert economic pressure on the Cast ro government (and even tually hasten its demise) by reducing the flow of hard currenc y to the Caribbean is land. I hypothesize that, in spite of stiffened sanctions, the United States has not only been unable to stifle the flow of foreign investment into Cuba, but has actually contributed in a significant way to the recovery of the Cuban economy from the deep recession following the demise of the former Soviet Union. Interestingly, form al and informal activities by the CubanAmerican community, the most vocal and infl uential group in the United States in favor of the embargo, have been a major factor in mitigating the overall impact of U.S. economic sanctions against Cuba. Propositions and Contribut ions of the Research Two main propositions are addressed in this study. The first one is that the HelmsBurton law has made foreign inve stment in Cuba more problematic, but largely failed to stem the flow of foreign cap ital delivered to the island and hinder the slow but steady recovery of the Cuban economy. There is little doubt that the Castro government has faced increasing difficulties to obtain external financing for its main economic activities and probably lost some deals because of He lms-Burtons penalizing provisions against foreign firms that invest in or use U.S. expropriated propertie s. However, it appears that the overall process of foreign investment in Cuba has not been halted as many foreign companies continue to run profitable businesse s on the island and take advantage of the absence of U.S. competitors. The second proposition of this study is th at, in spite of th e tightening of the embargo, the United States has played and keep s playing quite an important role in the Cuban economy in several diffe rent ways. More specifica lly, large amounts of hard

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11 currency have been channeled into the Cuba n economy through U.S. visitors (especially Cuban-Americans) and remittances sent by Cuban exiles to relatives on the island. Smaller amounts were also channeled through U.S. telecommunications payments to Cuba, American food exports (sold in gove rnment-owned dollar stores), and U.S. investors who hold publicly traded shares of major foreign firms engaged in business activities with the government of Fidel Castro. The fact that a significant share of hard currency reaching Cuba is in violation of U. S. regulations also provides some evidence for the inability of the U.S. government to obtain compliance from its own citizens. Based on available information on U.S. citi zens activities with respect to Cuba, this study attempts to demonstrate the following: 1) Even with travel restrictions in place, legal and illegal visits to Cuba from the Un ited States have increas ed constantly during the 1990s, consolidating U.S. citizens as th e second largest group among foreign travelers to the island; 2) Cuba has become in recent years increasingly dependent on remittances from abroad, mainly sent from the Cuban Am erican community in South Florida, and net hard currency revenues to the Cuban government from remittances ar e today greater than its profit from tourist activ ities and sugar and nickel e xports combined; 3) The United States has played an important role in financing the development of Cubas telecommunications sector sin ce a large portion of the isla nds hard currency revenues from telecom services come from dollar char ges applied to incoming calls (mostly Cuban American calls) from U.S. territory; 4) In the past three years th e United States ranked first among Cubas sources of imported food a nd a share of U.S. products ended up in the islands state-owned dollar stores where the elevated markup on prices generates significant amounts of foreign ex change revenues to the Castro government; 5) American

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12 entities own equity interests of several fore ign companies that have provided Cuba muchneeded capital, technology, ma nagement expertise, and new markets for its main exports. Overall, there is sufficient evidence to argue that the U.S extraterritorial measures against foreign companies investing in Cuba have had little success. Furthermore, Washingtons policy toward Havana ended up throwing a lifeline to the same government it was supposed to undermine. The aforemen tioned activities are emblematic examples of gaping holes in the United States effort to economically isolate Cuba and provide a solid explanation of why the Cuban embargo has failed to achieve its main goal. My study, therefore, promises to make two signi ficant contributions to the scholarship on economic sanctions. First, it challenges the idea on the utility of unilateral economic coercion as a tool of foreign policy and enriches the debate on whether sanctio ns are effective by analyzing the impact on the Cuban econom y of activities carr ied out by transnational players. While some scholars have focused on the effects of the Cuban embargo on U.S. entities in terms of forfeited businesses with the Cuban government, very few have examined the possibility that foreign i nvestors and U.S.-based transnational actors bear major responsibility for the failure of sanctions to achieve ambitious foreign policy goals with respect to Cuba. In the post-Cold Wa r context of economic globalization and transnational linkages, these actors deserv e more attention from the academic community than they have received so far. Second, this study provides concepts that can be used to examine not only the Cuban embargo but also other sanctions situ ations. Indeed, activities carried out by multinational corporations and other transn ational actors (including individuals and

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13 entities of the coercer state) might have had a positive impact on the economy of other countries that, like Cuba, are subject to U.S. economic sancti ons. In particular, foreign direct investment, remittances sent from exile s, and secondary or indirect investment operations may undermine the ability of sanctio ns to squeeze economically these target countries. Mainly as a result of increasing migration flows, remittances have become the second largest source, behind foreign direct investment (FDI), of external funding for development countries (Solimano 2003: 5). In addition, money transfer and investment operations are facilitated by the rapid growth of Internet and other electronic transactions. In short, the flow of hard currency reachi ng Cuba from abroad, especially from the United States, exhibits patterns that may sugge st a potential path for further research on the role and usefulness of economic sanctions. Sources of Data In addition to extensive documentary rese arch in the United States, this study is based upon field research conducted in Cuba between 2000 and 2004. Data were generated from the following sources: In-depth interviews with key staff-memb ers at the Cuban Ministry of Foreign Investment and Economic Collaboration in Havana (MINVEC), the Center for the Promotion of Investment (CPI), and th e Cuban trade and investment consulting firm Consultores Asociados S.A. (CONAS) These interviews provided valuable information about the impact of th e Helms-Burton law on specific foreign companies operating in Cuba and the status of foreign investment in the islands most important economic sectors. In-depth interviews with economists at ma jor centers of inves tigations located in Havana ( Centro de Estudios de La Economia Cubana Centro de Investigaciones de la Economia Internacional, Centro de Estudios Sobre Estados Unidos Instituto Nacional de Investigaciones Economicas ). I interviewed expe rts on the issues of remittances, tourism, external sector, a nd foreign trade. The main goal was to evaluate the role of the United States in the Cuban economy by obtaining detailed information on the following topics: 1) Th e number of U.S. na tionals that visit Cuba every year and how they circumvent travel restrictions; 2) How remittances from the United States are sent to Cuba and how they are estimated; 3) How net

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14 hard currency revenues to the government from remittances are calculated; 4) How the Cuban government obtains financing for commercial transactions with the United States and the share of U.S. food sales that are sold in dollar stores. In-depth interviews with Cuban corre spondents for foreign press agencies and newspapers such as Reuters Associated Press Financial Times Dallas Morning News Sun-Sentinel and Chicago Tribune Foreign journalists were a precious source of information on both political and economic issues and provided suggestions about how to obtain relevant data and contact sp ecific people. Archival research at Cubas public lib raries on local newspapers articles ( Granma Juventud Rebelde Trabajadores Prensa Latina ), governmental documents and declarations (speeches and press conferen ces), and publications related to Cubas business environment and economic developments ( Anuario Estadistico de Cuba Opciones Economics Press Service Enfoques Negocios en Cuba and annual reports of the Cuban Central Bank). Archival research in the United States on newspapers articles ( New York Times Miami Herald Los Angeles Times Washington Post and Dallas Morning News ), publications of organizations that mo nitor the Cuban business environment (Economic Commission for Latin America and the Caribbean, Economist Intelligence Unit, and U.S.-Cuba Trade and Economic Council), and financial reports of selected foreign companies th at operate in the Cuban market. These sources provided relevant informati on on the islands economic structure and macroeconomic indicators, developments of specific sectors such as tourism, nickel, sugar, and telecommunications the Helms-Burton law and foreign investment trends, international trade and financing activities, and U.S. secondary or indirect investments in Cuba. Organization of This Study As previously observed, many scholars of international relations assess the effectiveness of sanctions by focusing on th e economic adjustments introduced by the target country to cope with external pr essure, neglecting the importance of growing transnational flows of capital and finance in the context of globalization. Chapter 2, therefore, explores the prevailing discourses on transnational linkages at both global and local levels in order to structure the proposed case study and identify theoretical assumptions relevant to its working hypothese s. Transnational business practices by nonstate actors such as multinational corporati ons and migrant entrepreneurs will receive

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15 special attention since foreign investment a nd remittances have played a major role in keeping afloat the Cuban economy in the pos t-Cold War era. Chapter 3 reviews the history of U.S. economic sanctions with respec t to Cuba that were first enacted in the early 1960s and then intensified during the 1990s with the Torricelli law and the HelmsBurton law. A major contention is that the strengthening of the embargo was linked to self-interested groups in the Cuban American community seeking to serve their parochial interests and able to influence U.S. deci sion-makers. Regarding Helms-Burton, this section focuses on those articles aimed to cr eate disincentives for foreign companies in Cuba along with some discussion of their cont roversial aspects. Chapter 4 analyzes the evolution of foreign direct investment in Cuba and describes the several different ways in which the Helms-Burton law affects foreign comp anies that intend to invest in the island and those already operating in the Cuban market It also evaluates the impact of the legislation on the Cuban economy and the flow of foreign investment, as well as its effectiveness in forcing overseas firms to pull out of Cuba. Chapter 5 tracks the flow of hard currency reaching Cuba from the United States in order to provide evidence of the importance for the Cuban economy of activities carried out by U.S. citizens (mainly Cuban Americans) and firms. More spec ifically, it analyzes the presence of U.S. visitors on the island, th e flow of remittances from Cuban exiles, and payments to the Cuban government by Am erican companies for telecommunications services. It also examines recent developm ents in U.S. food sales to Cuba and U.S. investments in foreign companies that operate in the Cuban market. Chapter 6 attempts to identify other cases of U.S. unilateral sanctions that may exhibit patterns similar to those seen in the Cuban case. Without pe rforming detailed empirical analyses, this

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16 section uses available information on remitta nces and foreign investment to support the argument that economic activities carried out by transnational actors might play a crucial role in the overall effectiv eness of sanctions. The conc luding section summarizes the main findings of the study, offers suggestions for a more effective U.S. policy toward the government of Fidel Castro, and identifies potential paths for further research on the role and usefulness of economic sanctions.

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17 CHAPTER 2 TRANSNATIONAL LINKAGES AT GLOBAL AND LOCAL LEVELS Transnational linkages are broadly define d as movements of information, money, objects and people across borders that are not controlled by organs of governments (Vertovec 2003: 642). The concept of trans nationalism in the study of international relations came into prominent use in the ea rly 1970s in the contex t of the growth of international organizations a nd particularly relations be tween non-governmental bodies. A number of scholars, mostly with a liber al background, began to question the prevailing state-centric view of international relations by analyzing the impact on interstate politics of transnational activities carried out by multinational businesses, revolutionary movements, non-government organizations (NGOs ), trade unions, scientific networks and the Catholic Church (Keohane and Nye 1971). More recently, the growing interconnectedne ss of the world as a consequence of globalization and technologica l change has stimulated a proliferation of literature concerning various types of transnational practices by private i ndividuals and groups, including students, tourists, migrants, NGOs, and corporations. Trasnationalism overlaps globalization but typically has a more limited scope. Whereas global processes refer to economic, political, and social activities that are largely de-linked from specific national territories, transnational processes tend to be anchored in and transcend one or more nation-states (Levitt 2001: 14). For inst ance, migration (which is embedded in globalization) is considered a transnational phenomenon since it refers to individuals who move across the borders of one or more nation states. Similarly, transnational

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18 corporations (TNCs) operate across nationa l boundaries but are centered in one home nation (Kearney 1995: 547). The growing number of non-state participan ts in internationa l activities and the expansion of capital, cultures, and people ac ross borders have provoked discourses on the crisis of the nation state a nd the complex transnational linkages that bind societies together in todays interdependent and shri nking world. As Guarnizo and Smith (1998: 3) observe, the nation state is seen as w eakened from above by multinational capital, global media, and supra-national political institutions, and from below by informal economic channels, ethnic nationalism, and gras sroots activism. However, while there is little doubt that transnational activities escap e control and domination by the state, an analysis of power relations and economic inte ractions in the contex t of sanctions must take into account an additional element. The movement of capital sustained through transnational linkages could actually strengthen the target country by providing it with crucial financial resources to weather the im pact of economic sanctions. Transnational hard currency flows (mainly foreign investment and remittances) are even more important in the case of communist Cuba, wher e the government controls a large share of the economy and thus greatly benefits from all capital inflows. Transnationalism From Above and From Below In order to describe the variations in the intensities, frequencies, and the scope of cross-border linkages, interna tional relations scholars have introduced several different typologies of transnationalism as referred to continuous or occasional practices (Itzigsohn et al. 1999), the level of stat e and economy or the intimate level of family and household (Gardner 2002), global networks or kinship and diasporic ties (Faist 2000). Nevertheless, the substantial differentiation between tran snationalism from above and from below,

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19 based on who initiates and sustains linkages, seems to be the most common approach to the study of transnational proces ses. In this two-levels ap proach, activities initiated by TNCs and international organizations w ith a global governance agenda belong to transnationalism from above. Most local linkages between immigrants and their homecountry counterparts, instead, are considered as transnationalism from below. It must be noted that such a distinction focuses on who in itiates and determines the direction of any cross-border action in order to capture the dynamics of economic and power relations in the transnational arena. The above and th e below of transnational action should not be equated exclusively with gl obal and local structures or agents, since these categories are contextual and relational (Gua rnizo and Smith 1998: 7 and 29). Transnational businesses and organiza tions born of political and economic integration (the United Nations, Intern ational Monetary Fund, World Bank, and international NGOs) now vie with states for gl obal influence and attempt to build a global neoliberal contextual space to regulate transn ational flows of capital, trade, people, and culture. TNCs with largely jettisoned national origins, in particular, are seen as major players in the global economy. By establishing universal systems of supply, production, marketing, investment, information transfer, and management, they create the paths along which much of the worlds transnational activ ities flow (Vertovec and Cohen 1999: xxii). Since they are controlled by powerful elites who seek dominance in the world, TNCs are able to use their resources, range, and specia lized flexibility to spread capital, imagery and information on an almost global scale. Moreover, as Sklair (2002) suggests, a transnational capitalist class has arisen alongside the TNCs. Comprised of TNC executives, globalizing state bureaucrats, poli ticians and professionals, and consumerist

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20 elites in merchandising and the media, this new class pursues intere sts that are global, rather than exclusively local or national, and therefore contro l most of the world economy. In short, the homogenizing and eli tist forces of transn ationalism from above undermine the economic, political, and cultural networks of more local units, including nations, ethnic groups, and grassroots communities (Mahler 1998: 67). Transnational corporations with enormous financial resources and capabilities have created considerable difficulties for the othe r international actors, primarily the nationstates and the labor unions. Although the behavior of a par ticular corporation (what we might call its code of conduct) will depend on the way its management decides to use the available resources, several scholars ha ve documented how TNCs interfere in the domestic political affairs of sovereign nati ons (Kline 2003), tend to be labor abusive in their overseas investment destinations (Wa ng 2005), and frequently fail to uphold and promote environmental standards in developi ng countries (Cohan 2001). In order to raise public awareness of these harmful activitie s, the 2000 United Nations Global Compact called upon TNCs to assume great er responsibilities toward t hose living in the countries in which they operate, and to abide by standard s in the areas of huma n rights, labor, and the environment (Nien-he 2004: 643). In the context of economic sanctions, however, the coercer state is mostly interested in finding ways and means for cont rolling the positive effects of TNCs on the target countrys economy rather than am eliorating their damaging practices. For instance, one of the main goals of Washington s policy toward Havana is to stifle the flow of foreign direct invest ment (FDI) into Cuba and hinde r the growth of the islands main economic sectors. Investment operations carried out by TNCs play a crucial role in

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21 the development of receiving economies as they contribute capital for the acquisition of modern technologies, increase theoretical and business knowledge for th e integration into global marketing, distribution, and produc tion networks, and stimulate greater international competitiveness of national fi rms (Prez Villanueva 2005: 162). In other words, FDI is an important catalyst for economic growth in developing economies, although such a positive impact may vary across countries depending on the level of human capital, domestic investment, infrastr ucture, macroeconomic stability, and trade policies. A key contention of this study is that the attempts by stat es to control the activities of transnational corporations are doomed to fa ilure for three main reasons. First, these firms have been growing very rapidly and ex ert a great deal of pow er in the globalized world economy. Through mergers and acquis itions, the leading TNCs are richer and more powerful than most of the nation-state s that seek to regulate them. In 2000, the combined sales of the worlds top 200 corpora tions were far greater than a quarter of the worlds economic activity. Of the 100 larges t economies in the world, 51 were TNCs and only 49 were countries (Anderson and Cavanagh 2000). Second, TNCs are headquartered in one country but they opera te across borders in a number of political jurisdictions. This inevitably creates enor mous legal and political difficulties for the parties since the firm is only partially within the control of an indi vidual state and must deal with different and often conflicting nati onal requirements. For example, when the U.S. Congress passed the Helms-Burton law in 1996 and threatened sanctions against foreign firms investing in Cuba, the European Union vowed to fight th e legislation at the World Trade Organization, while Mexico and Ca nada passed antidote laws that prevent

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22 their citizens from complying with U.S. regul ations. Third, because of its hierarchical and highly integrated nature, a TNC has th e capacity to shift its resources among jurisdictions in accordance with a central pl an, which can easily escape national control (Bock 1979: 41). Modern corporations raise f unds in international cap ital markets to help finance their expansion plans anywhere in th e world, including in embargoed countries. In the light of the significant presence of U.S. investors in several major TNCs that engage in business activities with the government of Fidel Castro, one is left wondering if it makes any sense for the United States to k eep using economic sanctions as a tool to achieve ambitious foreign policy goals. While activities by TNCs complicate the e fforts of governments to control their own economies and the global flow of capital, we must avoid confusing intentionality with consequences, as when actors are desi gnated resistant or oppositional because their practices produce results th at are at odds with the inten tion of states. Foreign firms that invest in communist C uba might help the Castro government to withstand the economic pressure of the U.S. embargo, but their goals toward Havana are not necessarily different from those of the U. S. government. Many TNCs that are taking advantage of existing business opportunities in Cuba also r ealize that the introduction of political changes and profound economic refo rms on the island would be extremely beneficial to them. The same distinction is valid for Cuban immigrants in the United States and the money they send to relatives who have remained in Cuba. Although the Cuban government is able to capture the vast majority of remittances through sales in state-run hard currency stores, the primary goa l of Cuban Americans is to support family members, not Fidel Castro.

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23 In contrast to transnationalism from above, in which transnational corporations play a crucial role, transnationalism from below is largely the terrain of grassroots collectivities (local households, kin networks elite fractions, and other emergent local formations) that are marginal to the centers of power and rely almost entirely on social capital. The latter usually refers to the ab ility to secure resour ces by virtue of group membership and networks (Bourdieu 1986: 249) Thus social capital is a resource available through transnational linkages, making possible the ach ievement of certain ends that would not be attainable in its absence. In particular, migrants transnational practices are believed to reconfigure the existing power hierarchies by sustaining material resources that finance good-will projects in their country of origin and challenge multiple levels of structural control: local regional, national, and global (Mahler 1998: 68). In addition to the big players in th e global economy, migran t entrepreneurs who comprise the bulk of transnational communities are making an ever-greater impact by transferring huge amounts of money across bo rders in the form of remittances. The resulting capital flows help re duce poverty and may contribute to the economic growth of recipient countries. Since the early 1990s, the rapid growth of international migration has ushered in a new era of transnational studies mostly interested in the lived realities of migrants and their cross-border communities and activities. Instead of focusing on traditional concerns about their adaptation to receiving societies, this emerging perspective concentrates on the continuing relations between migrants and their places of origin and how this backand-forth traffic builds complex social fields that straddle national borders (Basch et al. 1994: 6). In particular, the rebirth of the notion of diaspora has stemmed from academics

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24 using it to describe practically any population that has origin ated in a land other than which it currently resides, and whose social economic, and political linkages cross the borders of nation-states (Ver tovec and Cohen 1999: xvi). In response to the process of globalization, migrants are thought to create transnational communities that are neither here nor there but in both places simultane ously. As they sustain economic activities that are grounded on the differentials of a dvantage established by state boundaries, these communities operate, to a large degree, in a way very similar to that of large transnational corporations. The crucial difference is that these enterprises emerge at the grassroots level and their activities are often informal (Portes 1997: 4). It is worth emphasizing that migrants cons truct and maintain social networks that are rooted in place, even as the networks tr anscend place. The social groups, identities, beliefs, rituals, practices, and power rela tionships in both se nding and receiving communities (as well as locations in transit) are critical to our understanding of the process and effects of transnationalism from below. Several scholars have challenged the image of transnational migrants as de-territori alized, free-floating people that are socially, politically, economically, and culturally unbound. While extending beyond two or more national territories, transnational practices are constituted within historically and geographically specific points of origin and migration established by transmigrants. In addition, transnational linkages between migran ts and certain local and national contexts abroad are built within the confines of speci fic social, economic, and political relations, which are bound together by perceived shared interests and values. For instance, Guarnizo and Smith (1998: 13) argue that the context in which migrants transnational actions take place is not just local but also translocal (i.e. local to local), and that

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25 relations between people across national territories would be unthinkable without a basic sense of shared meanings and social bounds. Similarly, Levitt (2001: 6-7) observes that individual actors cannot be vi ewed in isolation from the tr ansnational social fields in which they are embedded. According to her, the economic initiatives, political activities, and sociocultural enterprises migrants engage in are powerfully shaped by the kinds of organized social groups within wh ich they are carried out. There is now a substantial and growing body of literature on th e initiatives of migrants to establish durable transnational linkages with their societies of origin. Analyses of migrants connections with peopl e and institutions in their homelands have focused on family obligations and marriage patterns, remittances, political engagement, religious practices, regular visits, media cons umption and so on. In order to assess the effectiveness of economic sanc tions against a target governme nt, this study gives special attention to remittance practices and their significance for the economy of the recipient country. The practice by mi grants sending money home to family and friends left behind is hardly new. But the volume of these money transfers has now become so important that in many cases they determin e the development prospects of villages, towns, and entire countries. Whereas from an individual perspective remittances have purely personal consequences, in the aggregate they translate into a flow of capital that can constitute a crucial s ource of foreign exchange fo r receiving countries, into investments that sustain the home construction industry in these countries, and into new cultural practices that radically modify the value systems and everyday lives of entire regions (Portes 2003). Remittances that migrants send to their homelands have indeed become the prime topic of research in the field of migration and the most often-cited,

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26 tangible evidence and measuring stick for the ti es connecting migrants with their societies of origin (Guarnizo 2003). It has been argued that the extent, intens ity, velocity, and imp act of transnational activities are enhanced by the advent of new space-and time-compressing technologies, which greatly facilitate rapid communicati on across national borders and long distances (Portes et al. 1999; Held et al. 1999; Kivisto 2001). Re gardless of the migrants motivations to sustain economic connections wi th their countries of origin, technological improvements are believed to explain a good pa rt, if not all, of contemporary migrant transnationalism. Improved modes of trans portation and new electr onic money transfer services have boosted the frequency of fa mily reunions across national boundaries and provided cost-efficient ways to send remittances to relatives abroad, thus shortening the distance between sending and receiving countri es. However, these connections cannot be fully understood without analyz ing the growing family and kinship ties (mostly as a result of recent trends in international migra tion) that constitute a powerful agency for the cross-border transmission of capital, values, cu stoms, and culture. Crucially, it is within the linkages established through family rela tions that most migrants engage in transnational activities (G oulbourne 2002: 160-161). My findings suggest that the vast majority of remittances reaching Cuba from the United States arrive on the island in the luggage of friends or entrusted agents rather than through electronic transactions. Although such practices are su rely aimed to circumvent the cap on money transfers to Cuba established by U.S. em bargo laws and regulations, they also reveal the migrants commitment to support family members abroad, or what Portes (1998: 8) called bounde d solidarity, no matter how difficult it might be to

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27 accomplish this goal. Thus, to a large extent it is social capital mainly built through family ties that sustains the transnational flow of remittances regardless of improved technology, not the other way around. As Ec kstein (2005: 338) observes, the rapid growth of remittances to Cuba during the last decade hinges more on the strengthening of cross-border bonding and trust than on technological breakth roughs in wire transfer services. Finally, whereas migration and family-based economic transactions undermine the autonomy of states, the latter have found ways to influence the volume and density of such activities and reap substantial benefits from them. As remittances constitute a significant source of foreign exchange earni ngs, some developing countries encourage international migration, hoping that money transfers from abroad will raise the welfare of their non-migrant residents and stimulate economic growth (Chandawarkar 1980). In embargo situations, the potential contribu tion of remittances at both the macro and microlevels provides great incentives for sanc tioned states to stimulate these financial flows, and thus minimize the negative imp act of economic sanctions on their economy. For instance, family remittances to Cuba have increased dram atically since Fidel Castro, amid a deep economic recession, legalized U.S. dollar holdings in September 1993 and allowed about 35,000 Cubans to flee the is land the following year, most of them resettling in the United States. What came to be known as the Balsero Crisis of 1994, ended with the United States agreeing to accept 20,000 legal migrants a year from Cuba and pledging to speed up the admission of another 4,000 to 6,000 who were already on a visa waiting list. Nevertheless, in a clear attempt to stem family contacts and the flow of remittances to the

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28 communist island, Washingtons immediate resp onse to these events was to impose a ban on money transfers to Cuba and terminate the general license for travel to the island by Cuban Americans (Morley and McGillion 2002: 75-78). Today, remittances from this last wave of Cuban migrants, and those who left Cuba in 1980 during the Mariel Crisis,1 generate in net terms more hard curr ency revenues to the Castro government than any other economic activity. In short, the encouragement of out-migration (coupled with domestic economic adjustments) by sancti oned states may be seen not only as an escape valve to release internal pressure on th eir governments, but also as an effective way to boost foreign exchange earnings at particularly critical times. In summary, this section ha s presented an analysis of cross-border linkages from both above and below, contrasti ng the transnatio nalism from above of corporations to the transnationalism from below of internationa l migrants. Such a distinction has been criticized by several scholars because it fa ils to recognize that certain agents may act simultaneously from above and from below depending on the nature of their actions (Schein 1998), downplays the role of states in co-opting and advancing transnational practices (Itzigsohn 2000), and privileges organized activitie s over more diffuse forms of mass action with no collective purpose (Mahler 1998: 72). Even so, the aforementioned typologies allow us to develop a research strategy that situates specific actors in regard to power hierarchies and examines different cate gories of transnational linkages along with the political, social, and economic factors th at condition their crea tion and reproduction. Since global processes and micro-dynamics of migration are hypot hesized to play a 1 In 1980, after thousands of Cubans rushed into the Peruvian embassy in Havana seeking asylum, the Castro government opened the port of Mariel to allow all who wanted to leave the island to do so in an orderly fashion. While the exodus proceeded rather chaotically, approximately 125,000 Cubans left, most of them reaching the United States.

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29 crucial role in the context of sanctions, the re st of this chapter pr ovides further details on the activities of TNCs, international migra tion and the spatial e xpansion of social networks (family ties) that sustain monetary remittances across borders, and the economic impact of migrants money transf ers to their countries of origin. Transnational Corporations and the Movement of Capital Transnational corporations are defined as all enterprises which control assets (factories, mines, sales offices and the like) in two or more countries (UNCTAD 1995: xix-xx). There are currently at least three ma jor categories of corporations that operate internationally: 1) Relatively small TNCs with commercial activities only in a few countries; 2) Medium-size enterprises that function in regional markets such as the Americas, Europe, or Asia; 3) Large TNCs also known as global corporations, that operate on a worldwide basis and concentrate th e greatest economic a nd political power. As a result of technological advances and increasingly liberal policy frameworks, these actors have come to dominate the internati onal economic system and, in some cases, they are more powerful than most states acting alone. Today, TNCs are capturing global markets with foreign direct investment and creating global webs of pr oduction, commerce, culture and finance virtually unopposed. These actors are able to exert a significan t influence over the domestic and foreign policies of governments worldwide and the de stinies of individua l economies in the developing world, order the age nda of the World Trade Orga nization, and set wage-levels that can cause the first world to bend to th eir demands (Macleod and Lewis 2004: 77). In addition, as they move across national boundari es and forge linkages between countries, TNCs encourage the intertwining of nati onal economies, thus limiting the scope of government action and its controlling power (Sut er 2004: 44). This pa rticular aspect is

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30 very important in the contex t of economic sanctions since laws and regulations of the coercer state are specifically designed to halt business ope rations by TNCs in target countries and the resulting flow of capital. Transnational corporations home bases are geographically concentrated in the industrialized countries of the North (mainly the United States, the European Union and Japan) but their practices are assuming an ever more stateless quality. As stated by Karlin er (1997: 6), this combination of stateless corporations and corporate states . allows a large TNC to hide behind the protection of a national flag when convenient, and to eschew it when its not. It should be noted that, among the major world powers, the United States is not only the country that has made more freque nt use of economic coercion against other nations, but also the country with probably the lowest le vel of interdependence and cooperation between its government and corporat ions. Back in the late 1970s, Esterline (1979: 32) observed that the United States, unlike the other four major supernational actors of that time such as Japan, the Europ ean Community, China, and the Soviet Union, did not have a symbiotic relationship between government and private enterprises. In fact, the fundamental nature of U.S. policy on international invest ment was neither to promote nor discourage inward or outward investment through government intervention. While Esterline demonstrated that U.S.-bas ed TNCs suffered disadvantages both abroad and at home because they operated in the ab sence of an American political-economic policy, his findings also suggest ed that the U.S. government s control over the activities of its own corporations was virtually none xistent, or at least very limited. The current situation seems to confir m that American-based transnational enterprises continue to enjoy a high degree of autonomy in carrying out their operations.

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31 Despite numerous attempts to limit corporat ions power and increase their accountability to the state, these TNCs maintain a strong grip on the domestic and foreign policies of their home country and, at the same time, us e the accelerating proce ss of globalization to gain independence from their government.2 Admittedly, all the major economic powers face great difficulties in regulating their corpor ations business practices as a result of the increasingly global nature of the internati onal financial system and growing corporate mobility (Karliner 1997: 9-11). Nevertheless, su ch an attempt is particularly problematic for a country like the United States, which is the most open political system and the one most committed to the promotion of trade libe ralization, privatization of state enterprises, deregulation, foreign investment, and legal s ecurity for property rights. Thus, the U.S. commitment to neoliberal economic policies se riously complicates its strategy to isolate target countries economically and undermin e their governments through the imposition of sanctions. Curiously, while direct investments in C uba are prohibited for U.S. firms under the embargo, the United States allows individuals and entities subject to U.S. law to hold publicly traded shares of fore ign-based TNCs that are engage d in business dealings with the government of Fidel Castro. In Marc h 1994, because of efforts by the U.S.-Cuba Trade and Economic Council or USCTEC (a Ne w York-based organization that monitors business activities between Washington and Havana), the U.S. Department of the Treasury issued an opinion according to which an American entity can make a secondary, non-controlling investment in a third country company that has commercial activities in 2 The political power and lack of accountability of U.S. corporations are mostly derived from their economic power. In 2000, a total of 59 of the global top 200 TNCs were U.S.-based enterprises, including AT&T, Boeing, Lockheed-Martin, BellSouth, Kmart, Chase Manhattan, GTE, Mobil, and Texaco (Anderson and Cavanagh 2000).

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32 Cuba as long as the majority of the reve nues of this company are not produced from operations within the isla nd (USCTEC 1998). The obvious difficulty for the U.S. government in limiting such practices is that the Cuban operations of most TNCs that invest in the islands market represent only a small fraction of their global activities. Given the enormous economic interests at st ake (non-controlling i nvestments in leading TNCs may be worth billions of dollars), it would be extremely problematic for U.S. policymakers to prevent American entities from holding shares of these corporations just because of their ventures in Cuba. However, the ironic result for the United States is that these TNCs undermine the main purpose of the Cuban embargo by providing the Castro government with much-needed capital, tec hnology, management expertise, and new markets for its main exports. Washingtons gl obal economic interests and its policy goals toward specific target countries are clearly at odds in the context of econo mic sanctions. Even more important, in a global economy driven by competition and the search for the best short-term return on investment, it is very difficult, if not impossible for the United States to dictate through the impositi on of unilateral sanctions where foreignbased TNCs can or cannot invest worldwide. States have little ch ance of controlling the huge sums of capital that move electronically every minute from computer to computer, bank to bank, and country to country. In a ddition, transnational fi rms headquartered in foreign countries are able to devise effective strategies to circumvent U.S. restrictions. For instance, in order to a void potential penalties under th e Helms-Burton law, several foreign investors have devel oped roundabout methods to oper ate in Cuba, using offshore companies registered in fiscal paradises in the Caribbean and Central America to keep anonymity, reduce personal liability, and obtai n easier access to cap ital funding. Other

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33 corporations, instead, have simply decided to create legally distinct entities that are associated exclusively with their Cuban asse ts or reorganize their activities on the island in such a way as to escape the reach of the U.S. legislation (Spadoni 2001: 29-32). Unilateral sanctions, especia lly when imposed by an economic power like the United States, may dissuade some TNCs from investin g in a target country, but they are unlikely to stem the overall foreign investment process in that particular c ountry. The reality is that relatively low levels of overseas investments, or just a few major business deals, may still provide sufficient resources for target states to resist chan ges and guarantee the survival of their governments. In 2001, more than half of the worlds popula tion in 78 countries, for the most part developing ones, was subject to some forms of U.S. unilateral coercive economic measures. Economic sanctions by the United States may include the prohibition on all dealings with a foreign country, trade restric tions, the withholding of financial assistance, a ban on participation in U.S. government procurement, and opposition by U.S. representatives in international financials institutions to loans or financial assistance to a particular country (Carter 2002). According to the United Nations General Assembly, the use of unilateral economic coercion adve rsely affects the economy and development efforts of developing countries and has a general negative impact on international economic cooperation and on worldwide effort s to move towards a non-discriminatory and open multilateral trading system (United Nations 1998). Even so, FDI flows into developing countries have increased signi ficantly during the last decade. While American companies account for a substantial share of these capital flows, foreign-based corporations might have helped diluting the impact of U.S. coercive measures on several

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34 target nations, especially those where U.S. direct investments are prohibited. Currently, the United States maintains comprehensive economic sanctions against Cuba, Iran, Sudan, and Burma (Myanmar). Sanctions against North Korea and the Federal Republic of Yugoslavia (Serbia and Montenegro) were significantly relaxed in late 2000, and those against Iraq and Libya were pr actically lifted in 2004. Since the early 1990s, the continued liberal ization of FDI regimes and trade has been a major factor for the substantial grow th of TNC activities in developing nations. Worldwide, the number of countries that e ach year introduced re gulatory changes aimed to create incentives for fore ign investment and strengthen ma rket functioning rose from just 35 in 1991 to 82 in 2003 (UNCTAD 2004: 8). As a result, net FDI flows to developing states jumped from about $40 billion in 1990 to $238.4 billion in 2000 and, after a sharp decline following the Sept ember 11, 2001 terrorist attack on the United States, peaked again at $255 billion in 2004. Whereas in 1990 foreign investment directed to developing countries accounted for little more than 20% of total capital flows worldwide, last year their share of global FDI was almost 42%. In 2004, Asia (mainly China) and Latin America were the leadi ng recipients of foreign investment among developing regions. Africa also experienced a substantial increase in FDI, although its share of the total remained relatively low (ECLAC 2005: 31). Interestingly, the United Nations Conference on Trade and Developmen t (UNCTAD) reports that, between 1990 and 2002, the FDI performances of sanctioned nations such as Sudan and Myanmar were among the best in the least developed countries Foreign direct investment has continued to flow into these two countri es after the United States imposed sanctions against them in 1997 (FDI to Sudan, in particular, has been gr owing considerably in recent years), and

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35 today exceeds total official development assistance (ODA)3 from foreign governments (UNCTAD 2004: 5-6). Although FD I could have been higher without restri ctions on U.S. investors, foreign-based TNCs have filled the gap by providing Sudan and Myanmar with crucial sources of fina ncing and development tools. A similar situation has occurred in C uba, where FDI keeps pouring in despite serious hurdles created by the U.S. HelmsBurton law of 1996. It has been claimed by some scholars that foreign investment plays a ne gligible, or at least very limited role in the Cuban economy. Criticism mainly fo cuses on the cumulative amount of FDI delivered to the island, which is significan tly lower than in many other developing countries (Werlau 2001: 290). However, th e significance of foreign capital in Cuba cannot be measured from a simple quantitat ive comparison with other nations. Cuban authorities make no secret they resorted to foreign investme nt in the early 1990s out of necessity, and essentially against their will. By their own admission, the government policy is not intended to create a market economy and develop a real and substantial private sector, but aimed at es tablishing a state economy that regulates foreign capital so that the benefits of investment go to the entire society. In addition, Cubas business environment and its economic system present ch aracteristics that are very different from those of most developing nations. Theref ore, quantitative comp arisons with other countries based on delivered FDI have a lim ited value (Spadoni 2002: 173). Foreign corporations investment activ ities in Cuba have had a pos itive impact on the islands 3 Official Development Assi stance (ODA) consists of loans or grants administered with the objective of promoting sustainable social and economic developm ent and welfare of the recipient country. ODA resources must be contracted with governments of foreign nations with whom the recipient has diplomatic, trade relations or bilateral agreements or which ar e members of the United Na tions, their agencies, or multilateral lending institutions.

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36 most important economic sectors and stimulated the competitiveness of Cuban products both domestically and intern ationally. Overall, it is generally believed that fore ign direct investment by TNCs play a key role in improving the economic performance of recipient countries. Transnational corporations are seen as development agents able to provide assistance to developing countries through an arsenal of economic, technical, and ot her managerial resources. Many analysts have demonstrated that the deployment of these assets accelerates recipient countries growth by augmenting domestic savings and investment, helping transfer of new technologies, increasi ng production, exports, and foreign exchange earnings, and fostering spillovers from TN Cs to domestic firms through imitation, competition, and training (Findlay 1978; Gr ossman and Helpman 1991; Barro and Sala-iMartin 1995; Campos and Kinoshita 2002; Ram and Zhang 2002; Baliamoune-Lutz 2004). These findings and the monumental transformation of the global economy under way have great implications for the research on economic sanctions. While the United States continues to use unila teral economic coercive measur es as a way to curtail the resources (and change the beha vior) of target governments especially in developing countries, FDI flowing through transnational corporations has become the single most important source of foreign capital for thes e countries (Ramamurti 2004: 277). As they dominate the realm of global capital flows, promote economic growth and reduce poverty worldwide, and tend to escape control from nation states, TNCs could bear a major responsibility for the failure of economic sanctions to accomplish far-reaching foreign policy objectives.

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37 Migration, Family Linkages, and Remittance Decisions In the last decade, the dramatic growth of international migration and monetary remittances has stimulated extensive multidis ciplinary inquiry on migrants long-distance economic relations with their homelands Between 1990 and 2000, the number of migrants in the more developed regions (mainly Europe, Asia, and North America) increased by 23 million persons, or 28%. In 2000, around 175 million persons resided outside the country of their bi rth, and almost one of every 10 persons living in the more developed regions was a migran t from developing countries (United Nations 2002: 2). Whereas early scholars of migration believed th at most migrants severed ties with their countries of origin as they assimilated into the country that received them, recent works have suggested that a large number of thes e individuals remain oriented toward the communities they come from (Levitt 1998). Remittances, the funds that transnational migrants send home to family members, have become a major source of foreign exchange earnings for many developing na tions, and a key addition to their gross domestic product. They are often one of the main reasons why individuals decide to leave their home country to search for job opportunities abroad as well as an important consequence of the overall migration process. It has been argued that migrants relationships with their places of origin are forged and sustained by complex and enduring transnat ional social networks. Rather than a movement of individual players, internati onal migration is considered as a process leading to the formation of groups and commun ities that bring social units into contact across national boundaries. In his historical overview of immig ration in the United States, Tilly (1990: 84) emphasized that, to a large degree, the effective units of migration are not individuals but sets of people linked by acquaintance, kinship, and

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38 work experience. According to this perspe ctive, migrating means enlarging ones living space and making a more or less permanent commitment to maintain multiple relations (familial, economic, social, organizational, re ligious, and political) that span borders. Migrants carry out activ ities, from visitation to sending remittances, to making telephone calls, that are transnational in nature a nd connect them to two or more societies simultaneously (Glick Schiller et al. 1992: 1-2). In order to describe th is constant contact between communities of origin and destinati on, recent studies have used terms such as transnational migration circu its (Rouse 1992), transnational so cial fields (Basch et al. 1994), transnational communities (Portes 1996), and binational societies (Guarnizo 1994). As stated before, social capital mostly developed through family linkages is a powerful agency for the transmission of mone tary remittances. The flow of these money transfers is not a random byproduct of migration by an individual, but an integral part of the familys strategy behind migration. While the behavior of individual migrants should not be neglected, group decision-making and objec tives in the context of the family play a crucial role in determining migration patterns and remittance flows. Using the tenets of portfolio investment theory, St ark (1991) demonstrated that the decisions to migrate and remit earnings to relatives left behind are of ten ordered by family needs for stable income levels, specialization (migration by some labor ers, non-migration by others), and the need to jointly insure the familys well-being. In some cases, families might even decide to allocate their labor assets ove r geographically dispersed and st ructurally different markets in order to reduce the risk of losing income in individual markets and allow family members to smooth its consumption. The ge neral idea is that the main stimulus for

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39 migration is the prospect of receiving rem ittances rather than the wage differential between two places. Once the migrants have successfully established themselves in other locations, they play the role of financial intermediaries and substitute for missing or imperfect markets (G ubert 2002: 268). Although Stark focused on internal migration trends and practices in a number of developing countries, namely Botswana, India, and the Philippines, most of his findings are valid for international migrants in devel oped regions as well. In the 1980s and early 1990s, for instance, several scholars who an alyzed return migration from England, Canada, and the United States to a group of E nglish-speaking islands (West Indies) in the Caribbean found that many migrants had maintained very closed relationships with families at home during their years abroad. In those years, they visited relatives on a regular basis, continued as actors in key family decisions and purchased properties and built houses in their countries of origin (Rubenstein 1982; Thomas-Hope 1985; Gmelch 1992). More recently, Crawford (2003: 107-108) showed how African Caribbean women migrating to Canada have utilized their ex tensive family and kinship connections to buffer the effects of social and economic instab ility in their home countries in the last three decades. According to her, these act ors commitment to maintain their families from abroad is not simply a consequence of globalization but a c ontinuation of African Caribbean family interactions across seemi ngly distant borders. Thus, what we might call transnational families are critical decisi on-making entities that shape international migration patterns and stimulate the flow of remittances across national boundaries. Individuals commit themselves to act togeth er and develop strate gies on how to share common income and improve their economic conditions. Seen in this light, coordinated

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40 efforts and arrangements by all or most memb ers of a family allow the overall group to enjoy more resources than it could ob tain in the absence of cooperation. Remittances are the exemplary forms of migrant transnationalism (Vertovec 2002: 4). They are usually associated with migrant workers transfers of a proportion of their income to their families in the country of origin. The importance of remittances as a private mechanism on income redistribution has given rise to a burgeoning literature on motives for and purposes of these money transf ers. For some scholars, altruism could play a crucial role in the decision to remit. In the early 1970s, Becker (1974: 1079-1080) argued that migrants send remittances to thei r rural families because they care sufficiently about the well-being of their relatives. The altrui stic behavior is the result of the familys utility function, which is the same as that of one of its members. Resources are transferred voluntarily because all member s have the same motivation to maximize family opportunities regardless of how selfish they are. The person making the transfers would not change the consumption of any me mber even with dictatorial power because his/her utility partly depends on the familys welfare. Put it differently, sufficient love by one member leads all other members by an in visible hand to act as if they too loved everyone. In his study of remittance patter ns in El Salvador and Nicaragua, the two countries with the largest and most perman ent out-migrations from Central America in the 1980s, Funkhouser (1995: 138) also develope d a function model th at includes both the migrants own utility and that of the hous ehold in the source country, weighted by a factor of relevant importance. The altruistic motivation is demonstrated by the fact that the migrant receives nothing but the satisfaction of th e households increase in consumption.

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41 Pure altruism, however, cannot fully explai n why migrants remit a portion of their income to relatives abroad. To a certain extent, remittances may also be triggered by selfish interests such as the aspiration to an inheritance or the desire to channel ones investments through the trustworthy family bot h as purchasing agent and for subsequent maintenance. Based on a household survey c onducted in Western Kenyas rural areas, Hoddinott (1994) claimed that remittances are influenced not only by the migrants wages but also by the reward, or bequests of la nd, offered by the parents. As parents age, they may require both financial assistance a nd help with agricultural work and domestic tasks. Parental land holding, therefore, beco mes an effective bargaining tool to induce children residing abroad to ma ke available a portion of thei r earnings, especially when they have plans to return to their home lands. In addition, Ah lburg and Brown (1998: 136-138) argued that migrants may remit cap ital with the self-i nterested aim to accumulate physical assets (homes, farms, small businesses, financial deposits) and become good entrepreneurs in their home count ries, or to encourage family, social and economic ties that keep alive the possibility of one day returning home, even if they are not planning to move in the near future. Using data from a survey of Tongan and Samoan migrants in Sidney, Australia, they concluded that migrants remittances are driven, at least in part, by the accumulation of physical and social cap ital and not, as is often thought, only by altruism and the need for family consumption support. Finally, the flow of remittanc es could be the result of implicit contracts and/or loans among family members. Lucas and Star k (1985: 913-914) used an eclectic model labeled tempered altruism or enlightened se lf-interest to show how the migrant and the family have an implicit understanding to share mutual benefits and reduce risks by

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42 allocating certain members as migrants and using remittances as a mechanism for redistributing gains. In this case, private tr ansfers are the result of a mix of altruism and self-interest as they are part of, or one clau se in, an inter-temporal, mutually beneficial contract arrangement between migrants and their families. In other words, there is a coinsurance contract based on altr uistic social norms (family loyalty and mutual care) and self-seeking motives (inheritances and invest ments), which makes the cost of enforcing much lower than if dealing with non-family members. According to Poirine (1997: 589590), instead, most remittances c onsist of the repayment of an informal and implicit loan resulting from the household paying for educatio n and the cost to emigrate. While noting that surveyed migrants seldom admit openly to acting in such a calculating manner, he presented a three waves theory to explain the remittance flow over time. In the first stage, migrants send remittances home to re pay an education-related loan taken out during their youth. In the second stage, they transfer money to fina nce the education of other family members until they are ready to em igrate. Then, in the third stage, the next generation of migrants pays back the former lenders who may have relocated home, or both groups help older family members build a house and set up busine sses. This theory, which is particularly relevant to international migration fr om poor to rich countries, is based on the idea that the family savings or loan component is more important than the family co-insurance or altruistic components in remittances. In the case of Cuba, the significant out-migration during the last two decades and the strengthening of transnational family li nkages have stimulated increasing flows of remittances mostly from the United States (where the vast majority of migrants resettled), especially after Fidel Castro legalized the po ssession and circulation of the U.S. dollar in

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43 the Cuban economy in 1993. There is little doubt that altruism is a critical component in the Cuban migrants decisions to remit mone y to relatives left behind. Until the early 1990s, transnational connections between Cuba n exiles in the United States and their families on the island remained at minimal levels, mainly as a result of institutional barriers imposed by the U.S. and Cuban govern ments and informal social pressures on Cubans in both countries to avoid crossborder bonding. However, when the deep economic recession of the early 1990s threaten ed the survival of the Cuban economy and many islanders tried to reach out to the Cuban diaspora, financial assistance from overseas relatives in the form of remittances witnessed a dr amatic surge (Eckstein 2005: 320-321). This could be seen as altruistic b ecause migrants began to transfer substantial amounts of capital to their families abroad wh en they needed it most. Remittances to Cuba may also be prompted by moral and fina ncial obligations toward the family or by self-seeking motives such as the migrants desi re to raise his social status or prestige within the homeland context. Attempts to accumulate physical capital through purchasing agents or secure bequests in the c ountry of origin play virtually no role as determinants for remittances to communist Cuba. A very low number of Cuban residents are permitted to hold private productive assets on the island and inheritance is extremely limited under Cuban law. It must be noted that both the U.S. and Cuban governments contributed to the deepening of family linkages and to bondi ng of potential economic worth between islanders and exiles during th e 1990s. The Castro government shifted its stance toward the diaspora and courted remittances by intr oducing reforms in its monetary policies, increasing the channels for c onverting or spending U.S. dolla rs, and allowing more exiles

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44 to visit relatives in Cuba. After 1998, th e Clinton administrati on also encouraged transnational connections by streamlining pro cedures for U.S.-based travel to Cuba, facilitating family reunions with the resu mption of direct flights between the two countries, and easing limitations on money transfers to the island (Barberia 2002: 30). Clintons policy changes, in pa rticular, assume great importance for future U.S. attempts to stem the flow of remittances to Cuba th rough the creation of new cross-border barriers. Once formed, migrants connections with rela tives abroad often become self-sustaining, reflecting the establishment of formal and informal networks of information, economic assistance, and obligations (Boyd 1989: 641). As Cuban exiles in the United States have widely demonstrated their abil ity to circumvent U.S. sanctions, it is likely that large amounts of remittances will continue to flow to Cuba despite the Bush administrations recent tightening of restrictions on Cuban Amer ican family visits and money transfers to the island. In short, migrants decide to remit money to their countries of origin for a variety of reasons. Commitment to home rests upon comp lex emotional and social foundations and manifests itself in the migrants willingness to financially support t hose left behind, share the costs and benefits of migration, pay back a loan to relatives, invest in assets in the home area and ensure their careful maintenan ce, and maintain social relationships that facilitate an eventual return at some time in the future. Nevertheless, a common element of most remittance decisions, whether they ar e triggered by self-inter ested or altruistic motives, is that they occur in the context of family linkages that often span national borders. The family is at the heart of c ontractual arrangements, bequests, loans, and social norms like guilt, solidarity obligations, and loyalty. These resources constitute a

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45 social capital that reinforces international mi grants connections to relatives in the source country and sustains the flow of transnational monetary remittances. Economic Impact of Remittances The flow of remittances, which are typi cally in cash rather than goods, has increased dramatically worldwide during the last two decades. Official statistics tend to focus on capital flows from developed to deve loping regions, neglecti ng domestic as well as intra-regional money transf ers. In addition, accurate quantitative assessments are complicated by the fact that a very la rge, unknown amount of money (unrecorded remittances could be larger than recorded ones) is usually transferred through informal mechanisms and to countries that do not provide statistics on these transnational practices. Even so, it is reported that globa l remittances to developing countries rose from $15 billion in 1980 to an estimated $93 billion in 2003, and were close to $100 billion in 2004 (Carling 2005: 9). They are cu rrently the second-larges t financial flow to developing countries after forei gn direct investment, more th an double the size of official development assistance. In terms of speci fic regions, Latin America was the largest recipient of remittances in 2003 (around 30% of the total), followed by South Asia, East Asia and Pacific, Middle East and North Africa, Europe and Central Asia, and SubSaharan Africa.4 Figures for the African region are extremely underrated due to the lack of comprehensive data for most of its countri es. The United States is by far the leading source of remittances to developing nations accounting for about one third of total money transfers in 2002 (World Bank 2004). 4 Further details on remittance flows to developing countries and their regional distribution are available at: http://siteresources.worldbank.org/GDFINT2004/Home /20175281/gdf_appendix%20A.pdf (last visited November 2005).

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46 Today, remittances constitute the fastest growing and most stable capital flow to developing countries, especially as compared to foreign investment. FDI flows are volatile components of external financi ng and tend to be affected by global macroeconomic cycles, raising incomes during booms and depressing them during downturns. Remittances, instead, are less infl uenced by these cycles and may actually increase during periods of crises, given that migrants send money home to their relatives in bad times to augment their income and thereby reduce the impact of the shock on welfare (Sander 2003: 6). For instance, wh ereas FDI flows to developing countries decreased by approximately 35% between 2001 and 2003, mostly as a result of the September 11, 2001, terrorist attacks on the Unite d States, remittances rose by about 20% during the same period (World Bank 2004). The fact that migrants money transfers tend to be counter-cyclical seems to suggest that very often they se rve as a critical source of both income and consumption smoothing strategies, especially for families in poor countries living close to subsistence levels. Remittances are less susceptible to economic downturns than FDI even when their main purpose is to accumulate physical assets abroad. As Ratha (2003: 161) st ates, overseas residents are more likely to continue to invest in their home country despite economic adversity than are foreign investors, an effect that is similar to the home-bias in investment. The positive economic impact of remittances on individual households and local communities is widely acknowledged. For the most part, migrants transfer funds to relatives abroad with no strings attached a nd deliver capital resources on a massive scale directly into the pockets of those who need them most, increasing prosperity and satisfying the basic necessiti es of people living in econom ically peripheralized areas

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47 throughout the developing world (Ballard 2003: 14). These resources are primarily used to cover household expenses for food, medi cines, clothing, child rens education, and other consumer goods. Therefore, it can safely be argued that remittances make crucial contributions to welfare enhancing and pove rty reduction (Siddiqui and Kemal 2002: 14). In a recent study on international migration tr ends and remittances for a group of 74 low and middle-income nations from each major region of the developing world, Adams and Page (2003: 21-22) found that in ternational remittances (defin ed as the share of money transfers from abroad in a country GDP) have a strong, statistical impact on reducing poverty. On average, a 10% growth of the sh are of transferred funds in a country GDP will lead to a 1.6% reduction of the share of people living on less than $1 dollar per person per day, and to about a 2% decline in the depth of poverty in that particular country. Noting that official statistics greatly underestimate the actual level of international remittances (and their potentia l impact) because they report only funds transmitted through official banking channels, the authors conclude that migrants money transfers to their original communities appear to raise average income and lower both the incidence and severity of poverty. Although the bulk of remittances are usually spent on consumer goods, a smaller but substantial part of them go into savings and investment. Once sa tisfied the recipient households immediate consumption needs, remittances increase the opportunity for additional savings that can be invested in home construction and repair and in more productive sphere, including agriculture. In two separate survey st udies of Egyptian and Pakistani rural households, Adams offered ev idence for the marginal propensity of families to invest money transfers from abroad in residences, land, and other rural assets

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48 (Adams 1991: 715; Adams 1998: 170). In a similar vein, Alderman (1996: 362) demonstrated that a significan t portion of international remittances to rural Pakistan tend to be saved and used for purchases of lands and buildings, adding that resources for nondurable goods (food and clothing) are mostly obtained though local remittances. Transferred funds may also be invested in financial assets, such as a bank savings deposit, which can be held either by the mi grant in the host country or by his family members at home. In a comprehensive survey on the use of remittances in South Pacific countries in the early 1990s, Brown (1994) f ound that in more than 60% of households that received remittances some financial savi ngs had been made out of family income, as compared to only 40% of households that did not collect money from relatives abroad. Hence, migrants transnational money tran sfers allow recipient families to channel increasing amounts of capital in to productive investment in their domestic economies or into the build-up of financial assets to provide for long-term income security. Remittances augment the income of recipient families and may help lifting them out of poverty, but their overall impact on receiving economies remains a highly debated topic. Several scholars have expressed negative views on the e ffects of these capital flows at the macro level and their role in spurring economic development. A common argument is that remittances contribute minimally or do not contribute at all to economic growth because they are largely spent on cons umption, with little left over for productive use (Weist 1984; Rubenstein 1992). Even when a substantial portion of transferred funds are saved and devoted to investment, they are mostly used to purchase land or build new houses for family members rather than to set up businesses and improve agricultural technology and productivity (Ballard 2003: 2). Mo reover, the benefits of remittances are

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49 selective and tend to increas e inequalities betwee n households, adding to macroeconomic instability in poor countries. And they also have a propensity to be unequally distributed among nations in developing regions. In fact to a large degree, money transfers from abroad tend to go to the better-off househol ds within the better-off communities in the better-off countries of the developing world since these households, communities, and countries tend to be the source of migr ants (Nyberg-Sorensen et al. 2002: 53) Finally, it has been argued that regular flows of remittances lead to the development of a dependency syndrome, creating moral hazard problems between remitters and recipients that produce negative effects on economic growth. Given that remittances are often part of an insurance arrangement in a situation of imperfect monitoring, recipients have incen tives to limit their job search es and reduce work efforts (thus earning less income) in order to be eligible for fi nancial assistance (Gubert 2002: 285).5 This suggests that migrants money tran sfers provide short-term relief but could be detrimental for long-term development, as recipients would act in ways that tend to decrease expected output. Using a panel of aggregate data for 113 developing countries over a 29 years period (1970-1998), a recent st udy commissioned by the International Monetary Fund (IMF) found that remittances are negatively correlated with economic growth. The authors of the study claimed that such an outcome is mostly the result of moral hazard mechanisms and asymmetric in formation, which exert strong influences on the behavior of the recipients and inhibit productive investment. According to them, remittances do not act as a source of capital for economic development since they are frequently ill-spent in a cont ext of growing dependency. Remitted funds may be used to 5 The remitter may establish occasiona l contacts with the reci pient through telephone calls, visits home, electronic mail, and letters, but he/she cannot directly observe the daily activities of remittance beneficiaries and how they utili ze the transferred funds.

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50 raise the familys consumption and stock of wealth, but not n ecessarily the overall economys stock of wealth (Chami et al. 2003: 5-9). Notwithstanding the potential negative consequences of remittances at the aggregate level, recent scholars in the fiel d have become increasingly optimistic about their effects on receiving economies. This optimism was partly triggered by a reevaluation of the nexus between consumpti on and investment, based on the idea that expenditures on health and edu cation represent an investment in human capital (Carling 2004). However, remittances augment the foreign exchange reserves of receiving countries and produce macroeconomic benefits whether they are used for investment or simply for consumption, offsetting in both cas es some of the losses that a developing nation may experience as a result of highly skilled workers migrating abroad (Ratha 2003: 164). Productive investments benefit the overall economy by contributing to output growth and creating new jobs. But remittances may generate positive multiplier effects even if they are totally consumed, pr ovided that at least some of the funds are spent on domestic goods and services. Using input-output tables to assess the diffused impact of migrants money transfers on th e Greek economy, Glytsos (1993: 154) showed that the spending of remittanc es on final consumer goods stimulates the development of domestic industries, leading ultimately to more production, higher employment, and increased capital formation and economic growth. He also contended that remittance leakages do not impose any serious burden on the balance of trade despite their strong import-generating effect. Research studies on Bangladesh, Pakista n, and Mexico have reported similar findings on the positive spil lover effects of remittances operating

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51 primarily through family consumption (Stahl and Habib 1989; Nishat and Bilgrami 1991; Durand et al. 1996). The issue of whether migrants remittances to their countries of origin contribute to economic development remains a question that elicits many contra dictory answers. While these capital flows certainly benefit recipient families, their impact on economic growth depends on a variety of factors, incl uding the type of migrant workers who left home (the adverse growth effect of high-sk illed out-migration is bound to be large), the receiving countrys regional economic position and its relationship to a more economically salient country, and how remitted funds are used by their beneficiaries (Solimano 2003: 16; Orozco 2003: 5). Nevertheless, even if remittances simply enhance the welfare of recipient house holds, with little or no imp act on the overall economy, they would still play a crucial role in the context of economic sanctions. In order to intensify pressure on the economy of a target country and induce its government to comply with the requests of the sanctioning state (or even tually remove this government from power), the mechanism of economic sanctions require s the generation of ma ssive shortages and popular discontent in the target territory that inevitably affect the lives of the civilian population. Because they increase the cons umption of recipient families and help alleviating poverty, thus easi ng civilian pain, remittances to a sanctioned country may reduce the likelihood that its citizens will rally against their government. In other words, remittances could undercut the transmission mechanism of sanctions by which widespread social suffering is translated in to demands for political and economic changes or into a call for the removal of authorities.

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52 The flow of remittances and their benef its to large segments of the civilian population in terms of consumption are partic ularly important in the case of communist Cuba, where the social welfare state is suppos ed to satisfy popular needs such as the supply of food and other consumer goods, se rvices, work, and incr eased standards of education and health care. When the Castro governments supply of rationed goods to its citizens shrunk considerably in the ea rly 1990s amid a deep economic recession, purchases of food products, clothing, medicine s, and other items in state-owned dollar stores became the only relief from scarcity for many Cubans. Alt hough Washington tried to capitalize on this precarious situation by strengthening th e embargo against the island, the dramatic surge of remittances from the Un ited States brought valuable hard currency into the hands of a large number of Cubans, a nd from there into the coffers of the Castro government. In practice, wit hout remittances there would ex ist no hard currency stores for Cubans, since money transfers from abro ad represent the main source of foreign exchange for the Cuban population. While rem ittances have not solved all the problems of the islands economy and created inequali ties that defy the re volutions egalitarian precepts,6 they would seem to have minimized the impact of U.S. sanctions and undermined their main goals by improving the st andard of living of many Cuban citizens, making them less prone to question their govern ment and the inefficiencies of Cubas socialist system. Conclusion Business practices by transnational corporat ions and migrant entrepreneurs sustain hard currency flows across national borders that greatly complicate the attempts of 6 Brundenius (May 2002) estim ated that the Gini coeffi cient in Cuba increased from 0.22 to 0.41 between 1986 and 1999 as a result of unequa l access to hard currency sources, with remittances representing one of the factors that contributed to the new inequality.

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53 nation-states to promote changes in a targ et country through the imposition of economic sanctions. Because of their structure, si ze, and supra-national decision-making powers, TNCs are major players in the global economy and tend to escape control from national governments. Stimulated by the free play of market forces, especially maximum profits and earnings, TNCs capture global markets wi th foreign direct investment and may adversely affect the purpose of sanctions by delivering capital a nd other resources to embargoed nations. At a more local level, transnational linkages mainly built through family ties sustain the flow of remittances from migrants to their homelands. These capital flows are centered on the family whet her they are triggered by altruistic reasons such as the care of migrants for those left behind, or by self-interested motivations such as the migrants desire to accumulate physical investments in their countries of origin. The positive effects of remittances on recipient families consumption patterns, in particular, might play a crucia l role in the contex t of economic sanctions by preventing social suffering from translating into a pre ssure for political and economic changes. Having presented the theoretical concepts of the transnational literature that are relevant to the working hypotheses of this study, the next chapte r shifts to a review of the key events regarding U.S. sanctions with respect to Cuba. It also offers an analysis of the Helms-Burton law of 1996 and the potential imp lications for foreign companies that are engaged in investment activities within the communist island.

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54 CHAPTER 3 THE U.S. EMBARGO AND THE HELMS-BURTON LAW The Origins of the U.S. Embargo Against Cuba On January 7, 1959, the United States r ecognized the new Cuban government led by Fidel Castro, but relations quickly deteriorated. The U. S. policy toward Cuba was initially a reaction to Cubas confiscation of American properties without compensation, its alliance with the Soviet Union, and its decl ared intention to spread the revolution to other Latin American count ries (Fisk 2001: 93). While economic sanctions were established to punish Cuba for the expropriations, raise the co st of Cuban adventurism in Latin America, and raise the cost to the Sovi et Union of maintaini ng its new relationship with the Castro regime, the United States ultimate goal was the economic and political isolation of Cuba (Peters 2000: 5). In th e early 1960s, the embargo was not simply a unilateral measure on th e part of the United States, but a more general Latin American attempt to contain the Communist threat. By 1964, all members of the Organization of American States (OAS) with the exception of Mexico had broken diplomatic and trade relations with Cuba. Between 1959 and the first half of 1960, the Castro government expropriated 70,000 acres of property owned by U.S. suga r companies, including 35,000 acres of pasture and forests owned by the United Frui t Company in the Eastern portion of the island. It also took over U.S. oil refineries, after they refused to refine oil Cuba had acquired from the Soviet Union, and U.S. prope rties in key sectors such as telephone and electricity (Jatar-Hausmann 1999: 15). In re sponse, the United States cancelled Cubas

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55 portion of the annual U.S. sugar import quot a in July 1960 and announced a complete ban on U.S. exports to Cuba (except for non-subsid ized foodstuffs and medical supplies) later in October. On January 3, 1961, the Eise nhower administration officially broke diplomatic relations with the Castro government. On September 4, 1961, just a few months afte r the famous speech of Fidel Castro in which he defined for the first time the 1959 re volution as socialist and declared himself a Marxist-Leninist, the United States promul gated the Foreign Assistance Act (FAA). The FAA granted the U.S. President specifi c authority to impose economic sanctions against Cuba and deny all U.S. foreign assistan ce to the Caribbean island. On February 7, 1962, the FAA was expanded and the Kennedy administration announced a total embargo of U.S. trade with Cuba. It should be noted that, since th e prohibition of all U.S. exports to Cuba in October 1960, the embargo had become extraterritorial with regulations barring re-export to Cu ba of any commodities or technical data that originated in the United States. The legal foundations of the U.S. economic embargo with respect to Cuba are laid down in the Cuban Assets Cont rol Regulations (CACR) prom ulgated in 1963 pursuant to the Trading with the Enemy Act (TWEA) of 1917. The TWEA, signed in the context of U.S. entry into World War I, allowed the President to prohibit, limit or regulate financial and commercial transactions w ith hostile countries in time of war. It was amended in 1933 to grant the President authority to exerci se the powers of the act during periods of national emergency. The main reasons be hind this amendment were to deny hard currency resources to sanctioned countries and their nationals as well as to preserve the assets of such countries and their nationals for possible vesting and use in the future

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56 settlement of American claims against th em. The CACR of 1963 froze all Cuban assets in the United States and pr ohibited all unlicensed financia l, commercial, and travel transactions by Americans with Cuba or it s citizens. The Office of Foreign Assets Control (OFAC), established by the U.S. De partment of State in 1962, was responsible for issuing, interpreting, and applying economic sanctions regulations. With the CACR, the U.S. government aimed to isolate Cuba, pr otecting Cubans from ha ving their assets in the United States confiscated by Cuban authorit ies, preserving Cuban assets for future disposition, and denying Cuba access to dollar earnings and financial facilities (TraviesoDaz 1993). On May 5, 1966, the U.S. Congress expande d the embargo by passing the Food for Peace Act. The act outlawed food shipments to any country that sold or shipped strategic or non-strategic goods to Cuba, except for sp ecific circumstances in which the President could allow shipments of medical supplies and non-strategic goods. The Food for Peace Act was signed by President Johnson in November 1966, although he expressed some concern for certain provisions of the act that prec luded food aid to countries that traded with Cuba and North Vietnam. Well into the 1970s, the United States c onditioned the reestablishment of normal relations with Cuba on the end of Castros effort to spread the revolution in Latin America as well as on the end of its military ties with the Soviet Union. Fears of a military threat from Cuban and Soviet expansion in the region were confirmed in the Cuban Missile Crisis1 and deepened later in the 1970s when the Cuban military became 1 In late October 1962, the Khrushchev-Castro attempt to deploy nuclear missiles on Cuban soil brought the world to the brink of a nuclear war. The Cuban Miss ile Crisis ended with the Soviet Union agreeing to remove its missiles from Cuba in exchange for the U.S. commitment not to invade Cuba and to remove U.S. missiles from Turkey and Italy (Nuti 1994).

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57 involved in Angola and Ethiopia (Piczak 1999: 4). However, there was no formal condition regarding Cubas internal system or arrangements or demands that Cuba become a democracy and adopt a market economy. The 1970s: Efforts Toward Normalization In the mid-1970s, a more favorable interna tional climate and so me changes in the political scenario of the Western hemis phere promoted the active resumption of economic ties between several Latin American countries and Cuba and undermined the overall support of the OAS for the U.S. em bargo. Castros decision to reach out to establish diplomatic relations with the same Latin American governments he had previously vowed to overthrow was a cons equence of his failed attempt to export armed struggle in the region and growing pr essures from the Soviet Union to adopt tactics less likely to provoke a confrontation between Moscow and Washington. On July 29, 1975, the OAS dropped multilateral sanctions against Cuba in recognition of Castros less aggressive policies in the hemisphere. In terestingly, the United States voted with the majority as an indication of its willingness to at least explore possi ble grounds for more formal negotiations with Cuba l eading to normalization (Smith 1998).2 Contacts with Cuba had begun in the last months of the Nixon administration. In July 1974, a secret message was transmitted by the U.S. Secretary of State Henry Kissinger to Fidel Castro to determine if there was interest for changing the relations between the United States and Cuba. In 1975, Kissinger, now serving under President Gerald Ford, indicated that he was prepared to move in a new direction, and some expansion in commerce with Cuba was grante d to subsidiaries of U.S. firms with 2 In February 1973, the United States and Cuba si gned an anti-hijacking agreement in which the two countries pledged to return or prosecute hijackers.

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58 amendments to the CACR (Schwab 1999: 15). Overseas subsidiaries of more than a hundred large firms based in the United States could now apply for a specific license to trade with Cuba from third countries. This kind of commerce increased constantly during the 1980s and reached its highest level in 1991 (before the enactment of the Torricelli Law) to more than $770 million (Aguilar Tr ujillo 1998: 3). However, talks between Washington and Havana for a relaxation of te nsions were drastica lly suspended in the autumn of 1975 when Cuba deployed troops in the civil war then raging in Angola.3 On December 20, 1975, Ford announced in a public speech that the Cuban involvement in Angola would preclude any possibi lity of restoring full diploma tic relations with Cuba in the near future. Talks resumed during the first year of the Carter administration. In March 1977, the U.S. government dropped the ban on U.S. travel to Cuba by U.S. citizens, who were since then allowed to spend $100 in trav el-related expenditure s on Cuban goods during their visits to the isla nd. In September of the same year the two countries opened interest sections in each others capita ls, physically located at the si tes of their former respective embassies (Gonzalez 1995: 210). The United St ates arranged for the Swiss Embassy in Havana to assume its diplomatic and cons ular representation in Cuba while the Czechoslovakian Embassy in Washington provided the same service for Cuba. These offices dealt primarily with trade and consular issues and represented important channels of communication between the two countri es. Although scholars disagree on the feasibility of positive U.S. overtures to the gove rnment of Fidel Castro in the late 1970s, 3 Cuban and Soviet troops backed the Popular Movement for the Liberation of Angola (MPLA) in its effort to take power after Portugal granted Angola its independence.

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59 it is widely believed that Carter has been th e only U.S. President to make a concerted effort to normalize relations with the communist island.4 According to Wayne Smith, who became the second head of the U.S. Interest Section in 1979, the esta blishment of interest sections, which were embassies in all but name, inaugurated a more flexible and pragma tic U.S. approach toward Cuba and a more flexible position of the Cuban government on the issue of compensation for expropriated U.S. properties. However, while recognizi ng its obligation under international law to compensate the original owners, the Castro government claimed damages resulting from the Bay of Pigs invasion5 and the U.S. economic embargo. Given that Havana would have been unable to pay back Americans unless the embargo was lifted, the United States and Cuba agreed informally to simultaneous ly negotiate both the issue of compensation and the removal of sanctions (Smith 1998). Scarcely three months after the openi ng of interest sections, the Carter administration dropped its conciliatory stance, and normalization efforts came to a halt as the Cuban government begun sending military troops to Africa again. Fidel Castros involvement with the Soviet Union in the conflict between Somalia and Ethiopia put an abrupt end to negotiations that were still at a very preliminary stage and led the Carter administration to add two more conditions for progress toward normalization: the removal of Cuban troops from Africa (echoi ng President Fords 1975 public speech) and Havanas greater respect for human rights (S mith 1998). The Carter administration could not accept the Cuban incursion in Africa because it was perceived as a strategic gain for 4 Schwab (1999: 17) argues that Carters attempt at achieving a modus vivendi with Cuba demonstrated that accommodation was entirely feasible and that the pr oblem was the traditional U.S. foreign policy. 5 On April 17, 1961, a group of 1,200 Cuban exiles backed by the U.S. Central Intelligence Agency (CIA) invaded Cuba on the South-West shore of the island (Bay of Pigs). The internal support anticipated by the CIA failed to materialize and the Cuban forces de feated the exiles after 72 hours of fighting.

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60 both Cuba and the Soviet Union, and thus a setback for the United States in the EastWest struggle (Gonzalez 1995: 210). In this context, a broad definition of the U.S. national security linking U.S. credibility to developments throughout the world returned to be pervasive in Washington. The proce ss of rapprochement was frozen and then reversed in the 1980s with the election of Ronald Reagan and the new wave of revolutionary socialism backed by Soviet and Cuban troops in Central America, the Caribbean, and Africa (Zimbalist 1995: 26). The long-standing U.S. policy of hostility and isolation against Cuba and its Cold Wa r intent on punishing and destabilizing the Castro government were resumed. The 1980s: Renewal and Intensification of Economic Sanctions Ronald Reagan reinstated the traditional hard-line toward Cuba. He intended to pursue the containment strategy with respect to Cuba much more vigorously than many of his predecessors as well as to revive the goal of rolling back Communism. Besides putting forward the same conditions for normalization imposed by former President Carter, the Reagan administra tion clearly aimed at undermini ng the tide of Soviet-Cuban advancements throughout the Third World, and especially in the Western Hemisphere (Erisman 1995: 132). Throughout the 1980s, Cuba expanded its military presence abroad, supported logistically by the Soviet Union. Depl oyments reached 50,000 troops in Angola, 24,000 in Ethiopia, 1,500 in Nicaragua, and hundreds more elsewhere. Cuba also served in a non-combat advisory role in Mozambique and Congo. However, the focal point of U.S. attention and its main source of concern was Central America. The region, peripheral for Moscow earlier in the Cold War, had become a crucial area for Sovi et and Cuban foreign policies in the Third World after the 1979 Sandinista victor y in Nicaragua and the 1980

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61 outbreak of civil war in El Salv ador. In this regard, Washington realized that if it could not prevail in Central America, it could not e xpect to prevail elsewhere. The cases of Nicaragua and El Salvador hi ghlight the U.S. strategy of containment and protection of political and economic interests. Duri ng the 1980s, Washingt on spent hundreds of millions of dollars to back Contra opposition forces and overthrow the Sandinista government, whose socialist convictions and cl ose ties with Cuba a nd the Soviet Union unnerved U.S. officials. Moreover, the Stat e Department embarked in its longest and costliest war ($6 billion in tw elve years) since Vietnam by providing material assistance to the Salvadoran military against revolutionary insurgents ( Farabundo Mart National Liberation Front ) backed economically and militarily by Cuba and the Soviet Union (Seligson 1993: 261-262). The regional security of the Eastern Caribbe an also served as the target of the reassertion of U.S. hegemony within the c ontext of the Cold War and the ideological challenge of Cuba. In 1983, U.S. troops i nvaded the Caribbean island of Grenada to overthrow its Marxist-leaning Revolutionary M ilitary Council, consid ered too radical and too closely aligned with Fidel Castro. Fo r Reagan, the Soviet-Cuban militarization of Grenada could only be seen as Soviet power projected into the region. Between 1980 and 1986, annual U.S. military aid to Grenada jumped from $200,000 to $20 million. The U.S. role in the region, fueled by the f ear of nationalism and Cuban communism, was abetted by the extremely pro-U.S. government s in Jamaica, Dominica, Antigua, Barbuda, and St. Lucia (Schwab 1999: 22-24). In line with a tougher position toward C uba, the economic sanctions were renewed and intensified during the 1980s. On Ap ril 19, 1982, the Reagan administration

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62 reestablished the travel ban prohibiting U.S. citizens (with the exception of officials, relatives visiting family, and professional activities) from spending money in Cuba, despite the fact that U.S. courts had upheld the constitutional right to travel. That same year, it warned U.S. subsidiaries in Third countries not to exceed the limits allowed by the Treasury Department. Finally, on August 22, 1986, the U.S Treasury Department announced new restrictive measures with resp ect to Cuba. These measures prohibited U.S. businesses from dealing with a list of foreign firms operating in the United States, Panama, and Jamaica, which were considered as Cuban fronts intended to break the U.S. embargo (Leyva de Varona 1994: 9). They also included lower limits on cash and gifts that Cuban Americans could se nd to relatives on the island and tighter regulations on companies that shipped food and care packag es to Cuba from Cuban-Americans. By the early 1990s, the U.S. strong respons e to Cuban and Soviet initiatives in Latin America and Africa, its tougher stance on economic sanctions against the island, and the collapse of the Soviet Union had pr ovoked significant changes in the areas of major concern for the United States. First of all, Cuba had begun to pull back militarily from Africa and Latin America. The Castro government unilaterally removed its forces from Ethiopia, met the timetable of the 1988 Angola-Namibia accords by completing the withdrawal of its forces from Angola befo re July 1991, and ended military assistance to Nicaragua following the Sandinistas' 1990 electora l defeat. Furthermore, the signing of the peace agreements in El Salvador in ear ly 1992 ended any hope that Central America would join Cuba in its socialism and oppos ition to the United States. Following the agreements, Fidel Castro stated at a conf erence in Havana: Times have changed, we have changed. Military aid outside our border is a thing of the past. The most important

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63 task is to see that the Cuban revolution su rvives. Abroad we in tend to live by accepted norms of international behavior (Seligs on 1993: 263). Second, a report of the State Department on human rights violations ac knowledged that Cuba had shown signs of improvement in this regard. A significant number of political prisoners were released while Red Cross officials were allowed into the prisons to interview inmates (Smith 1998). Third, after the fall of the Soviet Union in late 1989 and the end of its special relationship with Havana, the massive amount of aid that had allowed Cuba to weather the U.S. embargo began to dry up. In February 1991, the Council for Mutual Economic Assistance (the Soviet bloc) was disbande d and by the following year most Russian military personnel stationed on the island had been withdrawn, except for some technicians at the Lourdes electronic system facility near Havana. Without Soviet aid and without the external markets for its ma in products, the Cuban economy went into a deep recession while the government was no longer able to finance revolutionary movements across the globe. Socialism had collapsed almost anywhere in Eastern Europe and the Cold War was over. Cuba ceased to represent a threat to the U.S. security interests (unless for a migration crisis that could overwhelm Florida or the potential use of the Cuban territory to advance the drug trade) whereas its military forces, starved for resources, went into decline (Peters 2000: 3). Although it was possibl e that Castro still wished to support Marxist revo lutionaries in the Americas such an action appeared highly improbable. In short, three of the four conditions put forward by the United States (the end of Cubas active support of revolutionary forces in Africa a nd Latin America, and the end of

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64 its close ties with the Soviet Union) for re suming a constructive dialogue with Havana toward normalization had been met. On the fourth issue, the case of human rights, the Castro government had at least given a few timid, but encouraging signals. Therefore, the circumstances seemed to allow a possible relaxation of U.S. economic sanctions with respect to Cuba and the beginning of friendlie r relations between the two countries. In addition, one might expect that the normalization of U.S. in ternational relations following the collapse of the Soviet Union would fa vor new commercial exchanges with countries, including Cuba, that were once polarized by the superpow ers confrontation (Roy 2000: 18). However, as we will see in the next section, things turned out quite different. The 1990s: U.S. Approach Toward Cuba in the Post-Cold War Era The collapse of the Soviet Union and its European proxies inaugurated a very difficult period for Cuba and an unprecedented economic recession that seriously threatened the survival of the Castro governme nt. The Cuban authorities were forced to loosen up their centrally planned economy, es tablish more develope d relations with the capitalist world, and introduce limited market re forms in areas including trade, foreign investment, and tourism. Instead of tri ggering improved relations between Washington and Havana, the situation of emergency of the Cuban economy led the United States to further tighten the embargo against the island. In the early 1990s, supporters of the emba rgo benefited from important political changes in the United States with respect to Cuba. At that time, Cuba was low on the list of the first Bush administrations priorities given the preoccupation with the fall of the Soviet Union and the problems still unresolve d in the Central American region. The Clinton administration was also perceived not to have a Cuba policy or much less a secret plan to normalize U.S. relati ons with the island. With the executive branch effectively

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65 leaving a policy vacuum, hard -liners within the U.S. C ongress stepped up efforts to reinforce the U.S. embargo against Cuba (Fis k 2001: 94). In addi tion, the United States tried to capitalize on Cubas economic dilemma and frustrated economic adjustment. It is important to note that, up to 1989, the embargo placed conditions on the 15% of Cubas international trade that fell outside the socialist market. After 1991, the embargo placed conditions on more than 90% of that trade (Schwab 1999: 71-72). Under these conditions, it appears obvious that Washington was given an unparalleled opportunity to finally get the most of economi c sanctions that had failed for thirty years to overthrow the government of Fidel Castro in Cuba. Despite the collapse of the Soviet Union a nd the end of its close relationship with Havana, U.S. policymakers have continued to use the old Cold War palate while painting their Cuban enemy during the 1990s. At th e level of political discourse, Washington denounced the lack of democracy in the island but also kept alive the realist approach that had dominated the old strategy of contai nment of communism. Cuba continued to be portrayed as a backlash state accused not onl y of spying for strate gic military secrets and maintaining links with Colombian guerril las, but also of e ngaging in terrorist activities and developing computer viruse s and biological weapons (Landau and Smith 2001: 8-9). However, such a discourse concea ls the fact that U.S. strategic beliefs, instead of being learned from history, were simply the result of domestic politics. Privately, a number of past and present administration officials conceded that BushClinton policy was anachronistic, even ab surd, and on occasion publicly canvassed the need for a more rational appro ach toward Cuba similar to the increasingly businesslike manner the United States adopted toward most other governments with which it had

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66 disagreements, including even North Korea. The major obstacle remained the absence of political will in the White House to challeng e entrenched interests of an increasingly important Cuban American constituency in Fl orida and New Jersey and its champions in Congress (Morley and McGillion 2002: 6). In other words, domestic political concerns dictated the U.S. approach toward Cuba and established the limits of Washingtons interest in engaging th e Castro government. During the post-Cold War era, the CubanAmerican community has consolidated itself as one of the principal players in shap ing the U.S. policy toward Cuba. Hoping for a possible return to Cuba under a different government, before 1980 Cuban exiles had been slow to apply for U.S. citizenship, which means the acquisition of the right to vote. The election of Ronald Reagan in 1980 repres ented an important shift in the role of Cuban exiles because it dramati cally increased participation of Cuban-Americans in the U.S. electoral system. By the mid-to-late 1980s, this surge in el ectoral participation began to heavily influence the anti-Castro agenda of the U.S. government. CubanAmerican voting blocs in two key electoral states, Florida and, to a lesser extent, New Jersey, fueled so-called low politics aime d to assure election. Both Republican and Democratic candidates for Congress and the Presidency became aware that supporting a hard-line against Cuba increased their chances to be elected. In addition, a powerful exile group lobbying for new sanctions emerged by the late 1980s in Washington with the increasing power of the Cuban American Na tional Foundation (CANF). Several CubanAmericans were also elected to Congress. In short, Cuban exiles were no longer mere agents or implementers of U.S. policy toward Cuba but directors of that same policy to which their personal interests were linked (Perez 2000: 4).

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67 The Torricelli Law In 1991, under the Bush administration, the Treasury department denied licenses for trade with Cuba to U.S. subsidiaries in third countries, or firms trading products containing U.S. components. German, Swed ish, Japanese, Argentinean, and French firms were affected. In September of the sa me year, the Treasury Department announced tighter restrictions on the amount of money U. S. citizens could remit to family members in Cuba and on travel to Cuba. In Sept ember 1992, in the heat of the presidential campaign, a Democrat-controlled Congress ap proved the Cuban Democracy Act or CDA (better known as the Torricelli law). Th e Cuban American National Foundation, frustrated as Congress was by pr esidential inattenti on toward Cuba, played a crucial role in the passage of the bill. As noted by Richard Nuccio, special assistant of Bill Clinton, CANFs enthusiasm for the legislation wa s based on a perception that the Bush administration was doing nothing on Cuba, or at least nothing good fr om their point of view and now was the time to strike (Morley and McGill ion 2002: 42). In February 1992, based on a draft proposal put to him by Mas Canosa (director of CANF), Robert Torricelli (D-NJ) introduced the legislation into the House to further tighten the trade embargo while simultaneousl y promoting greater in teraction at a peopleto-people level between Ameri cans and Cubans. Subsequent ly, Robert Graham (D-FL) and Connie Mack (R-FL) submitted a virtually identical proposal into the Senate. The Bush administration initially opposed the CDA by claiming that it would create problems internationally for the United States while having little impact on the Cuban economy. However, given the lack of support for th e bill from Bush, the CANFs director Mas Canosa went looking for a White House aspira nt who would. He found one in the person of Democratic presidential candidate Bill Clin ton. In the spring of 1992 the two met in

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68 Tampa, Florida. Clinton showed some w illingness to endorse the bill and left the meeting with the notion he could at least ne utralize Cuba as an election issue for Cuban Americans and thus concentrate their vote in November on the social and economic policies that were the Democr atic candidates strong points. In April 1992, with his presidential campaign grasping for mone y, Governor Clinton attended a CANFsponsored fund-raiser in Miami's Little Havana and announced to cheers : "I have read the Torricelli bill and I like it." He also declared that the Bu sh administration had missed a big opportunity to put the hammer down on Fidel Castro and Cuba." Clinton was rewarded with $125,000 and received an additional $150,000 at another CANFsponsored event the same day in Coral Gables (Franklin 1993). Therefore, he left Miami with his campaign coffers $275,000 richer for the endorsement and with Bush suddenly outflanked in a key electoral state. Locked in a bidding war over which candi date could be tougher on Cuba, Bush almost immediately changed his mind and announced his support for the CDA. In an election year, domestic political perceptions we re all that counted when it came to Cuba policy (Morley and McGillion 2002: 50). C onfronting a Democratic opponent committed to make inroads into the historically Repub lican Cuban American vote in Florida, and despite his initial objections, George Bush signed the law a few weeks before the November 1992 presidential elections. In s hort, Congress had seiz ed the initiative on how the United States should deal with Fidel Castro, and both presid ential candidates had signed onto CANFs agenda of forcing a re gime change on the island. The influence exerted by domestic politics, especially th e electoral context linked to the partisan bidding for Cuban American votes in the pivo tal state of Florida, was therefore the

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69 mobilizing incident and the key for the passa ge of the Torricelli law (Dominguez 1997: 61). By signing the legislation, Bush sent a very sharp message about his order of priorities: the national interest took a back seat to the inte rests of the hard-line exile community in Miami and, of course, the Pres idents own domestic pol itical advantage. Analyzing U.S.-Cuba relations during the past 30 years, Leogrande (1998: 68) argues that temporary relaxation in tensi on followed by heightened hostility might be explained as a result of a two level game. A ccording to him, national leaders are actually involved in two negotiations simultaneously: the international negotiation (level 1), wherein the leader seeks to reach agreemen t with other international actors, and a domestic negotiation (level 2), in which the national leader must persuade his domestic constituency to accept or ratify" the level 1 agreement. For leaders, the problem is that rational moves in the level 1 game may prove im politic at level 2, or vice versa. In the 1990s, as exemplified by the proposed reconstructi on of the events that led to the passage of the Torricelli law, the problem has been th at the salient domestic constituency was so hostile to Cuba, that it effectiv ely vetoed any effort to rela x U.S. hostility. This suggests that, in this issue area, domestic politics ultimately determined U.S. foreign policy. Stated in another way, the domestic political goals of U.S. policymakers have outweighed their foreign policy goals. The Torricelli law was conceived as an e ffective instrument for exerting economic pressure on the Cuban economy while offering positive inducements to democratic reforms in Cuba. It established a two-track policy to reach out to the Cuban people while strengthening the embargo against the Castro government (Piczak 1999: 4-5). There is no doubt that the U.S. legislation irremediab ly reversed the policy direction toward

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70 normalization that had emerged in the 1970s. Here are the main provisions of the Torricelli law of October 23, 1992. It prohibited foreign subsidiaries of U.S. corporations from engaging in any transaction with Cuba. It prohibited any vessel from entering a U. S. port for a period of 180 days if that vessel had handled freight to or from a Cuban port. It maintained strict limits on remittances to Cuba by individuals subject to U.S. law. It permitted humanitarian donations incl uding medicines, medical supplies, instruments, and equipment, after onsite verification. It authorized the President to prohibit U.S. economic and military assistance, military sales, or debt forgiveness or reduc tion of debt owed to the United States, to any country that provide s assistance to Cuba. It authorized telecommuni cations and mail services (the latter with certain limitations) between the United States and Cuba. Payments to the Cuban government for telephone services were also allowed. The Torricelli law undoubtedly had an imp act on the Cuban economy, in particular the section that intended to halt the shor tfall in food imports from the defunct CMEA being made up by imports from U.S. subsidia ries. While in 1992 the Cuban trade with U.S. subsidiaries was about $760 million, in 1994 such trade dropped to less than $10 million. In addition, the growing process of merger and acquisition of firms taking place on a global scale (in which the United Stat es was certainly the most active player) amplified the reach of the law (Aguilar Trujil lo 1998: 9). Finally, the combined effects of U.S. economic sanctions, the end of pref erential trade agreements with the Soviet Union, and unfavorable weather conditions pu shed Cuban sugar production to a low of 4.2 million tons in 1993, while it had averag ed 7.5 million tons a year between 1987 and

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71 1991.6 The country was now able to earn hard currency sufficient to pay for little more than its necessary food and fuel imports. Cuban imports, which had already plummeted to 2 billion pesos in 1992 from more than 8 billion pesos in 1989, fell by another 24% in 1993. By that year, Cuba was deeply embedde d in an economic crisis that seriously threatened the survival of the Castro government (Cole 1998: 4). Thanks to economic adjustments in troduced between 1993 and 1994 and the opening to foreign investment, the Cuban ec onomy slowly began to recover around the mid-1990s. While successful in aggravating th e economic crisis of the Caribbean island, the Torricelli law ultimately failed to hasten the demise of the Castro government. The legislation also galvanized the internationa l community against the U.S. sanctions with respect to Cuba. Table 3-1 shows the Unite d Nations vote on resolutions calling for an end to the embargo against Cuba, which were presented between 1992 and 2004. Table 3-1. UN Vote on Resolutions Against the U.S. Embargo on Cuba Year In favor Against Abstentions 1992 59 371 1993 88 4 57 1994 101 2 48 1995 117 3 38 1996 137 3 25 1997 143 3 17 1998 157 2 12 1999 155 2 8 2000 167 3 4 2001 167 3 3 2002 173 3 4 2003 179 3 2 2004 179 4 1 Source: United Nations data 6 The full and combined force of the collapse of Soviet-bloc communism and of the U.S. economic blockade came to be known in Cuba as the double blockade, between a one-time friend and an implacable foe: Moscows betray al and Washingtons obsession.

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72 Prior to the passage of the Torricelli law, Cuba had never been able to obtain a resolution condemning the U.S. embargo on the floor of the United Nations General Assembly. In November 1992, as a consequen ce of a widespread international concern regarding the extraterritorial character of the U.S. legislation, the General Assembly condemned the embargo by a vote of 59 to 3 (w ith 71 countries abstaining). Since then, the vote has been more lopsided with ev ery passing year. In 1995, a total of 117 countries expressed disapproval of the embargo. The United States was left with Israel and Uzbekistan as its lo nely partners in voti ng against the resolution.7 By 1998, the governments condemning the embargo were 157 (with only 12 abstentio ns). Instead of gaining international support for its policy to ward Cuba, the United States became more isolated. As stated by Roy (2000: 102-103) Washington had lost a public relations war. The number of countries opposing U.S. economic sanctions against Cuba reached 167 in 2000, and peaked at 179 in 2003 and 2004. The Helms-Burton Law Washington enacted an even harsher pack age of measures against Cuba in 1996. The story of the Cuban Liberty and Democr atic Solidarity Act (better known as the Helms-Burton law)8 is very similar to that of the To rricelli law. Approval of the bill coincided with the 1996 Republican presiden tial primary elections in Florida and preceded the general presidential elections of November of that year. Moreover, the conservative faction of the Cuban American community lobbied heavily for a much tougher line against Cuba. As recalled by Nicholas Gutierrez, a prominent Cuban 7 It must be noted that both countries (like the Unite d States) currently trade with Cuba; Israel is also a major investor in the islands citrus sector. 8 The Cuban Liberty and Democratic Solidarity Act is wi dely referred to as the Helms-Burton law after its sponsors, Senator Jesse Helms (R-North Carolina) and Representative Dan Burton (R-Indiana).

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73 American figure, nobody lobbied the bill as methodically and in as well-funded a fashion as CANF (Kiger 1998: 52). The only real difference was Jesse Helms new role within the U.S. Congress (Dominguez 1997: 62). The conservative Senator had been installed as chairman of the Senate Foreign Relations Committee after the Republican electoral victory in the Congressional elections of November 1994. Representative Dan Burton had also replaced Robert Torricel li as chairman of the House Subcommittee on Western Hemisphere Affairs. It was the same platform Torricelli had used to become one of Capitol Hills most influential voices on C uba policy, and Burton moved to exploit it (Kiger 1998: 45). The new legislation, origina lly presented by Helms to the U.S. Senate in February 1995, was subsequently intr oduced by Burton into the House of Representatives. The Republican-controlled Co ngress, increasingly critical of President Clintons commitment to the maintenance of the status quo in Cuba policy, pressed ahead for continuing the policy of tightening sanc tions on Cuba while simultaneously offering positive inducements to democratic change. Nevertheless, this time the act sought to build a two-track approach by expanding the target of possible sanctions to foreign companies who knowingly trafficked in U. S. properties expropr iated by the Castro government without compensation in the early 1960s (Fisk 2001: 94-95). The issue of the settlement of property cl aims had been largely neglected since then, at least as a possible reason for new punitive measures against Cuba. The severe economic decline of the Cuban economy in the early 1990s nurtur ed fears among U.S. legislators that the Castro government would seek to cure its capital crunch by selling properties expropriated from U.S. nationa ls. The increasing number of foreign

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74 companies investing in Cuba since 1993 simp ly confirmed these fears and gave U.S. legislators a further pretext for tightening the economic embargo. The issue of human rights violations was raised as an important reason for their action, but the real goal of Helms-Burton was clearly to bring about co llapse of the Castro regime by keeping international firms away from Cuba, thus denying the Cuban govern ment needed capital (Arreola 1998). Indeed the law, engineer ed by hard-liners in Congress and leading figures of the Cuban American community (s uch as the prominent exile family Bacardi)9 had nothing to do with resolvi ng the original U.S. claims. Not one of the 5,911 certified U.S. claimants lobbied on behalf of the Helm s-Burton legislation. They were all against it. For them, it would have probably been bett er to engage in business activities in Cuba and satisfy their property claims through reve nues from joint ventures with the Cuban government (Peters 2000: 12). When the Helms-Burton legislation was first submitted in early 1995, President Clinton and Secretary of State Warren Chri stopher opposed it. The President, in particular, worried that the law limited his au thority to conduct foreign affairs and feared retaliatory measures by the U.S. major trade allies such as Canada, Mexico, and the European Union, whose companies were tradin g with and investing in Cuba. Clinton noted in April 1995: I support the Cuban Democracy Act, which passed in 1992 and which we have implemented faithfully. I thi nk we should continue to operate under it. I know of no reason why we need further action (Morley and McGilli on 2002: 85). Given the opposition from the international comm unity and the reticence of the State Department, the future for Helms-Burton seemed gloomy in late 1995 and early 1996. 9 Many Cubans on the island refer to Helms-Burton as the Bacardi law, due to the active involvement of the Cuban American family in the passage of the legislation.

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75 The legislation had also lost the center stage because of the federal budget battle between Congress and President. Since September 1995, the Clinton administra tion had quietly been trying to drum up opposition to the legislat ion in the U.S. corporat e sector, hoping to create a counterbalance in the embargo debate to th e conservative Cuban Americans (Kiger 1998: 54). But the tide turned drastically on February 24, 1996, when two small planes operated by Cuban exiles (belonging to the gr oup Brothers to the Rescue) were shot down by Cuban forces over the Straits of Florida. This tragic event proved to be the key to the passage of Helms-Burton, especially because of its proximity to important election dates. Unable to obtain the enactment of the law until then, supporters in Congress and within the Cuban American community were successful in capitaliz ing on the outrage over the shoot-down. The latter transforme d the dynamics of the whole debate: limiting its domestic political fallout became the overrid ing concern. Clinton tried to negotiate a milder version of the bill with its proponent s in Congress and with prominent figures in the Cuban American community, but he was ul timately compelled to accept the initial version of the legislation. He even agreed to codify all existing embargo executive orders and regulations into law with no presidential waiver loophole, thus ced ing a great deal of authority to Congress in dictating future sh ifts in Cuba policy (Morley and McGillion 2002: 107). Early in March 1996, Congress rapidly approved Helms-Burton by overwhelming majorities in both chambers. President Clinton was forced (as was Bush four years earlier) to set aside the national interest in order to avoid a major electoral setback in the presidential elections of November 1996. He ended up changing his initial position and

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76 signing the law on March 12, 1996, just 17 days after the two planes were shot down (Smith 1998). The passage of Helms-Burton si mply demonstrates a proclivity in the White House to distort foreign policy to c onform with short-term domestic political imperatives. Anti-Castro lawmakers, and especially an increasingly powerful Cuban American lobby, had established the domestic game as the major factor shaping U.S. policy toward Cuba. Being the only signifi cant, organized group working on the Cuba issue, Cuban Americans dominated the field and played a crucial role in the tightening of the embargo. Although some polls showed that a majority of the American public in the first half of the 1990s favored a policy of e ngagement with the Castro government, the issue was not highly salient, and no domestic group stood to reap any significant gain from a normalization of relations with Cuba. As Putnam (1988) points out, when the political costs of an international agreem ent fall disproportionate ly on a domestic group that is cohesive and politically mobilize d, and the benefits from the agreement are diffusely distributed, the mob ilized group often has the power to block ratification (and eventually push foreign policy on a more c onfrontational ground). That description captures perfectly the political dynamics be hind U.S. policy toward Cuba in the postCold War era. The final text of the Helms-Burton law is composed of thir ty-three sections grouped into four titles.10 The legislation aims to asse rt the property rights of U.S. nationals affected by the exte nsive process of nationalizati on undertaken by Fidel Castro 10 The final text of the Helms-Burton law does not include two clauses of the original version that had attracted considerable international attention. First, the U.S. Congress did not attach a provision, which would have prohibited imports of sugar from third countries that import Cuban sugar. Instead, the HelmsBurton law simply reaffirms the old U.S. regulation that forbids the import of sugar from Cuba through third countries. Second, the U.S. Congress left out a clause that would have prohibited U.S. financial institutions from financing companies of third countries th at traffic in expropriated properties, even if this financing was not used to support trafficking activ ities. Instead, Helms-Burton reiterates the existing regulation, which forbids U.S. nationals to fund transactions related to Cuba (Krinsky 1996: 26).

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77 after January 1959. It also presents itself as an effective measure for promoting political change in Cuba and assisting the Cuban pe ople in regaining democratic institutions (Groombridge 2001: 2). Title I codifies the restric tions in effect as of March 1, 1996, that collectively form the U.S. economic embargo against Cuba. Thes e restrictions include the Torricell Law of 1992, which calls upon foreign governments to re strict their trade and credit relations with Cuba. This title aims to multilateralize and strengthen the U.S. embargo to the extent possible. In fact, it prohibits Cuban particip ation in international financial organizations, restricts travel by U.S. residents wishing to visit family members in Cuba, and threatens sanctions against countries that provide a nything that could be defined as economic assistance to Cuba (even in the fo rm of favorable terms of trade). Title II, labeled by some U.S. and Cu ban scholars a second Platt Amendment, lays down a series of conditions demanded by Washington for re-engagement with some future Cuban government. The central one is that neither Fidel nor Raul Castro be part of that government. Basically, the law nullifie s a calibrated response by eliminating the United States ability to respond positively to anything except the fall of the Castro government (Leogrande 1997). This is the firs t time that the objectiv e of getting rid of Castro has been explicitly stated as Am erican policy. Other conditions are: 1) a democratically elected government; 2) releas e of all political pris oners; 3) progress in moving toward a market economy; 4) progress in returning propertie s confiscated by the Castro regime to U.S. citizens, including pr operties of those who we re Cuban citizens at the time of the expropriation; and 5) stop to jam Radio a nd TV Marti, even though they are operating in violation of the In ternational Broadcasting Convention.

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78 While the first two titles of Helms-Burt on may seem designed primarily for Cuban consumption, both in the U.S. exile community and in Cuba, Title III and IV are the aspects of the legisla tion aimed at Cubas commercial pa rtners. Title III allows U.S. citizens whose property was expropriate d without compensation by the Cuban government, including those who were not ci tizens when the expropr iation occurred, to sue in U.S. courts those foreign companies or individuals who traffi c in that property. In order to make it more difficult for fore ign companies to evade Helms-Burtons reach, the authors of the law consciously left a marg in of uncertainty in the interpretation of trafficking. This is broadly defined and includes selling, leasing, managing, and purchasing expropriated properties. It also includes the use of trademarks or licenses claimed by American firms. In short, any commercial activity in C uba can in principle be considered as trafficking and could be affected by the implementation of the HelmsBurton legislation (Roy 2000: 64). For the first two years after the enactment of the law, only claims that had been certified by the U.S. Foreign Settlement Co mmission (FCSC) could provide the basis for an action under Title III. I ndeed, under the Cuba Claims Program completed in 1972, the FCSC determined the validity and amounts of claims by U.S. nationals against Cuba and certified them to the Secretary of State fo r use in a future negotiation of a claims settlement agreement with a friendly gove rnment in Cuba (Conf idential Report 1999: 21). There are already 5,911 certified clai ms listed by the Settlement Commission for a total value of approximately $6 billion. Table 3-2 reports th e largest 10 U.S. claims and their approximate amounts.

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79 Table 3-2. Ten Largest Certified U.S. Claims ($U.S. million) Company Certified Claim Cuban Electric Compan y $267 million International Telephone and Telegraph Corp. $131 million North American Sugar Industries Inc. $109 million Moa Bay Mining Company $88 million United Fruit Sugar Company $85 million West Indies Sugar Company $84 million American Sugar Company $81 million Standard Oil Company $72 million Bangor Punta Corporation $53 million Texaco Inc. $50 million Source: U.S.-Cuba Trade and Economic Council After two years, uncertified claims could also serve as the basis for action. The claim must exceed $50,000 in 1996 dollars, excludi ng interests, costs, and attorney fees. Regarding the impact of this specific provi sion, there are contrasting interpretations. Kiger (1998: 57-58), for instance, argues that it would exclude all bu t 75 of the certified claimants and probably most claims by Cuban-Americans.11 On the other hand, a declaration by the former U.S. Secretar y of State Warren Christopher suggested a different scenario. Christopher affirmed that the implementation of Title III would exponentially increase the number and value of U.S. property claims against Cuba from their current total of about $6 billion to as much as $100 billion (Groombridge 2001: 4). If this is true, properties th at were worth a few thousand dollars in the 1960s might be easily worth over $50,000 dollars today.12 Therefore, the Helms-Burton law would actually expand the process of sett lement of property claims. 11 Robert Muse, a Washington lawyer whose clients have included European firms with investments in Cuba, said he expects 430,000 lawsuits if Title III of the Helms-Burton law is implemented. He believes Cuban-Americans will bury U.S. courts in claims for lost homes, businesses, and farms (Cox 2001). 12 For instance, a Cuban family which owned a sugar plantation valued at $3,000 in 1962, is seeking compensation of close to $10 million from a Spanish firm (Sol Melia) that has built a hotel on that property.

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80 Under Title III, a foreign company with in vestments in the United States might be victim of retaliation by U.S. claimants (backed by a court or der) on its properties in this country, which can be obtained legally as compensation (McKenna and Kirk 1998: 6). However, the mere condition of trafficking in expropriated prope rties is by no means sufficient for the application of sanctions. In order to be subjected to the jurisdiction of U.S. courts in case of a controversy based on this title, a forei gn company must have systematic and continuous business links with the United States whose amplitude makes reasonable a process of reclamation. Th is provision is not applicable to foreign companies that simply trade with and obt ain financing from the United States. Furthermore, Title III can be applied only in a U.S. court of the state where the foreign company has business activities. More specifically, if a forei gn enterprise has investment activities in Miami, it is subject to the juri sdiction of Floridian c ourts and not to the jurisdiction of courts in other U.S. states (Krinsky 1996: 29). We can fairly assume that claims against foreign companies with no U.S. exposure (mainly no assets in the United States) and requ ests of compensation for violation of Title III are probably going to be ignored by fore ign investors. Without operations in the United States, a company is not obligated to defend an action. However, a further question should be raised. Can the subse quent default judgment (in case the executives of the firm do not appear before the U.S. court) be enforced in courts of other countries? For example, in January 1997, Canada amended the 1985 Foreign Extraterritorial Measure Act (FEMA) by establishing that any court judgment linked to the HelmsBurton legislation would not be recognized in Canada.13 Yet, a few months earlier, a 13 The amendment to FEMA allows Canadians who are sued in the United States to recover any amounts awarded if the other party has assets in Canada. Mexico passed a similar law in October 1996. The law

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81 Canadian lawyer commented on this aspect: With amendments to FEMA we could have a stronger case, but I am not going to give Ca nadians a guarantee that their assets would be protected (Lacy 1996: 30). Although Title III of Helms-Burton was due to come into effect on August 1, 1996, it has not been implemented so far because former President Bill Clinton used his discretionary power to waive it for period of six months (the last in January 2001). In fact, a clause included in the final draft of the law permits the President to delay it for national security reasons or to promote demo cracy in Cuba. Since July 2001, George W. Bush has also suspended every six months the application of the controversial Title III. Although the postponement can still be lifted in the future, Bushs actions raise the likelihood that the full force of HelmsBurton may not take effect during his administration. Title IV of the Helms-Burton law allows the U.S. government to deny entry into the United States to senior executives of foreign companies that are accused of trafficking in properties subject to U.S. claims. This pr ovision also applies to close relatives of the executives such as their spouses and any depe ndent children. Unlik e Title III, Title IV cannot be suspended. Determination of tra ffickers and application of sanctions are responsibilities of the U.S. Department of State. Title IV seems deprived of a retroactiv e character since it focuses on trafficking activities ini tiated after March 12, 1996. Section 401(B)(2)(A)(i) (III) suggests that the exclusion from the United States would not be applicable if a comp any in possession of a confiscated property avoids making any ch ange to the way it was conducting business establishes that Mexican companies can be fined if th ey comply with the extraterritorial provisions of Helms-Burton and it provides for the non-recognitio n and non-enforcement of foreign judgments under such extraterritorial legislation.

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82 activities in Cuba prior to the enactment of the Helms-Burton law. Improvements and investments in a confiscated property are permitted only if they are for routine maintenance (Lacy 1996: 29). However, how is it established that re novations, upgrades, or other constructions have been undertaken just for routine maintenance? The extreme vagueness of the provision makes it very difficult for foreign exec utives to avoid the re ach of Title IV. If you do business on a confiscated U.S. prope rty, you might be easily identified as a trafficker. Just a few mont hs after the passage of Helm s-Burton, the U.S. Department of State sanctioned the executiv es of two foreign companies (a third one was sanctioned in 1997) trafficking in expropriated propertie s in Cuba. In add ition, it has maintained pressures on several other firms by sending them warning letters regarding potential violations of the U.S. legislation and by th reatening to deny them visa entry into the United States. In such a short period, it seems at least improbable that those foreign firms made enough changes to their activities in C uba to justify the app lication of sanctions under Title IV. Finally, the Helms-Burton legislation locks U.S. policy in place indefinitely. While most U.S. economic sanctions against the gove rnment of Fidel Cast ro were previously based on executive orders, which could be m odified or rescinded at the presidents discretion, now they are embedded in law. A future lifting of the embargo and the beginning of normal relations with Cuba w ill be possible only after Helms-Burton has been repealed (Smith 1998). In recent years, though, there have been several changes in U.S. policy toward Cuba. Before the end of the 1990s, the Clinton administration eased some restrictions on U.S.-based travel to the island. In Octobe r 2000, the U.S. Congress

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83 allowed an exception to the embargo by author izing food sales to Cuba. In March 2003, the Bush administration relaxed limitations on family remittances by significantly increasing the amount of money that U.S. au thorized travelers could carry to Cuba. Bushs policy was reserved in June 2004, just a few months before the U.S. presidential elections, when remittance (and travel) restric tions were again tightened. Further details on these changes will be provided in chapter 5. The next chapter analyzes the evolution and the current situation of foreign invest ment in Cuba, the impact of Helms-Burton on potential and existing investor s in the islands market, and the most important cases of foreign companies affected by the U.S. legislation.

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84 CHAPTER 4 IMPACT OF THE HELMS-BURTON LAW ON FOREIGN INVESTMENT IN CUBA Cubas response to the dete riorating economic situation subsequent to the demise of its former benefactor, the Soviet Uni on, was the implementation in September 1990 of an economic austerity program called speci al period in time of peace. The program consisted of a series of measures intende d to conserve energy and raw materials, stimulate food production, expand markets fo r exports and imports, and accelerate the development of international tourism. But the main novelty was the opening of the island to foreign investment in the search for th e markets, technology, and financing that disappeared with the collapse of the socialist bloc. While it cannot be argued that foreign investment plays a fundamental role in the Cuban economy, it appears that foreign capital has helped Cuba to raise production of oil a nd electricity, find new markets for its main exports, boost international tourism, and increas e domestic supplies to the tourist industry and the internal market in hard currency. Following a cautious start during the worst years of the economic recession when a handful of hotel and oil explor ation joint ventures were fo rmed, foreign investment in Cuba gathered pace after 1993 as the economy began to show signs of a modest but constant recovery. Since then, and despite the passage of the Helms-Burton law in 1996, an increasing number of foreign companie s have entered the Cuban market with investments in nearly all sect ors of the islands economy. However, after more than a decade of uninterrupted growt h, the number of joint ventures with overseas firms fell

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85 significantly in the past two years, raising questions on just how wide the Castro governments welcome to foreign investment really is. Although it should be noted that the level of interest for the Cuban market on the part of foreign investors has diminished, the recent decline of international economic associations ( Asociaciones Econmicas con Capital Extranjero or AECEs)1 is not due to the impact of Helms-Burton but mainly to C ubas increasing selectivity toward foreign investment and its unwillingness to create a more attractive business environment. President Fidel Castro and other senior offici als have never concealed their intention to keep foreign ownership and capital in the co mmunist island at a minimum level. They keep saying that foreign investment is a complementary measure aimed to help strengthen and improve the c ountrys state-run so cialist system, not destroy it. While acceptance of new investments is based on strict consideration of what they can bring to Cuba in terms of capital, technology, and ma rkets, the Castro government has made clear that it wants to keep overall state control of the economy. Additionally, Cuba has done very little to solve recu rring problems mentioned by overs eas partners, which include excessive bureaucracy, project approval delays, payments problems, and restrictive labor legislation. On the contrar y, recent moves by the islands au thorities to introduce foreign exchange controls for state-run enterprise s and other cen tralizing economic measures 1 The term international economic association (or simply economic association) refers to the following: joint action by one or more national investors and one or more foreign investors for the production of goods, the offering of services, or both, for profit, in its two forms, which consist of joint ventures and international economic-associations contracts. Joint ventures imply the establishment of a legal status distinct from that of any one of the parties; the proportions of capital stock which should be contributed by the foreign investor and the national investor are agreed upon by both partners and defined as part of the authorization. International economic associations contracts do not imply a legal entity separate from those of the contracting parties; each contracting party makes separate contributions, which constitute a cumulative amount which they own at all times, and even though they do not constitute capital stock, it is in their interest to establish a common fund, as long as the portion of ownership belonging to each of the parties is well defined.

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86 have lowered confidence among existing and pote ntial investors about th eir ability to deal with bureaucratic hurdles and collect paymen ts and arrears from the Cuban government. Given this situation, it is hardly surprisi ng that the number of active AECEs in Cuba decreased for the first time in more than a decade. Any attempt to carry out a comprehensive study of foreign investment in Cuba is hindered by the lack of reliable and detailed information on the activities of foreign firms and their contribution in terms of capital. Due to what Cubans call the U.S. economic blockade against the island, public disclosure of data on the presence of foreign capital in Cuba is practically limite d to statistics on the evolut ion of international economic associations by year, by sector, and by count ry. This method of reporting the level of foreign investment in the country offers no idea of the value or strategic importance of the deals involved. Nonetheless, this chapte r utilizes the best available information to date from a variety of sources (some of them confidential) in order to provide a quite detailed analysis of foreign business activit ies in Cuba and the effects of Helms-Burton on potential and existing invest ors, the flow of foreign cap ital, and the overall Cuban economy. Foreign Direct Investment in Cuba With the demise of the Soviet Union in the early 1990s and the plunge of its economy, Cubas need to find alternative fi nances, technology, and markets grew more urgent. As a result, the government move d actively to seek new long-shunned foreign investment and the first handful of joint vent ures were signed in the hotel industry and oil exploration under Decree Law 50 of 1982. Rega rding the latter, the limit of 49% for the foreign share of joint ventures and the low level of investment protection for overseas companies were certainly major dissuading f actors for capital inflows. Cuban statutory

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87 guarantees fell considerably short of providing the level of investme nt protection foreign firms would demand. According to Article 24 of Decree Law 50, if Cuba unilaterally terminated the activities of a joint venture, the Cuban National Bank simply guaranteed to foreign investors the ability to repatriate the proceeds of th eir share after liquidation. In addition, it was clear the inte ntion of the Cuban government to maintain the most important sectors of the economy in nati onal hands (Confidential Report 1999: 10). The opening to foreign investment a nd international tourism, matched by increasing interest but also growing complaints from foreign companies, led the government to draw up an updated and more attractive legislation in 1995. The 1995 Law 77, while repeating some of the basic aspects of Decree Law 50, set out specific guarantees for foreign firms by establishi ng full protection and security against expropriation and opened a ll sectors of the Cuban ec onomy (except public health, education, and armed forces) to foreign investme nt. It also abolishe d the limit of 49% of foreign shares for joint ventures and authori zed for the first time the possibility of 100% wholly foreign owned investments. Finally, in an attempt to speed up and streamline the approval process of new agreements, the law intr oduced an article requiring that approval or denial of an investment must be given w ithin 60 days of the pres entation of the formal request. After 1993, Cuba has intensified the prom otion of foreign investment. Through visits to foreign countries, participation in international investment events, and meetings with potential investor s, Cuban officials became very ac tive in publicizing the advantages of business activities in th e island (Prez-Lpez 1999). As a result, the number of international associations grew steadily and expanded to different sectors of the Cuban

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88 economy such as mining, construction, light and food industry, agriculture, and services. An important change of policy toward fore ign investment occurred in 1998 when the Cuban authorities declared their preference for AECEs that involved higher amounts of capital and loan financing. In fact, as a result of banking reforms and continued economic recovery, Vice President Carlos Lage announced that year the intention of the government to pursue a strategy of encouragi ng foreign investment in large development projects while limiting interest for smaller pr ojects, unless they included the introduction of new technologies or new e xport markets. He added that Cubas government-operated banks were in a position to provide small amounts of capital (USCTEC 1998). 120 176 212 260 317 345 374 392 400 403 342 313 0 50 100 150 200 250 300 350 400 450 199319941995199619971998199920002001200220032004 Figure 4-1. Active International Ec onomic Associations (1993-2004) Source: Cuban Ministry of Foreign Investment, March 2005. As shown in Figure 4-1, there were 313 ac tive international economic associations in Cuba at the end of 2004, most of them jo int ventures. The number of active AECEs, which had been increasing at an annual average of around 32% between 1993 and 1997, rose by just 5% per year between 199 8 and 2002, and dropped by 15.1% in 2003 and by 8.5% in 2004. However, despite the lower number of associations, Cuban authorities

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89 argue that foreign investment is in a process of consolidation. In February 2002, Minister Marta Lomas stated: While Cuba is often blam ed for trying to detain foreign investment, what is happening in reality is the opposite. The country has been concentrating on businesses with results (Ec onomics Press Service 2002). Early in 2004, Lomas noted that the main economic indicators of AECEs were positive in 2003 a nd that the declining number of joint ventures with foreign partners was more suitable to Cubas current needs in terms of technology, financing, an d market (Murgua Delgado 2004). Indeed, several foreign investors are engaging in profitable operations and expanding their interests in the Cuban market It is true that some major foreign companies have had problems in recent year s, but none of them have pulled out of the country. For instance, Spains So l Melia, the leader in Cubas tourist se ctor, revealed that the communist island had been one of the most affected destinations in the Caribbean in 2002 as a result of the downturn in tourism after 9/11. However, the company has an expansion plan for its Cuba division that includes the incorpora tion of a new 240-room hotel under management contract.2 In addition, Brazils Pe trobras, after ending oil explorations in 2001 (the wild cat well drilled off Cubas north central coast was a dry hole), said the decision was temporary and that it was still interested in prospecting for oil in deep-water areas in the Gu lf of Mexico (OilOnline 2001). With only a few exceptions, not even those companies that have been ta rgeted or sanctioned by the Helms-Burton law have divested themselves of their Cuban hol dings. In short, 313 international economic associations remain active in Cuba and some must be making money. 2 See Sol Meli. 04 First Quarter Results. http://www.solmelia.com/sol/pdf/f inancials/English/1Q04.pdf (l ast visited November 2005).

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90 69 11 12 13 13 16 20 21 47 56 64 0 10 20 30 40 50 60 70 80Basic Industry Tourism Construction Agriculture Light Industry Food Industry Metalworking Communications Transportation Sugar Others Figure 4-2. Associations with Fo reign Capital by Sector in 2003 Source: Cuban Ministry of Foreign Investment, March 2004. At the end of 2003 (Figure 4-2), the greates t share of economic associations with foreign capital was linked to the basic indus try (64 agreements), followed by tourism (56), construction (47), agri culture (21), light industry manufacturing (20), and food industry (16). From previous years, there was an increase of AECEs in construction and, to a lesser extent, in the suga r industry. In contrast, joint ventures in many other sectors of the Cuban economy were in decline. Currently, the Cuban governments foreign investment priorities include the promotion of new project s in tourism, mining, energy, oil, sugar derivatives, biotechnology, and i ndustry of technology and information (CPI 2004). Estimating the real value of foreign direct investment (FDI) in C uba to date is not easy, mainly because the government refuses to provide updated overall figures. The secrecy is justified by the authorities of th e island as a protective measure against the U.S. economic sanctions with respect to Cuba Even the Havana embassies of the major investing countries are unable to give complete figures because, according to them,

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91 investments in Cuba are often channeled th rough third countries or offshore financial centers, thus escaping registra tion by the real country of origin (Confidential Report 1999: 3-4). Table 4-1. Annual Foreign Direct Invest ment in Cuba in $U.S. million (1994-2003) Year 1994 1995 1996199719981999200020012002* 2003*Total FDI 563.4(a) 4.7 82.1442.0206.6178.2 448.138.9100.0 90.0 2,154 Sources: Cuban Central Bank, May 2002; Triana Cordov, Juan. El desempeo econmico en el 2002. Centro de Estudios de la Economia Cubana (CEEC), March 2003; Economics Press Service. Deficit en sector externo. February 29, 2004. (a) 1994 data are cumulative to that year. Unofficial estimates Cuban experts calculate that, since the aut horization of the first joint venture in 1988 until 2003, the total amount of committed FDI was approximately $6 billion, of which approximately half had already been delivered (EFECOM, July 7, 2004). The Cuban Central Bank has not pr ovided data on the external sector since 2001, when accumulated foreign direct investment wa s $1.964 billion (Table 4-1). Unofficial estimates from Cuban sources put the am ount of FDI in 2002 and 2003 at $100 million and $90 million, respectively ($2.154 billion accumulated). These figures, if confirmed, represent a slight improvement from the disappointing result of 2001 (only $38.9 million in FDI), but they are still c onsiderably lower than the average annual investment during the 1997-2000 period. Sectors with a significan t presence of foreign capital are those linked to tourism, energy, oil, mini ng, telecommunications, and construction. In terms of the number of foreign direct agreements (Figure 4-3), countries of the European Union accounted for about 56% of the total in 2003. Spain confirmed its position as the first commercial partner for the island (98 agreements signed), followed by Canada (52), Italy (51), and France (15). Regarding the contribution of each country and sector to the total amount of foreign direct investment in Cuba, the only data

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92 available are those of the U.S.-Cuba Trad e and Economic Council as of March 1999. The total value of committed/delivered FDI through AECEs is estimated at $1,767.2 million. Leading countries are Canada ($600m ), Mexico ($450m), Italy ($387m) and Spain ($100m). Leading sectors are tele communications ($650m) mining ($350m), and tourism ($200m).3 98 52 51 15 11 10 9 9 8 79 0 10 20 30 40 50 60 70 80 90 100 Spain Canada Italy France Mexico China UK Germany Panama Others Figure 4-3. Associations with Fo reign Capital by Country in 2003 Source: Cuban Ministry of Foreign Investment, March 2004. The results of foreign direct investment in Cuba in th e last two years have been disappointing. The tota l number of active in ternational associati ons declined by more than 20% as many joint ventures with forei gn partners dissolved. Moreover, the amount of foreign capital delivered to the country s howed only a modest recovery from the sharp decline experienced two years earlier. Neve rtheless, a few new agreements with overseas companies were signed, some existing invest ors expanded their operations in the Cuban market, and the presence of AECEs operati ng abroad has become increasingly important. 3 For more details see U.S.-Cuba Trade and Econom ic Council. http://www.cuba trade.org/FORINVES.pdf (last visited November 2005).

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93 A large number of AECEs, formed for the mo st part in the first half of the 1990s, dissolved because of the termin ation of the regular contract between the Cuban state and the overseas investor. These are generally small-and medium-size associations whose profits have been disappointi ng, in part because of the lack of adequate financing. In fact, although changing priorities of the C uban authorities toward foreign investment might have played a role in this development, it is not a secret that the Cuban partner in joint ventures is often unable to honor its payment commitments. Other AECEs dissolved because of the antic ipated withdrawal of the fo reign partner. The existing restrictions on the operation of enterprises, excessive bureauc ratic practices, and failures to achieve the planned results seem to be the most common causes. Considering the Castro governments increasing attention to the economic performance of businesses with foreign partne rs, it is conceivable that low levels of profits have played a major role in the recen t surge of the number of dissolved AECEs. As noted by a Cuban official, we (Cuba) do not accept enterprises that operate with losses, except those joint ventures carrying out impor tant social functions.4 In the last few years, Havana authorities have subjected not only each new joint venture proposal but also each existing joint ve nture to close scrutiny to verify whether satisfactory economic results and the states original objec tives for establishing the enterprise have been achieved. As shown in Figure 4-4, the nu mber of audits of AECEs increased from 7 in 1997 to 66 in 2001, for a cumulative tota l of 233 reviews during this period. In particular, the Cuban government has closely mo nitored the activities of joint ventures in sectors that have had a strong presence of foreign investment. In 2001, for instance, more than 50% of audits targeted AECEs in tour ism (34%), basic industry (13%), and light 4 Interview with a Cuban official in Havana, June 10, 2004.

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94 industry (7%), the sectors where the majority of di ssolutions took place in 2003.5 It is reported that in the first quarter of 2004 the program of joint venture reviews was monitoring 60 internatio nal economic associations (EIU, May 2004). 66 65 60 35 7 0 10 20 30 40 50 60 70 19971998199920002001 66 Audits in 2001 Tourism 34% Basic Industry 13% Light Industry 7% Figure 4-4. Number of A udits of AECEs (1997-2001) Source: Cuban Ministry of Foreign Investment, March 2002. Information from Cuban official sources reveals the existence of many joint ventures with unsatisfactory economic results and corroborates the thesis that the Castro government is indeed trying to consolidat e foreign investment by getting rid of unprofitable businesses. Intere stingly, it is reported that at the end of 2002 more than 50% of the 403 active AECEs in Cuba did not generate economic results in terms of profits and losses for several different reasons. For the most part, these associations were in the process of dissolution, waiting for addi tional documentation to begin operations, or performing an undefined social function. Addi tionally, as presented in Figure 4-5, of the 191 active associations (or 47% of the total) that genera ted economic results, 149 (78%) 5 The Cuban government reports that, in addition to 66 investigations, about 250 control visits were realized to AECEs in 2001. In 2003, a total of 68 in ternational economic associations operating in Cuba were dissolved. Tourism was the most affected sector with 21 dissolutions, followed by the basic industry (12), and light industry (7). Of th e AECEs that have ceased to operate, 10 were with inve stors from Spain, nine from Canada, and six from Italy. Associations with foreign partners from the United Kingdom, France, and Mexico also experienced a decline.

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95 operated with profits and 42 (22%) with losses. In short, only 37% of total active AECEs yielded economic gains to Cuba in 2002, while a bout 10% ran at a loss. It should also be noted that the beginning of th e process of dissolution for se veral AECEs was a result of disappointing performances. Thus, it is conc eivable that the government took steps to eliminate unsuccessful enterprises. We must remember that some foreign companies are willing to operate with losses as the size of their investments is relatively small and their main goal is to get a foothol d in the Cuban economy befo re the lifting of the U.S. embargo. 149 42 Profits Losses 403 active AECEs Only 191 (47%) with economic results of which: 78% with profits 22% with losses Figure 4-5. AECEs with Pr ofits and Losses in 2002 Source: Information provided by MINVEC, June 2004. As previously reported, the amount of fo reign direct investment in Cuba has decreased significantly since 2000. Only $38.9 million in FDI have been delivered to the island in 2001 and about $100 million a year since then. Cuban authorities blame the world economic crisis, the U.S. embargo and the deteriorating relationship with the European Union for such a trend, although they specify that the decl ine in FDI mirrors a general tendency throughout Latin America and the Caribbean (MINVEC 2004). However, some foreign investors argue that th e situation is much worse in Cuba because of its business climate. According to a Eu ropean businessman, they (Cubans) insist you

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96 be partner with a state-run company, th at you hire workers at high rates through government-run labor agencies and then you r un-up against the bureaucracy and the U.S. embargo and threats to boot (Reuters, July 8, 2002). Canadas Pebercan, which is involved in the exploration and development of oil and natural gas reserves in Cuba, notes in its 2003 information report that the companys operations could also be affected to various extents by factors such as government regulation of production, price controls, export controls, income tax, expropriation, en vironmental legislation, land improvements, water use, local land claims, and security.6 In July 2002, the European Union embassies in Havana released a document that included business complaints and suggestions about Cubas foreign investment regime.7 The document specified that it was essential for European investor s to have greater judicial security and a stable, transparent a nd reliable legal framework in order to avoid discriminatory application of business laws against overseas firms. In fact, a major source of concern among foreign companies is that their partner on the Cuban side will invariably be the Cuban state, which makes both laws and policies and interprets them according to its needs and interests. Add itional complaints included excessive utility costs due to the state monopoly on services, dela ys in payments, a repeated need to renew visas and work permits, and expensive dollar payments to Cuban workers recruited by a state-entity (while the government pays them in Cuban pesos) (AP, July 7, 2002).8 Soon 6 Pebercan. Annual Report 2003. May 10, 2004. http://www.pebercan.com/en /financials/AIF2003.pdf (last visited November 2005) 7 For further information see: Europeans on Cubas foreign investment regime. http://www.lexingtoninstitute.org/cuba/EU0702R EFO.asp (last visited November 2005). 8 Cubas labor code for AECEs has been denounced by several international labor organizations. Criticism mainly focuses on the system of payment of Cuban workers hired by foreign companies along with discriminatory practices of recruitment due to patronage, cronyism, and conformity of workers ideas and

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97 after the release of the document, Forei gn Investment Minister Marta Lomas met separately with diplomats and businessmen fr om each European country to discuss their complaints. While offering assurance that Cuba would work harder to unravel its complicated bureaucracy, Lomas made clear th at the island was not considering changing the rules of the game and that foreign inve stors knew those rules when they arrived. Rather than taking steps to make its busin ess environment more flexible, Cuba has been moving in the opposite direction during the last two years. In mid-2003, the Castro government substituted the use of the U.S. dolla r for the convertible pe so or CUC (a local currency that was pegged at par with th e dollar since 1994, but has no value outside Cuba) in the transactions of state-run enterprises. A lthough the AECEs were exempted from the measure, several foreign investors complained about their ability to do business with and collect payments from state companie s as the latter must hand over their dollars to the Central Bank and buy them back for imports, debt payments, and local purchases from joint ventures (Frank, September 15, 2003). Moreover, Havana authorities tightened controls over the accounts of st ate banks and Cuban accounts abroad, reduced behavior to official ideology. The issue has gained importance since the opening to foreign investment in early 1990s and especially after the 1993 legalization of hard currency holdings and the expansion of stateowned dollar stores previously reserved for foreigne rs. Cuban workers in AECEs receive their wages in domestic currency at the official exchange rate of 1 peso per dollar. However, due to generalized shortages of goods available through the normal distribution syst em, they are increasingly compelled to buy dollars at the unofficial exchange rate (which is currently 24 peso s per dollar) in order to purchase the products they need in stores that deal only with foreign currency. In this regard, two Cuban exile groups (the Cuban Committee for Human Rights and the Independent Federation of Electric, Gas, and Water Plants of Cuba) filed a lawsuit in 1999 against 40 fo reign companies accusing them to be part of an illegal scheme by the Cuban government to deprive Cuban workers of most of their salary. According to the lawsuit, foreign companies pay their workers up to $450 dollar a month each. But the employment agency pays the same workers an equivalent of $5 dollar a month, while the government keeps the rest. See Morton, Peter. Two Canadian companies in Cuba lawsuit, The National Post June 29,1999. Cuban authorities defend their labor code and justify the high charge made to foreigners by claiming that: 1) direct dollar payments by foreign companies to their workers would create too mu ch difference between the latter and the rest of the Cuban work force; 2) direct paymen ts in domestic currency by foreign companies should also include the cost of benefits for medical assistance, education, and housing that is instead assumed by the Cuban government; 3) it is fair for foreign companies to pay their workers more than in other emerging markets because Cuban workers are more effi cient and qualified. Interview with two Cuban economists in Havana, June 7, 2001.

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98 the number of Cuban agencies responsible fo r imports of a select ed group of products (creation of purchasing committ ees or comits de compras), and established a fixed 10% markup price over the cost of producti on in the transactions between state firms.9 In recent months, Cuban officials have al so begun to reassert central control over the tourist industry, Cubas most importan t economic sector and generator of hard currency (at least in gross terms). Unhappy about loose spending and corruption that have limited profits, they fired in late 2003 several top executives from the islands largest tourism group Cubanacan. Early in 2004, they replaced the tourism minister Ibrahim Ferradaz with Manuel Marrero Cruz, who at the time of his designation was heading the army-controlled Gavi ota tourism group. Apparentl y, these moves are part of a plan to merge most, if not all, activities of four major state-owned corporations that control 75% of the hotel rooms on the isla nd (Frank, July 13, 2004). In November 2004, the Castro government eliminated the commerci al circulation of the U.S. dollar in Cuba in favor of the CUC10 and, a few months later, ordered state enterprises to deposit all the hard currency (CUCs and other foreign currenc ies) they obtain through business activities into a single account at the Cuban Central Bank, then request bank permission to use it. In short, there is little do ubt that Cubas shift toward a gradual but constant recentralization of its economy and its increa singly regulated business environment will cause further concerns among existing and potential fo reign investors. 9 The formula for state enterprises of selling products to each other with a fixed 10% markup price over the cost of production had been adopted in the early 1990s and then removed due to unsatisfactory results. The reintroduction of this formula and foreign exchange controls aim to avoid excessively high prices applied by state firms that enjoy conditions of monopoly or quasi-monopoly in the Cuban market as well as to reduce costs in the tourist sector, reduce state firm s dollar expenditures, and increase revenues to the government. See Triana Cordov, Juan. Cuba 2003. Centro de Estudios de la Economia Cubana (CEEC), 2004. 10 For a discussion on the end of the circulation of the U.S. dollar in Cuba see: Spadoni, Paolo. Reasons behind Cubas dollar ban. Orlando Sentinel November 22, 2004.

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99 In spite of this situati on, the Cuban Ministry of Fo reign Investment (MINVEC) reports that 17 new AECEs have been au thorized in 2003 and 2004. In addition, a number of existing investors have expanded their activitie s on the island while some major foreign companies expressed their willin gness to enter the Cuban market. In the last two years, the most important foreign i nvestment operations in Cuba were linked to tourism, basic industry (nickel and oil), food and beverage industry, and telecommunications (Spadoni 2004: 120-123). Another important FDI trend is th at MINVEC has been promoting Cuban investments overseas in recent years in an effo rt to offset a diminishing flow of foreign capital invested in busine ss activities on the island. In 1998, only 50 associations operated abroad over a total of 340 active AECEs (14.7%). By the end of 2002, there were 82 associations outside Cuba over a total of 403 active ones (20.3%).11 Europe 27% Asia 11% Africa 7% LA & Caribbean 55% AECEs operating abroad: 80 Active AECEs: 360 Figure 4-6. AECEs Operating Abroad by Geogr aphical Area (percentage as of June 30, 2003) Source: Centro de Promocion de Inversiones (CPI), September 2003. In 2003, Cubas investments abroad became even more important. Out of 360 active AECEs in mid-2003, 80 or about 22% we re outside Cuba pr oper (Figure 4-6). 11 Information provided by MINVEC, June 2004.

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100 According to Havanas Center for the Prom otion of Investments (CPI), 55% of these associations (mostly joint ventures) operated in Latin America and the Caribbean, 27% in Europe, 11% in Asia, and 7% in Africa. The geographical distri bution of AECEs is largely the result of Cubas attempt to intern ationalize its enterprises and increase exports through a new global investment strategy th at seeks to establish companies in developing countries employi ng Cuban high technology, specia lists, and know-how with native manpower (CTP 2003). In particular, th e island has targeted neighboring markets in the Caribbean region. As observed by CPI, Cuba maintains relations with all Caribbean countries and has established dipl omatic missions in most of them as an expression of the great interest the country gives to the stre ngthening of the relations with the Caribbean area (CPI 2003). Yet, recent in formation shows that, with the exception of tourist activities in Mexi co and China, Cubas most important foreign investment operations abroad have focused on biotechnol ogy and pharmaceuticals projects in East Asia (China, Malaysia, and I ndia), Middle East (Iran), and Africa (Namibia). Given the islands enormous potential in these sectors,12 the Castro government has begun to realize that investments overseas in knowledge-intens ive industries and the penetration of new markets may generate good prof its and provide alternative ha rd currency resources for the development of the Cuban economy. In summary, the flow of foreign direct i nvestment into Cuba is greatly inhibited by the islands rigorous evaluati on procedures, its increasing selectiveness toward FDI 12 Since the early 1990s, Cuba has invested heavily in the development of its biotechnology and pharmaceuticals industries. It is well known that the is lands scientific knowledg e base and the quality of its programs, laboratories, and products are extremely advanced by international standards. Cuba boasts more than 40 biotech institutions, clustered mostly in the fringes of Havana, and about 7,000 scientists. Vaccines and other medical products are exported to more than 50 countries, helping the industry to obtain about $100 million a year in hard currency revenues. See Sample, Ian. Cuban cocktails. The Guardian March 30, 2004. Also see May Yee, Chen. Cutting-edge biotech in old-world Cuba. The Christian Science Monitor April 17, 2003.

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101 projects, and its heavily regulated busine ss environment. Alth ough Cuban authorities have continued to encourage foreign companies to discuss the formation of joint ventures (and important agreements were recently si gned with Chinese and Venezuelan firms), many potential investors either withdraw duri ng the process of negotiations because the terms offered by the Cuban partner are not suffi ciently attractive or opt for lower levels of cooperation (EIU, February 2004). Overal l, it can be expected that some major investors will continue to expand their ope rations in Cuba and receive substantial concessions from the Cast ro government, given the la tters preference for wellestablished businesses and pa rtners and for projects invol ving large amounts of foreign capital. It is also evident that Cuba wa nts to stimulate foreign investment without transgressing the limits that threatens the control of the f undamental wealth of the nation (Prez Villanueva 2005: 194). However, a signi ficant long-term upward trend in the flow of FDI reaching the island will occur only if Cuba promotes a gradual decentralization of its state-dominated economy by introducing pr ofound internal reforms and taking steps to relax existing regulations on the activities of joint ventures and private enterprises. Other Forms of Investment Cubas increased selectivity toward forei gn direct investment and its preference for large projects in recent years do not mean that small and medium businesses have been halted. They are simply being provided for through different mechanisms, such as cooperative production agreements, regulated by Cubas Executive Committee of the Council of Ministers on December 6, 2000 (Agree ment N.3827). As with joint ventures, the government says the objectives of these agreements with foreign partners are to obtain capital, new technology and know-how, substitute im ports, and gain access to markets. Furthermore, in addition to the in creasing number of mana gement contracts in

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102 the tourist sector (promoted since the opening to foreign i nvestment in the early 1990s), Cuban authorities have encouraged administ ration contracts in i ndustrial sectors with foreign partners. This demonstrates that the search for technology and markets is accompanied by a growing awareness of th e value of management expertise. Cooperative production originally aimed at solving three major complaints raised by investors in Cuba: the length of negotiations excessive bureaucrac y, and costly dollar payments to their Cuban employees. Until recently, the approval of a cooperative production agreement was much more simple an d faster (between one and three months) than that of an international economic a ssociation, and the documentation required was less rigorous.13 In fact, while the latter must be authorized by the Executive Committee of the Council of Ministers or by a governme nt commission designated for that purpose, the former was simply approved by the Ministry of the Cuban entity. But early this year, following a trend of increasing centralization of the islands econom y, Cuban authorities ruled that cooperative agreements must now be approved by the central government like AECEs. They also established that fore ign individuals and co mpanies involved in cooperative investments can no longer pe rform import and export activities independently from the Cuban government. Cooperative production agreements can take many forms. For instance, instead of purchasing equity, a foreign i nvestor can provide capital a nd sell on credit raw material, technology, and know-how to its Cuban partner in exchange for a fixed sum per product produced (royalty), or buy the finished product outright for export. These agreements are not too different from international economic association contracts regulated by Law 77. 13 The MINVEC reports that the average time of negotiations for AECEs in 2003 was 10.3 months, as compared to 10.8 months in 2001 and 11.1 in 2000. Even so, this is still longer than elsewhere in Latin America.

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103 The main novelty, however, is that in cooperative production contracts, workers are paid directly by the government in local currency, an d the foreign partner pays no taxes. With foreign companies avoiding to pay for labor in dollars, business ope rations contemplated by these agreements have been characterized by some investors as a sort of Maquila, in the style of U.S. assembly plants on the Mexican border (Frank, August 26, 2001). Although this is not generally the case, there is also a possibility that a foreign firm is engaged in both a cooperative production and an administration contract, thus having the control of an enterprise a nd a share of its revenues. Sometimes, a cooperative produc tion might represent the first step toward the creation of an international economic asso ciation. This is a way for the Cuban government to test the seriousness of a forei gn company as well as its capacity to provide new markets and technological assistance. It is also a necessary process to increase the efficiency of existing installations and fac ilities. As noted by Jesus Prez Othn, former Cuban Minister of Light I ndustry, sometimes you have 90% of the equipment, but without that vital 10% you cant make a new product th at will succeed in the world market (Pags 2001). Following the Agreement N.3827 of December 2000, the Cuban Ministry of Foreign Investment passed Resolution N .37 in 2001, which regulates the process of registration, control, and supe rvision of cooperative production agreements. The number of cooperative production agreements in Cuba increased from 198 in 2001 to 270 in 2002, and peaked at 313 at the end of 2003 (Fi gure 4-7). Not surprisingly, they were mostly linked to labor-intensive sectors su ch as metalworking (102 agreements signed) and light industry (83). There were also smaller numbers of these agreements in

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104 construction (28), food industry (23), sugar (1 8), transportation (13) and fishing (11). Spain was Cubas main partner in this m odality, with 101 contracts, followed by Panama (58), Italy (47), Canada (14), and Mexico (14). Administration contra cts in industrial sectors were just 11, of which eight in metalworking (CPI 2004). 35 11 13 18 23 28 83 102 020406080100120 Others Fishing Transportation Sugar Food Industry Construction Light Industry Metalworking Total: 313 Major countries Spain (101) Panama (58) Italy (47) Canada (14) Mexico (14) Figure 4-7. Cooperative Production Agreements by Sector in 2003 Source: Center for the Promotion of Investments (CPI), March 2004. In 2003, 43 cooperative production agreements were approved, demonstrating the willingness of small and mid-size companies to take advantage of new modalities of doing business in the communist island. Additional contracts si gned in the first half of 2004 include the construction of a sugar m ill in Venezuela using Cuban and Brazilian technology and Brazilian finance, a two-year technical assist ance project to supply Cuban technology and know-how to Kenya's sugar indus try, cooperation projects with India to develop renewable energy, and a multi-sector cooperation plan with Guyana (EIU, May 2004). However, Cuban official sources report that the number of these contracts with foreign firms has dropped dramatically la st year. At the close of 2004, only 133 cooperative production agreements remained in operation in Cuba, a decline of about

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105 57% from 2003 (MINVEC 2005). Some fore ign analysts have argued that this development signals the Castro governments in tention to drive out small investors that contribute little to the island s economy and corrupt local entrepreneurs by introducing such practices as commissions a nd kickbacks (Frank, February 2, 2005). While cooperative productions with overseas partners have been actively promoted in recent years, foreign investment in Cuba s free trade zones (FTZs) was virtually halted by Cuban authorities in 2003. Decree Law 165 of 1996 authorized th e establishment of industrial parks and free trade zones in Cuba and granted a number of tax and operational incentives to companies making investments in these areas. The first FTZs were started in 1997. 326 34 171 324 284 354 319 0 50 100 150 200 250 300 350 400 1997199819992000200120022003 0 10 20 30 40 50 60 70 80 Operators in FTZs FTZ Exports 0.3 3.5 9.3 22.4 26.3 59.9Number of operator s Exports in $U.S. millio n Figure 4-8. Free Trade Zones: Number of Operators and Export Values, 1997-2003 Sources: Authors calculations from MINVEC data, 2002-2004; Prez Villanueva 2005. There are currently three free trade zone s in Cuba: Wajay and Berroa in Havana, and Mariel, located about 36 miles west of Ha vana on the northern coast. Their creation aimed to foster the islands economic a nd social development by attracting foreign investment, stimulating and diversifying e xport activities (even t hough up to 25% of FTZ

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106 output may be sold domestically with pr ior approval of the Cuban Government), generating new jobs, and deve loping new domestic industrie s through the assimilation of foreign technology and expertis e. In effect, as shown in Figure 4-8, the number of operators (local and foreign firms) in Cuba s free trade zones increased from 34 in 1997 to 354 in 2000. These companies were mostly engaged in commercia l activities and, to a lesser extent, in services a nd manufacturing. But the number of operators has been declining since 2000 as Cuban authorities ste pped up control over businesses in FTZs. It is reported that Cuban offi cials investigated 111 operato rs in 2001 and revoked licenses to about 90% of them, mainly because of poor economic results, violations of established rules for the movement of goods, and delays in the recruitment of Cuban workers (MINVEC 2002). In 2003, no authorizations were granted for new activities in FTZs and 35 firms had their licenses revoked. By the end of that year, only 284 operators remained in Cubas free trade zones (MINVEC 2004). Cubas experience with foreign inve stment in free trade zones has been unsuccessful. The total value of export s from FTZs grew from $300,000 in 1997 to almost $60 million in 2002, but the obtained resu lts were far from meeting expectations (Prez Villanueva 2005: 192). Additionally, Cuba was unable to attract major international companies in its FTZs, the amount of invested capital was relatively small and limited to low-technology sectors with little economic impact, and only a small percentage of operators performed manufactur ing activities (Marquetti Nodarse 2004). It was therefore no surprise when the Castro gove rnment announced in 2004 that it will stop promoting the development of FTZs in the isla nd and give existing operators a period of three years to find other business options in Cuba (MINVEC 2004).

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107 The Effects of Helms-Burton on Potential and Existing Investors I hypothesize that the Helms-Burton law mi ght have produced a number of adverse effects on foreign investment in Cuba. Thes e effects can be summarized as it follows: Low profile maintained by foreign companies operating in Cuba; Confusion among foreign investors, especially in the tourist sect or, as a result of the broadly defined con cept of trafficking; Loss of considerable time and money in verifying origins of expropriated properties; Disruption and delay of forei gn financing for strategic sect ors such as sugar and, to a lesser extent, tobacco; Creation of off-the shelf companies in th e Caribbean and Central America in order to disguise business activities in Cuba; Higher interest rates demanded by forei gn lenders for providing credits to the island; Increasing power of negotiation with the Cuban government of foreign companies targeted by Helms-Burton; Spin off of Cuban interests by foreign firm s in order to avoid running afoul of Title III of Helms-Burton. The Helms-Burton law compels foreign firms to maintain a low profile in carrying out their business activities in the Caribbean is land. Basic industry (oil, mining), tourism, telecommunications, and construction are the sectors where large (in terms of capital involved) expropriations have taken place, and where the pressure of the law should allegedly be stronger. The U.S. legislat ion has affected Cuba by discouraging some potential investors and deferring the investment plans of others Yet, it has been less effective in forcing foreign companies already operating in the Cuban market to withdraw from their investments.

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108 Business activities in the tourist sector demonstrate how the broad definition of trafficking creates confusion among forei gn investors. In Ma y 1996, Sagebien (1996: 43) stated: Canadian concerns in Cuba ar e mostly management contracts, except for some equity positions in Canadian hotels. So I would imagine that the risk is lower than if they had direct ownership. Neverthele ss, there are some vexing property questions based on broad definitions of trafficking, as well as some of the U.S. exposure of Canadian hotel concerns. Since Ma rch 1996, several European and Canadian companies operating in the Cuban tourist sect or have been targeted by Helms-Burton not only for equity positions in confiscated proper ties, but also for mana gement activities. The U.S. Department of State has sent w arning letters to Leisure Canada and Air Transat (Canada), Club Med (France), LTI (G ermany), SuperClubs (Jamaica), and Sol Melia (Spain) advising them that their operati ons in Cuba could constitute dealing in expropriated goods, and they could face pena lties under Title IV of Helms-Burton. Up to now no formal sanctions have been applie d to them. However, these companies have become extremely cautious in devel oping new projects on the island. Threatened U.S. sanctions might have al so discouraged some potential investors from carrying out their plans in the Cuban tourist market. For instance, two Spanish hotel chains (Occidental Hotels and Para dores Nacionales) did not pursue planned investments in 1996 because of the legal im plications of Helms-Burton. Finally, a possible lift of the waiver on Title III woul d grant Cuban-American s the right to claim their lands and industries. In this case, most of the deals would fall under the reach of the Helms-Burton legislation, includ ing the construction of new hot els. The lack of U.S.

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109 exposure of foreign companies operating in Cuba would then become fundamental in avoiding possible retaliations. In order to avoid problems with He lms-Burton, potential investors spend considerable time and money carry ing out prior due diligence to verify that a project does not involve a confiscated propert y (Lapper 1999). Official r ecords are consulted both in Cuba and the United States. Often, new i nvestors announce publicly that their projects are linked to clean assets. In 2001, a Cuban of ficial recalled that fo reign investors were persistent in their inquiries on expropriated properties soon after the enactment of HelmsBurton. But he claimed that th ings had changed and companies felt more secure in Cuba. By that time, according to him, potential investors focused on the U.S. legislation when more important issues ha d already been addressed.14 Although some doubts remain on this declaration, it seems reasonable to belie ve that the Cuban perception of the HelmsBurtons threat has evolved over time. After a ll, if we exclude the recent U.S. actions against the Jamaican tourist group SuperClubs (discussed later), Title IV has been applied only three times between 1996 and 1997 and Title III has never been applied. A consultant in Havana noted in 2001: The first thing we do is to check the official record of the claims certified by the U.S. Forei gn Settlement Commission. We do not check if the property was owned by some Cuban-Ameri cans because Title III has always been waived.15 The Helms-Burton law has disrupted and dela yed the flow of foreign financing into Cuba for strategic sectors such as sugar and, to a lesser extent, tobacco (SELA 1997). The sugar industry, in particular, accounts for most of the expropriations that occurred 14 Interview with a Cuban official in Havana, May 29, 2001. 15 Interview with a Cuban consultant in Havana, June 15, 2001.

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110 after the 1959 revolution. Te n of the twenty-two highest claims belong to U.S. sugar companies and they are valued at slightly more than $500 million, or about 27% of the total amount ($1.8 billion) of certified clai ms (Alvarez and Pea Castellanos 2001: 113114). Charges of trafficking have mostly been made for those companies that finance or trade sugar originating in expropriated lands, because direct foreign investment, at least until 2001, was not permitted in raw sugar produc tion (only in the sugar cane derivatives production). Overseas banks, financial institutions, and companies that have been targeted by Helms-Burton are the ING Bank (Netherland), E.D. & F. Man (United Kingdom), Tabacalera and Bank Bilbao Vizcaya (Spain), and Redpath Sugar (Canada). As a response to the U.S. legislation, some foreign firms (this is not the case of Redpath, which ceased to do business in Cuba) have decided to reorganize their sugar and tobacco operations in Cuba. Territorial fi nancing directed to specific provinces has been abandoned for a more generic scheme of national financing, in some cases through fiduciary mechanisms. In this way, it is more difficult to establish a connection between foreign credits a nd expropriated properties.16 The Law of Reaffirmation of Cuban Dignity and Sovereignty (Law 80) enab les the creation of fiduciary companies or investment funds to hold disputed pr operties. According to Article 6, The Government of the Republic of Cuba is empow ered to apply or authorize the necessary formulas to protect foreign investors against the applica tion of the Helms-Burton law, including the transfer of the fo reign investors interests to fi duciary enterprises, financial entities or investment funds. The creati on, in August 1996, of the Compania Fiduciaria S.A. seems directed at solving some of the problems related to the external financing. The Cuban company participates in operations such as financial solutions for investment 16 Interview with news correspondent posted in Havana, June 11, 2001.

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111 contracts, administration of external funds th at are directed to sp ecific activities, and deposits of guarantees. In 1997, Compania Fi duciaria received its first $5.3 million for the acquisition of supplies necessary for the de velopment of the sugar production. At the end of 1999, the company had received $367.8 million from banks and financial entities.17 In addition to sugar production, these investments contributed to financing important economic sectors such as textil e, metal and machinery, and construction, among others. Besides the use of fiduciary mechanis ms, a number of foreign banks have developed circuitous routes using off-the-sh elf companies in the Caribbean and Central America (Panama, Curacao, and the Cayman Islands) to disgui se their financial assistance to firms with out standing U.S. claims. As acknowledged by Peter Scott, chairman of the British Beta Gran Caribe Ltd., It is easy enough to buy companies offthe-shelf in countries with clos ed ownership registers and crea te a trail of money transfers which is extremely difficult to track (Eade 1996). Even so, some foreign banks with substantial interests in the United States have been less inclined to engage in procedures aimed to bypass the U.S. legislation. Lastly, it must be noted that not only banks but also many other foreign firms have created shell co mpanies to disguise their real identities and their business operations in Cuba. The Helms-Burton law has created a mo re uncertain and riskier business environment, resulting in foreign lenders prov iding credits to the is land at higher rates. Interest rates for bank loans and other financi ng for investment projects have been driven to as high as 20% or more (Confidential Re port 1999: 24). The final cost of foreign credits is therefore particularly burdensom e for Cuba, which was already obtaining short17 These data are included in th e 1997 and 1999 annual reports of Compania Fiduciaria S.A.

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112 term loans at high interest rates. In f act, even before March 1996, Cuba ranked among the most risky countries for investment due to its economic indicators (especially trade deficit), high foreign debt, government in tervention in the economy, and the U.S. embargo (Prez Villanueva 2001). It is conceivable that He lms-Burton has given some fo reign companies increased power in negotiating their projects with th e Cuban authorities. The acceptance of the risk of investing or expanding in Cuba might have been conditioned to important concessions in the contract. This seems the case of big companies that have been targeted by the Helms-Burton law, such as th e Canadian Sherritt, the Spanish Sol Melia, and the Israeli BM Group.18 Finally, some foreign investors with assets or operations in the United States have decided to spin off their Cuban interests in order to prevent possible attacks under Title III of Helms-Burton. This strategy consists in creating a legally distinct and completely unrelated company, which is responsible for all the benefits and potential risks associated with the Cuban assets. Since no cross-owne rship exists between the original company and the spun off entity, a possible lawsuit agai nst the latter cannot lead to retaliation on the U.S. assets of the original company (Lacy 1996: 30). One firm that opted for this strategy is the Canadian Sherritt. A few m onths before the enactment of Helms-Burton, Sherritt spun off the Cuban operations by cr eating a new and legally separated company, Sherritt International Cor poration. Although Title III ha s never been implemented, executives of the firm are quite confident that Sherritt International is safe from this title (Kiger 1998: 63-64). Yet, a case could be made against it as the two companies still maintain evident links (many executives and shareholders are the same). 18 Interview with a news correspondent posted in Havana, May 31, 2001.

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113 Application of Title IV Soon after the enactment of the Helms-Burt on legislation, and in spite of a strong international opposition, the U.S. government pr essed ahead with the implementation of Title IV of the law. In 1996, the U.S. Stat e Department sent out letters to two foreign companies with investments in Cuba. Execu tives and senior officers of Canada-based Sherritt International Corpor ation and Mexico-based Grupo Domos were informed that they would be barred from entering the Un ited States unless the companies divested themselves of their profitable operations in Cuba within 45 days, Sherritt in a nickel/cobalt ore processing pl ant and Domos in Cubas tele phone system. In November 1997 similar sanctions were also applied ag ainst the executives of the BM Group, an Israeli-owned firm registered in Panama. Sherritt International Corpor ation owns 50 percent of a nickel-cobalt mine in Moa Bay, in eastern Cuba, in a joint venture with the Cuban government. The U.S. sanctions against Sherritt were motivated by the fact that the company was making money off an American investment that was expropriat ed (without compensation) by the Cuban government. In fact, the United States said the mine, which was nationalized after the 1959 Cuban revolution, had been stolen from the U.S. Moa Bay Mining Corporation, now known as Freeport-McMoran Inc. based in New Orleans (Worsnip 1997). Deploring the U.S. decision to ban executives of She rritt from entering the United States, the Canadian Trade Minister Art Eggleton said that Washington had reached a new low by getting down to the employee level of th e company. Sherritt spokeswoman Patrice Merrin Best reacted even more firmly by announcing the intention of the company to strengthen its investments in mining and expa nd into real estate, sugar, electricity, and communication (XEN, February 6, 1998).

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114 In the telecommunication sect or, one of the most impor tant agreements was the creation of the joint venture ETECSA in mid-1994 between the Cuban state-run telephone company EMTEL and Corporacion Interamericana de Telecommunicaciones (CITEL), in which the Monterrey-based Mexi can company Domos held a 75% share and Stet International of Italy a 25% share. CITEL acqui red 49% stake in EMTEL with a total investment of more than $1.5 bill ion and a concession of 55 years for the modernization of the sector (Prez Villanueva 1999: 129). The application of Title IV against Domos originated from a claim of th e U.S.-based ITT Corporation that owned the Cuban telephone company before the 1959 revolution. The BM Group, in partnership with Cubas Union Nacional de Citricos, operates in Matanzas and the Isle of Youth and accounts fo r a substantial share of the islands total citrus exports. The sanctions against the Is raeli company seemed to stem from several U.S. claims on a 96,000-acre plantation in Ja guey Grande (Marquis 1997). But the U.S. government did not provide detailed inform ation either on the exact location of the expropriated properties or on the names of th e claimants. Asked to comment on why the BM Group was penalized at a press conf erence in Havana on May 13, 1998, Michael Ranneberger (director of the U.S. State Depa rtments Office of Cuban Affairs) simply said: What was happening there was that we had documentary evidence that the BM Group was using lands that were owned by U.S. citizens, and those lands are being used along the national highway. I don't have the ex act locations with me, but this has also been transparent.19 19 Transcripts of the press conference are available on the Internet at: http://usinfo.state.gov/regional/ar/uscuba/rann15.htm (last visited November 2005).

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115 Whereas Sherritt Internationa l and BM Group continued thei r business activities in Cuba in the face of U.S. pressure, Grupo Do mos withdrew from its investment in 1997 by selling its stake in ETECSA to the Italian firm STET. In the case of Domos, the HelmsBurton legislation seems to have played a minor role, along with more important financial problems. It is reported that the Mexican company never was able to obtain the financing required under the inve stment agreement with ETECSA.20 Domos counted on a $350 million loan from the National Bank for Foreign Commerce controlled by then-Mexican Presiden t Carlos Salinas. The President and a group of important Mexican firms strongly s upported the telecommuni cations project. When Salinas left the presidency in August 1994, the bank raised the interest rates, thus forcing Domos to delay its payments to the Cuban government.21 Management mistakes and the collapse of the Mexican peso in 1995 further more exacerbated the situation. In this context, the 1996 application of Title IV against executives of Grupo Domos gave the final blow to a company already vexe d by untenable financial problems. Although Domos did not abandon its investment in re sponse to Helms-Burton, the law did make it more difficult for the firm to acquire the nece ssary financing for its business activities in Cuba (Sagebien and Tsourtouras 1999). In early 1997, at the time of its withdrawal, the company was months behind on its payments for ETECSA and unable to obtain credit to honor the debt. Cuban exile groups and so me U.S. officials celebrated Domos withdrawal and cited it as a pr oof that Helms-Burton was an effective tool in weakening 20 For further details see U.S.-Cuba Trade and Economic Council (USCTEC). Grupo Domos Out of ETECSA. Economic Eye on Cuba, 30 June 1997 to 6 July 1997. http://www.cu batrade.org/ eyeone.html (last visited November 2005). 21 Interview with a Cuban economist in Havana, June 21, 2000.

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116 Castro and the Cuban economy (Rohter 1997).22 However, it must be noted that in 2001 the Mexican firm was still perf orming minor activities in Cuba, in an attempt to recover the capital invested or, perhaps, maintain a f oothold in the islands economy for the time the embargo is lifted. The strategy adopted by the Italian co mpany STET International in filling Domos place in Cubas telephone system supports the thesis that financial problems were the major factor in Domos withdrawal rather than the Helms-Burton law. In May 1997, STET received a letter from the U.S. Stat e Department asking if it was using ITT equipment. A STET official in Rome said the Italian firm was not concerned by HelmsBurton because it had documents showing the equipment STET used was not seized from the former U.S. owner (Tamayo 1997). Nonethele ss, it is reported th at, in addition to an initial investment of $300 million, STET agreed with ITT on the payment of a compensation of about $30 million for use of the confiscated property (Roy 2000: 113). If the Italian company was able to protect its investment in Cuba by reaching an agreement with ITT, the Mexican Domos could have probably done the same. Unfortunately, its precarious fi nancial conditions did not allo w this type of solution. The payment of compensation to the former U. S. owner is very important because it highlights a possible way for foreign investors to circumvent (or perhaps succumb to) the provisions of the Helms-Burton law. Although Washington has continued to warn many foreign companies for potential violations of Helms-Burton, no formal sa nctions under Title IV were applied or announced between November 1997 and May 2004. Last year, however, the Bush 22 Subsequently, the U.S. Department of State reinstated visa privileges for the executives of the Mexican company (Roy 2000: 165).

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117 administration stepped up economic pressure (a gain in a presidential election year) on several foreign firms and banks doing business wi th Cuba as part of a broader attempt to further disrupt Cubas limited access to international financing and hasten the demise of Fidel Castros decades-long rule over the island.23 In June 2004, the Jamaican tourist group SuperClubs pulled out of two hotel contra cts in Cuba after receiving U.S. notice in early May that it had a 45-days grace period be fore the application of visa restrictions on its top executives for travel to the United States. Curiously, SuperClubs not only withdrew from the 480-room Breezes Costa Verde resort in the Holgun province, a confiscated property, but also from a sepa rate Cuban venture not on the disputed property, the newly opened 436-room Grand Lido Varadero. Some analysts claimed that the Castro government forced the Jamaican company out in punishment for its bowing to Washingtons demands (Hemlock 2004). Conf idential sources in Havana added that Cuba took the decision because many other fo reign hotel chains we re interested in running the Grand Lido Varadero.24 The resort is now managed by Sandals, another Jamaican group, under the name of Princesa del Mar. SuperClubs still manages the 270room Breezes Varadero and the 250-room Br eezes Jibacoa in Santa Cruz del Norte, Havana province. Withdrawals from Investments in Cuba Cases of withdrawals from existing investme nts or planned ones as a result of the Helms Burton law are difficult to document because both the foreign company and the 23 In 2004, the United States imposed fines on a number of European financial institutions dealing with the Castro government, including Switzerlands larges t bank USB, the Italian group Banca Commerciale Italiana, and the Spanish bank Santander. See Spadoni, Paolo. Only small European firms succumb to U.S. embargo on Cuba. The Gainesville Sun December 4, 2004. Also se e Spadoni, Paolo. Foreign banks exposure in Cuba unaffected by U.S. pressures. Orlando Sentinel February 14, 2005. 24 Interview with a foreign correspondent stationed in Havana, June 21, 2004.

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118 Cuban government usually prefer to avoid publ icity. Moreover, an admission of the role of U.S. pressures in the decision to pull out fr om an investment or desist from pursuing a project might undermine the possibility for a fore ign firm to resume business activities in Cuba in the future. Clear cases of companies that have ceased to do business in Cuba because of the U.S. legislation are those of the Mexican Cemex and the Canadian Redpath. Cemex withdrew in 1996 from a cement production vent ure in Cuba after learning that it was going to receive a notification le tter from the U.S. Department of State for violation of Title IV. The company did not renew a contr act of administration for the plant Cemento Curazao N.V. in Mariel (total investment of $40 million), which had been expropriated from the U.S. firm Lone Industries of Stan ford (Marquis 1996). While Cuban officials have never confirmed this version, it is beli eved that Cemex deci ded to sacrifice its operations in Cuba to protect larger intere sts (including several plants) in the United States (Sagebien and Tsourtouras 1999). In 1996, the Canadian sugar refiner Redpath al so halted its operations in Cuba from apparent fear of Helms-Burton. The company is a wholly-owned subsidiary of the U.K.based sugar producer Tale & Lyle PLC, wh ich has extensive interests in the United States. A key factor in the decision of Redpath was the co mpanys desire to continue selling sugar to Canadian food processors that export to the United States. In a clear reference to Redpath, Cuban authoritie s reported in 2001 that Helms-Burton had provoked the termination of a sugar contract wi th a Canadian refiner, resulting in annual losses for the island of about $30 million since 1996 (AFP, July 17, 2001). Until its

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119 withdrawal, the Canadian company had b een buying 100,000 tons of sugar a year from Cuba (Kiger 1998: 62). A few months after the passage of HelmsBurton, U.S. officials cited the Spanish hotel chain Paradores Nacionales as an exampl e of a foreign company that did not pursue a planned investment in Cuba because of the U.S. law. According to Spanish press reports, Paradores Nacionales pulled out of a provisional framework agreement to operate eight hotels on the island (Confidential Report 1999). The Spanish newspaper El Pais explained Paradores decision as a combina tion of Helms-Burton and the change of policy implemented by the new conservative Spanish President Jose Maria Aznar. Apparently, Aznars Partido Popul ar Party did not want to be seen as actively promoting tourism for Fidel Castros alienated regime through a st ate-owned company such as Paradores (Ing 1996). In July 1996, another Spanish hotel chai n, Occidental Hotels pulled out of a contract to manage four hotel s at the leading resort of Va radero after studying the legal implications of the Helms-Burton law. Th e company, at the time Spains second largest international hotel chain, ha d received an offer from the Cuban group Gaviota. The contract, due to come into effect in the autumn of 1996, was worth about $900,000 a year. Occidentals executives claimed they did not receive any kind of threat from the United States and there was no reclamation from Cuban exiles on th e four hotels that were part of the project. Furthermore, the ch ain had just one hotel in the United States in association with the U.S. Marriott group. But after a deep evaluation of the possible risks in pursuing its project, Occide ntal concluded that the juri dical confusion and the many legal loopholes created by Helms-Burton sugge sted the withdrawal from the planned

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120 investment (ABC, June 14, 1996). At any rate Occidental Hotels announced in January 2000 that it was analyzing opportu nities for a new investment in the Caribbean island, including the construction of three hotels through a joint venture with the Cuban government (Europa Press, January 27, 2000) Currently, the company manages two establishments in Cuba, the Occidental Mi ramar hotel in Havana and the Occidental Grand Playa Turquesa in the Holguin province. The psychological impact of the HelmsBurton legislation is underscored by two additional cases. In January 1998, British Borneo Petroleum Syndicate pulled out of Cuba amid political pressure from the United St ates. U.S. officials reported that Borneo was among three companies phoned by the U.S. St ate Department as part of a routine inquiry. The director of the oil explorati on group denied the company had been warned for a possible application of Title IV, but he concluded that political reasons had influenced its decision to leav e Cuba (Reuters, March 4, 1998).25 Another important case is that of the Canadian Bank of Nova Sc otia. The bank backed away from providing loans to Canadians wishing to invest in Cuba largely out of fear of running afoul of Helms-Burton and possibly jeopardizing its i nvestments in the United States (McKenna and Kirk 1998: 6). Reorganization and Relocation of Activities Several companies have reorganized their ope rations in Cuba in order to disguise their identity and avoid possibl e sanctions. For instance, be fore the enactment of the Helms-Burton law, the British sugar trader E. D. & F Man occupied an office, clearly marked with a company sign, in Havanas Mi ramar district. After the law went into 25 Curiously, just a week earlier British Borneo Petrol eum had said that it had abandoned its oil exploration activities in Cuba for technical reasons and not because of political opposition from the United States. For further details see Reuters British Borneo denies U.S. Cuba warning. February 25, 1998.

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121 effect, this sign was taken down but Man cont inued its sugar operations in Cuba using a different identity, that of Pacol S.A ., registered in Paris (Fletcher 2000). Other firms have taken the necessary st eps to conform their activities to the provisions of Helms-Burton (Werlau, 1997). Th is is the case of the Dutch banking group ING, the first foreign bank to open a repres entative office in Cuba. ING had provided pre-harvest financing for sugar producti on in two Cuban provinces, Havana and Matanzas, during the 1995-96 season. In July 1996, citing Helms-Burton, the bank said it would not be renewing its ter ritorial financing although it would maintain its presence in the island. More specifically, ING backed out of co-financing w ith the Spanish Banco Bilbao Vizcaya packages for the Cuban suga r industry worth nearly $60 million a year. The Dutch bank is understood to have taken this step as a protective measure to prevent possible U.S. sanctions after it was discove red that 45 mills the group financed were claimed by Americans. A more generic scheme of national financing (or general loans to the sugar sector) was soon established thr ough other European financial institutions, with ING acting as guarantor. The Spanish firm Tabacalera adopted a similar decision. From 1994 to 1996, Tabacalera had provided di rect financing to the Cuban tobacco industry to boost tobacco produc tion and cigar exports to Sp ain, Cubas biggest single market. In 1997, the company changed the stru cture of its relationship with the Cuban industry to avoid the effects of Helms-Burton. Instead of directly financing the Cuban crop, Tabacalera now guaranteed funds coming from other Spanish financial institutions (Reuters, February 13, 1997). In short, there is no doubt that the Helm s-Burton law has had a negative effect on the flow of foreign financing for strategic sect ors such as tobacco and sugar. But the law

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122 has created more problems for the Castro gove rnment rather than foreign companies. Foreign firms and banks, such as ING and Tabacalera, were able to reorganize their activities to avoid the reach of Helms-Burt on and maintain their presence in Cuba.26 The Cuban government was forced to accept credits from other European investors at rates as high as 20 percent. As a consequence of Helms-Burton, some foreign firms operating in expropriated properties have decided to relocate their ac tivities. This is the case of Motores Internacionales del Caribe S.A. (MICSA), a Panamanian company selling Mitsubishi, Lada and other vehicles in Havana. MICSA received a w arning letter from the U.S. Department of State on January 23, 1997, saying that the company could be in violation of the Helms-Burton law. The firm was accused of profiting from the Havana office it rented from the Cuban government, a prope rty seized after the 1959 revolution (Kerry 1997). A Cuban-American jewe lry storeowner in Miami had reportedly notified the Helms-Burton unit of the U.S. Department of State that his familys house was being used to sell cars. He was in possessi on of photos of the house beneath signs for Mitsubishi and Motores In ternacionales. Summoned in Washington, Mitsubishis executives declined any involvement with the property and dissociated themselves from the Panamanian firm. They argued that their cars were sold to a wholesaler in Japan before being sold to Motores Internaci onales in Panama (Marquis 1997). MICSAs executives, instead, defended their position by claiming that the company had rented the 26 If there are problems for companies that provide financing, especially to the sugar industry, they are mainly related to the inability of the Cuban government to make its payments. Loans are generally either repaid in sugar or guaranteed by sugar deliveries. However, successive low sugar harvests and reduced production have seriously complicated the repayment of the loans, thus creating a complex tangle of rolledover payments and sugar delivery commitments (Confidential Report 1999: 63)

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123 house in 1993, three years before the enactment of the U.S. le gislation. In their opinion, the firm had no responsibility because it could ha ve not violated a law that did not exist. In this regard, it is important to recall the provisions of Title IV. A foreign firm that has begun to operate on a confiscated property before the enactment of HelmsBurton may avoid sanctions if it refrains from undertaking renovations, upgrades, and constructions other than for routine mainte nance. For MICSA, and for all the other companies in a similar situation, it would ha ve been very difficult to keep operating in that property without running afoul of U.S. la w. While minor activi ties such as painting the local were clearly identified as part of routine maintenance, more important renovations such as fixing the infrastructure or improving the facilitie s could have easily been considered as expansion of interests, thus raising th e likelihood of a violation of Title IV (EFE, January 24, 1997). The U.S. Department of State also exercised psychological pressure by notifying the Panama nian company that its business operations in Cuba were under inquiry and they were going to be closely monitored. In February 1997, just a few weeks after receiving the warning letter, Motores Internacionales announced it was going to move to a larger location in Havana. The company claimed it changed location because it was expanding and needed more office space, not because of the U.S. threat (Reuters, February 22, 1997). However, it is conceivable that MICSA moved to another pr operty in order to avoid further problems and possible sanctions under Title IV of the He lms-Burton law. It must be noted that the head of the company and his son were exempt ed from a potential travel ban because they held dual Panamanian and U.S. citizenship, but as many as eight members of the

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124 executive board faced the possibility of bei ng denied entrance into the United States (Marquis 1997). Finally, some foreign companies have deci ded to make the necessary arrangements before entering the Cuban market For instance, the U.K. largest tour operator, Thomson Travel Group, has allegedly communicated with the U.S. Department of State to make certain that its business activiti es do not violate the Helms-Burt on legislation. It is also reported that a Canadian comp any specialized in hotel cons tructions, Leisure Canada, has investigated 443 properties in Cuba in order to find a place with no links with U.S. claims (De Palma 2000).27 In 1999 Leisure Canada launched a 10-year, $400 million venture to build 11 hotels in four loca tions around Cuba along with golf courses, spas and entertainment complexes. The Sol Melia Case A foreign company that has been repeated ly threatened by the Helms-Burton law is the Spanish group Sol Melia, the l eader in the Cuban tourist s ector and one of the worlds ten largest hotel chains.28 In July 1996, Sol Melia received a warning letter from the U.S. Department of State similar to the one sent to Motores Internacionales. The company was under inquiry for one of the hotel s it managed and partially owned (equity interest) in the Cuban beach of Varadero, th e Melia Las America. Before the revolution, the land on which the hotel had been built belonged, allegedly, to the U.S. billionaire Irenee Dupont. Although the Dupont family never claimed the e xpropriated property, executives of Sol Melia had to explain to U.S. officials that their business was not 27 Leisure Canada has, nevertheless, an important laye r of protection against potential sanctions under Title III of the Helms-Burton legislation because it has no assets in the United States. 28 Sol Melia manages two hotels in the United States, the Hard Rock Hotel Chicago and the Paramount New York. It also owns the Paradisus resort in Puerto Rico (U.S. territory).

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125 violating the provisions of He lms-Burton (Vicent 1999). Afte r a brief investigation, the United States informed the executives that th ere was not enough proof of an infringement of the law, thus freeing the Spanish firm fr om a possible application of Title IV. Sol Melia said its inquiries had led it to conc lude that it was beyond the U.S. laws reach, mainly because it had concentrated its investments on new properties (Haines 1997). Since July 1996, Sol Melia has significantly expanded its business interests in Cuba. It currently manages 23 hotels on the isla nd with equity interests in four of them (Spadoni, March 14, 2005). While being clear ed by Washington three years before, in 1999 Sol Melias Cuba business prompted one of the highest-profile scrutinies under Helms-Burton. This time, the controversy was mainly related to a plot of land in the province of Holguin on which the hotel Sol Ri o de Oro (only manage d by Sol Melia) had been built. In 1959, the land belonged to the Sanchez Hill family, a prominent Cuban family now living in the United States. The U. S. Department of State sent a second letter to Sol Melia on July 30, 1999, notifying the comp any that a new Title IV investigation had begun. The letter called for an agreemen t between Sol Melia and the former owner of the property in order to avoid possible sa nctions. Washington al so solicited details from the Spanish chain about two additional hotels in the province of Holguin (built on Sanchez Hills properties as well) an d another one in Varadero (Ebro 1999). Again, U.S. pressures against Sol Melia di d not produce any concrete result. The threat of sanctions under Title IV of Helms-Burton was temporarily withdrawn while the agreement between the Spanish company and the Cuban family never concretized. 29 29 According to Spanish sources, the July 1999 letter announced an imminent notification to Sol Melia of the 45-day deadline in which a company must either disprove the charge or abandon its investment. However, the notification has never been sent. See Economics Press Service. Siguen amenazas contra Sol Melia. November 15, 1999.

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126 Although Sol Melia keeps saying its involvement with Sanchez Hills properties predates the passage of Helms-Burton, it is believe d to have offered $1 million to the Cuban family.30 But the latter reportedly wants $10 m illion for the right to use 28 acres of coastal land it once owned (Cox 2001). Two factors have played a major role in Sol Melias successful attempt to avoid sanctions under Title IV of th e Helms-Burton law. First, since the earliest warning letter in 1996, and especially after the second one in 1999, the Spanish government (backed by the European Union) has strongly supporte d Sol Melias operations in Cuba. In November 1999, during a visit to the island, the Spanish Prime Minister Jose Maria Aznar publicly criticized the tightening of th e U.S. embargo against Cuba. Asked about his choice of accommodation at the Havana Melia Hotel, Aznar replied that he intended to show support for the position of Spanish en trepreneurs and demonstrate that he was against Helms-Burton (Bloomberg, November 16, 1999). Second, in the fall of 1996 the European Un ion (EU) decided to enact a blocking measure against Helms-Burton. The EU respons e involved the establishment of a watch list of U.S. companies and individuals f iling lawsuits against European firms and considered placing visa and work restric tions on U.S. businessmen. Even more important, EU officials have repeatedly wa rned Washington that implementing Title IV against Sol Melia and other European firms operating in Cuba would prompt a challenge 30 Interestingly, Sol Melias executives have denied on several occasions they have equity interest in Cuban hotels. In 1999, the spokesman of Sol Melia Carlos Forteza claimed that the firm had nothing to fear from investigations on its activities because it had management only, and not ownership, of the 14 Cuban hotels in which it operated. He added that nothing was going to change with respect to Cuba and that the company intended to expand on a management basis within the norms of international law and without violating any disposition. See Reuters. Spains Sol Melia said unworried by Cuba inquiry. August 23, 1999. In an interview with Travel Agent in January 2000, the president of Sol Melia Gabriel Escarrer reiterated the management distinction but he also underlined that all the contracts signed by his company until then were before the Helms-Burton appeared. S ee Travel Agent. Guiding Sol Melia. January 17, 2000.

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127 to Helms-Burton law in the World Trad e Organization (WTO) because of its extraterritorial character. As observed by Sir Leon Brittain, the former EU trade commissioner, the U.S. law establishes the unwelcome principle that one country can dictate the foreign policy of the others (Barnard 1996). To avoid a fight within the WTO, the United States and the EU reached a preliminary agreement in 1997, and a more extended understanding on May 18, 1998. The EU promised not to pursue retaliatory measures against the United States in th e WTO and discourage investments in certain questionable properties. In exchange, the Un ited States agreed to prolong the suspension of Title III, respect the current status of foreign investment in Cuba,31 and pressure the Congress for an amendment that would give th e president the authority to waive Title IV (Roy 2000: 127,152). While Sol Melia has maintained its operati ons in Cuba, several U.S. Congressmen have continued to push for the application of sanctions against the Spanish firm. In June 2000, U.S. Senator Jesse Helms sent a letter to the European Uni ons foreign relations commissioner Chris Patten in which he rej ected the 1998 understandi ng and reiterated his intention to persecute Sol Melia (Oppenheimer 2000). In November 2000, Helms asked the U.S. Department of State to formally dete rmine that Sol Melia is trafficking in Cuba and ban the hotel chains top executi ves from entering the United States.32 Finally, Cuban-American Representatives Lincoln Di az Balart and Ileana Ros-Lethinen have constantly tried to build s upport within the U.S. Congress for a more aggressive Cuba 31 The United States agreed not to make pre-May 1998 expropriations the target of lawsuits. 32 The U.S. Senator, who retired in 2003, claimed that Sol Melia had tacitly acknowledged trafficking by negotiating with the Sanchez Hill family. He added th at U.S. officials had exceeded their authority under Helms-Burton by pushing for an agreement between Sol Melia and the Cuban family. For further details see Cuba Trader. Helms demands Helms-Burton sanctions against Spanish hotel chain. November 21, 2000.

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128 policy. They have asked President Bush to sanction Sol Melia wit hout further delay and remove the waiver on Title III of the HelmsBurton law. Overall, Title IV remains a potential threat for the Spanish company, but it is unlikely to be applied. The Bush administration pursued a Jamaica-based targ et (SuperClubs) because its government lacks political weight (Gedda 2004). As the EU repeatedly warned the United States of tit-for-tat retaliatory actions, Washington can hardly afford a major dispute with its main trading partner over Cuba that would implode the mechanisms of the WTO. Helms-Burton: Failure or Success? Cuban and U.S. officials have provided cont rasting interpretations of the impact of the Helms-Burton law on foreign investment in Cuba. Since March 1996, and at least until 2001, Cuban authorities proudly insisted th at economic associations with overseas companies and the flow of FDI continued to grow. At the same time, they claimed that the codification of the embargo had done significant damages to the Cuban economy (Roy 2000: 170). In particular, they ac knowledged the problems related to the external financing and the inhibitive or psychologi cal effect of Helms-Burton on potential foreign investors. For their part, some U.S. officials argued that the law was having a significant impact on foreign investment in Cuba. In March 1999, then-Cuban Minister for Foreign Investment and Economic Collaboration Ferradaz declared that Helms-Bu rton had been unable to stop the foreign investment process. He said that out of more th an 360 joint ventures with foreign capital operating in Cuba at that time, more than 50% had been formed afte r the passage of the U.S. law (Veloz 1999). On February 2, 2001, his successor Marta Lomas maintained that foreign investment in Cuba was on the rise as demonstrated by 392 active international

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129 associations at the end of 2000. She also cl aimed that 61% of AECEs received approval after Helms-Burton (Prensa Latina, February 2, 2001). In spite of these declarations about the in effectiveness of the U.S. law, in April 2000 the Cuban Ministry of Foreign Investme nt released the results of a study that attempted to quantify the damages of Helm s-Burton to the islands economy. The study reports that the U.S. law has caused dama ges to Cuba totaling $208 million. It also presents six specific cases of projects a ffected by Helms-Burton and the correspondent amount of capital lost by Cuba. The name s of the firms are omitted, but the cases are well known. Regarding the proj ects that involve more capit al, Cuban authorities argued that U.S. pressures disrupted the export pl an of a joint venture in the construction industry (clearly referring to the withdrawal of the Mexi can cement company Cemex), which resulted in a loss of sales of $138.1 m illion. Moreover, U.S. court decisions and the action by a foreign firm in the telecommuni cations sector (the It alian Stets payment of a compensation to the former U.S. owner ITT for the use of confiscated properties) provoked damages of $37.6 million. Finally, the acquisition of a foreign firm in the transportation sector by a U.S. company (the Italian cruise line Co sta Crociere, bought in 1997 by the U.S. Carnival Corporation) preven ted the completion of a project estimated in $19 million (MINVEC 2000). On the U.S. side, Senator Jesse Helms st ated in March 1997 that Helms-Burton was having a devastating effect on the Cuban ec onomy by forcing many foreign investors to abandon their operations on the island. C ongresswoman Ileana Ros-Lethinen also contended that dozens of companies had suspen ded operations in Cuba while others were postponing their investment plans. She o ffered a list of companies (mainly Mexican,

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130 Canadian and European) that had left Cuba because of the uncertainty generated by Helms-Burton and the names of firms whos e projects had been put in hold (Roy 2000: 160-161). In March 1998, Michael Ranneberger, thendirector of the U.S. State Departments Office of Cuban Af fairs, claimed that U.S. pressures had forced at least nineteen foreign firms to either pull out of Cuba or alter th eir investment plans.33 Clearly, the Helms-Burton law has affected foreign investors behavior, forcing them to reorganize their business activities, double-check new properties, or eventually renounce to further expansion. It has also discouraged some potential investors from pursuing their plans in Cuba. But how effectiv e has the U.S. law been in forcing foreign companies already operating in the Cuban mark et to pull out of the island? 0 10 20 30 40 50 60 70 80 90 100 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Dissolved Authorized 595 Authorized 313 Active (53%) 282 Dissolved (47%) Figure 4-9. Authorized and Dissolved Associations by Y ear of Dissolution (1988-2004) Source: Authors calculations from MINVEC data, 2001-2005. Figure 4-9 presents data on authorized and dissolved international economic associations by year of dissolution. Betw een 1988 and 2004, a total of 595 AECEs were 33 Statement of Michael Ranneberge r (Coordinator for Cuban Affairs, Department of State) to the Subcommittee on International Economic Policy and Trade of the House International Relations Committee, March 12, 1998.

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131 formed in Cuba, most of them joint ventures; at the end of 2004, only 313 or 53% remained active, sharply down from the 403 re ported for 2002. The number of dissolved AECEs is 282, approximately 47% of the total constituted.34 Almost 85% of dissolutions occurred after the enactment of the Helms-Burton legislation. Dissolutions were generally due to the terminati on of the regular contract be tween the Cuban state and the overseas investor; less frequently, they were the result of an anticipated wit hdrawal of the foreign partner. However, except in very few cases, there is no evidence that HelmsBurton played a major role in forcing ex isting investors to pu ll out of Cuba or, eventually, to refuse the renewal of a contract More important factors seem to have been the inability of the Cuban gove rnment to meet its payment obligations, its increasing selectiveness toward FDI projects and unwillingness to create a more attractive business environment, and the existing restrictions on the operations of state and foreign enterprises. Between 1996 and 1997, when the United States stepped up enforcement of Title IV of Helms-Burton, 125 new AECEs were formed and only 20 dissolved. The U.S. Department of State, throu gh applied sanctions or simply warning letters for potential violations of Title IV, has mainly aime d to disrupt th e flow of FDI delivered to Cuba and exercise economic pr essure by targeting major companies with a significant presence in the islands market. Table 4.2 summarizes the impact of HelmsBurton on selected foreign firms operating in Cuba whose cases have already been discussed. Only the Mexican Cemex and the Ca nadian Redpath have clearly ceased to do 34 Only 10 new international economic associations were formed in 2004, while 39 dissolved. Interestingly, the Cuban Ministry of Foreign Investment reports that other 67 associations operating in Cuba are in the process of dissolution (MINVEC 2005) Therefore, unless a si gnificant number of new agreements are signed in 2005 (or perhaps most of the contracts of the AECEs in dissolution are renewed), it is possible that the total number of active AECEs will be about 250 at the end of this year. If this is the case, then Cuba would have lost more than one third of associations with foreign partners in just three years.

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132 business in Cuba because of the U.S. law and to save their investments in the United States. A less clear case is that of British Borneo Petroleum that pulled out of Cuba in late 1997 because of unspecified political reasons along with poor results of its oil exploration activities. Grupo Domos withdrew from its investment in the Cuban telephone system but did not abandon the is land. And the Jamaican group SuperClubs pulled out of two hotel contra cts in June 2004, but still manages two hotels in Cuba. In all the other cases presented in Table 42, we can see that U.S pressures failed to prompt a general pull out. In order to a void the effects of Helms-Burton, some foreign firms have taken specific steps such as the reorganization and reloca tion of their activities (E.D. & F. Man, ING Bank, Tabacalera, MICSA), the spin off of their operations (Sherritt Int.), and the payment of compen sation to the former owner of the property (STET Int.). Other investors have simply continued to operate and expand in Cuba undeterred by sanctions or U.S. inquiries (BM Group, LTI, and Sol Melia). A Cuban official observed in 2001: Foreign companies carefully analyze the potential risks of their operations in Cuba and undertake the ne cessary preliminary arrangements to avoid running afoul of the Helms-Burton legislation. But they feel quite safe once entered the Cuban market.35 Although it is virtually impossible to ga uge the psychological impact of HelmsBurton on foreign firms, data from the Cuba n Central Bank on foreign direct investment in Cuba (see Table 4-1 on page 91) show a significant increase after March 1996. About $1.3 billion in FDI was delivered to the island in the 1996-2000 period, compared to $568 million in the 1990-1995 period. Even if the alleged inaccuracy of these numbers 35 Interview with a Cuban official in Havana, May 23, 2001.

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133 Table 4-2. Impact of Helms-Burton on Sel ected Foreign Firms Operating in Cuba Company Country Type of Operations in Cuba Nature of Impact (Outcome) BM Group Israel Joint venture in citrus sector Application of Title IV (remained in Cuba) British Borneo U.K. Oil explorations Halted operations for political reasons and poor results (pulled out) CEMEX Mexico Cement produc tion venture in Mariel Not renewed contract of administration because of H-B (pulled out) E.D. & F. Man U.K. Sugar trader Reorganized operations to disguise its identity (remained in Cuba) Grupo Domos Mexico Joint venture in telecommunications (ETECSA) Application of Title IV (withdrew from investment but remained in Cuba) ING Bank Holland Pre-harvest financing for sugar production in 2 provinces Changed financing scheme (remained in Cuba) LTI Germany Manages and markets three hotels in Cuba (under the brand name Maritim) Received warning letter (remained in Cuba) MICSA Panama Car seller (Mitsubishi) Relocation of activities because of H-B (remained in Cuba) Redpath Canada Sugar refiner Halted purchases of sugar from Cuba (pulled out) Sherritt Int. Canada Nickel /cobalt ore processing plant Spin off and application of Title IV (remained in Cuba) STET Int. Italy Filled Domos place in Cubas telephone system Payment of compensation for use of confiscated property (remained in Cuba) Sol Melia Spain Leader in Cubas tourist sector Repeatedly threatened by Title IV (remained in Cuba) SuperClubs Jamaica Manages and markets two hotels in Cuba Application of Title IV (withdrew from investment but remained in Cuba) Tabacalera Spain Financing for tobacco production and cigar exports Changed financing scheme (remained in Cuba)

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134 must be considered, Cubas claim that FD I flows have actually increased after the enactment of Helms-Burton appears corre ct. In July 2000, however, Marta Lomas acknowledged that only 40% of the total amount of capital pledged since 1990 ($4.3 billion) had been approved af ter March 1996 (EFE, July 10, 2000; Granma July 11, 2000). This might suggest that the increased amount of FDI during the 1996-2000 period was partially due to agreements signed before the passage of Helms-Burton.36 While the flow of FDI delivered to Cuba has dropped significantly since 2001, companies from China, Venezuela, and Cana da have recently pledged a substantial amount of capital for new investment proj ects on the island. In November 2004, China announced a $500 million investment in an unfin ished nickel plant (Las Camariocas) in the eastern Holguin province and signed a letter of intent to explor e and develop nickel reserves in central Camaguey (San Felipe), in a project that might be worth more than $1 billion (Frank, November 23, 2004). Early in 2005, China signed an agreement with the Castro government to jointly produce oil on th e coast of western Pinar del Rio Province (Frank, January 31, 2005). Venezuela is consider ing off-shore oil explorations in Cubas Gulf of Mexico waters and has announced plans to upgrade an idled oil refinery at Cienfuegos and build a lubricants plant on the island (Boadle, April 29, 2005). In March 2005, Canadas Sherritt agreed to invest abou t $225 million to increase nickel production at the Pedro Soto Alba plant in the easter n Cuban region of Moa. (Bloomberg, March 4, 2005). In sum, the capital involved in thes e various projects in Cuba could represent more than one third of the total amount of FDI ($6 billion) committed by foreign investors in more than a decade. 36 Interview with a Cuban economist in Havana, June 4, 2001.

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135 Admittedly, the flow of FDI into Cuba remain s low, especially if compared to other emerging markets in Latin America. Howeve r, whereas Helms-Burton might have had a psychological impact on potential foreign i nvestors and prevente d the completion of some projects, Cubas overall performance se ems to be more a consequence of its limited and sometimes ambiguous commitment to FDI and its heavily regulated business environment. It must be remembered that the Castro government reluctantly resorted to foreign investment in the early 1990s out of necessity and said on several occasions it wants the minimum of foreign ownership on th e island. There is some space in Cubas ideology for joint ventures with foreign capit al, but they are welcomed as long as they contribute to the overall economic pie. In othe r words, Cuba is in a class of its own and its economic success ought not be measured in terms of delivered foreign investment and against the performance of other countries (San Martin 2001). The main indicators of international ec onomic associations have shown steady growth since the opening to foreign investment in the early 1990s and the impact of FDI on the Cuban economy, in spite of Helms-Bu rton, has become increasingly important. This development appears to confirm that Cuban authorities have been concentrating over the years on investments with positive economic results. As shown in Figure 4-10, total sales of international econom ic associations increased from about $200 million in 1993 to mo re than $2 billion in 2002. During the same period, exports of goods and services generated by AECEs rose from approximately $90 million to $963 million, and domestic mark et sales from around $113 million to $1.1 billion. The Cuban Ministry of Foreign Invest ment also reports that direct income from international associations (which refers to dividends of the Cuban partners in AECEs plus

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136 revenues from workers salaries and taxes) reached $310 million in 2002 (MINVEC 2004). As for 2003, Minister Mart a Lomas stated that even with fewer companies there was an increase in exports, domestic sales a nd profits. She added that 60% of the total inputs of AECEs were bought in the domestic market (EFE, January 25, 2004). In 2004, total sales and exports of AECEs peak ed, respectively, at $2,287 million and $1,345 million (MINVEC 2005). 2,068 1,105 9630 500 1000 1500 2000 2500 1993199419951996199719981999200020012002 Total Sales Domestic Market Sales Exports (G & S) Millions of U.S. dollars Figure 4-10. Main Indicators of AECEs, 1993-2002 Source: Information provided by MINVEC, June 2004. A small number of joint ventures has a large economic impact, as many projects with foreign partners in Cuba remain rela tively small. According to MINVEC, 30 major AECEs (names were not specified) accounted for 81% of total sales, 71% of domestic sales, and 92% of exports of international associations in 2002. Furthermore, 4 major joint ventures (Corporacion Habanos, Havana Club Internacional, Compaia Azucarera Internacional, and ETECSA) accounted for 47% of total sales, 14% of domestic sales,

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137 and 85% of total exports of goods a nd services of AECEs that year.37 The much lower impact of these enterprises on domestic market sales is not surpri sing as their revenues come, for the most part, from export-related activities. Corporacion Habanos is a cigar distributi on joint venture signed in late 1999 and 50% owned by the Spanish-French conglomerate Altadis. Havana Club Internacional is a 1993 rum distribution joint venture between the French company Pernod-Ricard and Cuba Ron S.A. Compaia Azucarera Inte rnacional is a 2001 jo int venture between Cubazucar and an unknown foreign partner (allege dly Paris-registered Pacol, S.A., a firm connected to the British sugar trader E.D. & F Man) for the commercialization of Cuban sugar in the world market (Frank, March 7, 2002). ETECSA is a 1994 telecoms joint venture in which Italy-based Te lecom Italia (through its subsid iary Stet International) has a 27% interest. The majority of ETECSAs revenues come from dollar charges applied to incoming international calls, which are c onsidered as exports of telecommunications services. If we also consider the volum e of export operations by Moa Niquel S.A., a 1994 joint venture between Cubas Union del Ni quel and Canadas She rritt International, 5 major enterprises account fo r almost all export revenues ge nerated through AECEs. In short, the increasing number of dissolutions of international econom ic associations will have little negative effect on the overall economic performance of FDI in Cuba as long as the big players continue to operate a nd invest in the communist island. Interestingly, Cubas foreign partners in the five most important joint ventures on the island have been targeted by, or could be potential ta rgets of Helms-Burton. In addition to the previously analyzed cases of Sherritt, Stet International, and E.D. & F. Man, the Spanish/French group Altadis has b een the target of a lawsuit filed by New 37 Information provided by MINVEC, June 2004.

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138 York-based General Cigar Holdings Inc. in November 2000. The lawsuit focuses on an alleged jawboning of Altadis with U.S. reta ilers to buy its non-C uban products now, if the retailers hope to buy Cuban cigars once th e embargo is lifted. However, General Cigar also contends that Cubas Habanos (partially owned by A ltadis) is using its warehouse in Havana that was confiscated by the Castro governmen t after January 1959 (Hemlock 2000). Similarly, the Cuban fam ily Bacardi has accuse d Pernod Ricard of using its expropriated distille ry in Santiago de Cuba to produce the rum Havana Club. The French firm denied that by claiming it simply markets the rum, which is produced in two distilleries in Santa Clara and Sant a Cruz built in the 1970s and 1980s (Luxner 1997).38 22.7 0 5 10 15 20 25 19951996199719981999200020012002 % Change Figure 4-11. Exports of AECEs, 1995-2002 (as percentage of Cubas total exports of goods and services) Sources: Authors estimates from MINVEC and ECLAC data, 2003-2004. Cubas reiterated claims that incoming fore ign direct investment is not crucial (only complementary) to the economic development of the country appear questionable. For 38 Pernod Ricard is also engaged in a legal battle with Bacardi over the rights to sell Havana Club rum in the United States once the economic embargo against C uba is lifted. A 1998 U.S. law, known as Section 211, prohibits the U.S. government from honoring trademarks confiscated by the Cuban government.

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139 instance, as reported in Figure 4-11, the share of export revenues generated through AECEs in Cubas total value of exports of goods and services increased significantly in recent years. In 2002, AECEs accounted for al most 23% of the countrys total dollar revenues from all sources. If we consid er that FDI in Cuba between 1993 and 2002 represented just 8.7% of the gross fixed cap ital formation (Prez Villanueva 2005: 173),39 the performance of enterprises with foreign participation appears remarkable. In 2004, exports of AECEs accounted for more than 25% of the islands total exports of goods and services. It should also be noted that export reve nues generated by AECEs are derived to a great extent from products rather than services. The latter may include the sales of joint ventures in the tourist sector (where dollar revenues are mostly linked to management contracts rather than AECEs) and internat ional calls in teleco mmunications. Today, exports of goods are certai nly less important for the C uban economy than during the 1980s, but they are still a precious source of hard currency for the country. Assuming that all export revenues from AECEs in 2002 are from goods, their share of Cubas revenues from all product exports would be about 68%.40 If we add exports from FTZs ($59.9 million in 2002) and those of cooperativ e production contracts, the importance of FDI in Cubas total earnings from goods is even more pronounced. Other indicators shed light on the role of foreign investment in the Cuban economy. By the end of 1997, joint ventures with foreign capital already accounted for the following shares of economic activity: 100% of oil exploration; 100% of metallic mining; 39 Gross capital formation refers to capital used for the production of goods and services. 40 The percentage is calculated from data of Cubas National Statistical Office ( ONE), according to which the islands total earnings from product exports in 2002 was $1402.3 million.

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140 100% of the production of l ubricants; 100% of the produc tion of soap, perfumes, personal hygiene products, and industrial cleaners; 100% of telephone services (wire and cellular); 100% of the export of rum; 70% of the production of citrus fruits, juices, and concentrates; 50% of the production of nicke l; 50% of the producti on of cement; 10% of all rooms for international tourism and an additional 39% under administration contracts with foreign firms (Prez Villanueva 1999: 119). Since 1997, the importance of foreign capital has grown. In the oil sector, Cuban authorities announced that ove rseas companies have invest ed around $1.2 billion so far (Luxner 2004), raising crude oil production from 0.7 million tons in 1990 to 4.1 million tons in 2003.41 Two Canadian companies, Sherritt (50%) and Pebercan (15%), produced approximately 65% of Cubas to tal national oil output in 2003.42 Crude oil extracted through exploration activities with foreign firm s (along with the introduction of top level technologies) has enabled th e Cuban government to increase domestic production of electricity and natural gas. For instance, th e Energas plant construc ted with Sherritt in Matanzas in 2000 uses the natural gas rele ased during oil extraction for producing electricity and naphtha. Today, nearly 100% of the countrys electricit y is generated with domestic fuel. In the nickel sector, the impact of FDI ove r production has been significant. Total foreign investment in nickel has amounted to over $400 million, increasing production from 26,900 tons in 1994 to 72,000 tons in 2003. The Pedro Soto Alba plant, operated by 41 This is almost 45% of the islands annual consumption of 9.2 million tons in 2003. See CEPAL. Poltica Social y Reformas Estructurales: C uba a Principios del Siglo XXI. April 2004. 42 Authors calculations from Sherritt and Pebercans 2003 annual financial reports, available at www.sherritt.com and www.pebercan.com (last visited November 2005).

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141 Sherritt, produced 32,042 tons in 2003 (44% of total production).43 In the cement sector, FDI has taken a prominent role thanks to a 50/50 joint venture (Cementos de Cienfuegos S.A.) signed in 2000 between Cubas Cemvid a nd Spains Pailas de Cemento S.A. for the modernization of the islands larg est cement plant in Cienfuegos.44 In tourism, there were 19,960 rooms under management contracts with foreign firms at the end of 2003, representing about 49% of the 40,963 avai lable rooms in Cuba (rooms under joint ventures accounted for 11-12% of the total).45 Finally, foreign participation has a substantial influence over the production and marketing for the five largest export sectors (in terms of gross U.S. dollar revenues) such as sugar, nick el, tobacco, rum, and fishing. According to the Cuban Central Bank, thes e sectors accounted in 2001 for more than 32% of Cubas total dollar revenues from all sources. 46.6 64.1 53.4 35.9 30 35 40 45 50 55 60 65 70 19951996199719981999200020012002 Exports (G & S) Domestic Market Sales % Change Figure 4-12. Exports and Domestic Market Sales of AECEs, 1995-2002 (as percentage of total sales of AECEs) Source: Authors estimates from MINVEC data, 2004. 43 CubaNews. Sherritt urges rapid nickel expansion while price is high. v.12, i.4, April 2004. 44 Economic Mission of the French Embassy in Hava na. Millions dUSD pour la cimenterie de Cienfuegos. Lettre de la Havane N.35, April 2004. 45 CubaNews. Canada still top source of vis itors to Cuba. v.12, i.3, March 2004.

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142 Foreign investment has not only helped Cuba find new markets for its main products but also increased the competitiven ess of Cuban production and, therefore, the contribution of import substitution to overall ec onomic expansion. If we analyze sales of international economic associations since 1995 (F igure 4-12), we can see that the share of exports has been decreasing wh ereas the domestic market has gained importance. While in 1995 exports represented almost two-thirds of the sales of AECEs, in 2001 they had dropped to around 36%. On the other hand, sa les in the domestic market have grown steadily, accounting for about 64% of total AECE sales in 2001. The significant increase of exports of AECEs in 2002 was mainly the result of the creation of Compaia Azucarera Internacional and its sugar activi ties and, to a lower extent, higher revenues from nickel exports.46 Nonetheless, domestic market sales still accounted for more than 53% of total sales that year. Of course, we are left without know ing the composition of these sales and their impact on import substitu tion. Even so, if AECEs have sold in the domestic market goods and services wort h more than $5 billion between 1995 and 2002, it is conceivable that such an impact has not been negligible. In the oil sector, foreign cap ital has doubled Cubas refi nery capacity and allowed the country to save more than $450 million in oil imports during 2001 (Prez Villanueva 2005: 183). Moreover, the propor tion of domestically pr oduced goods provided to the tourist industry has increased from 12 % in 1990 to 69% in 2003. Ten years ago, practically all products for hot els and restaurants had to be imported. The development of mixed enterprises in tourism has stimulat ed the formation of new joint ventures in other sectors (in particular f ood industry, agriculture, and services) to supply them at low 46 Triggered by a substantial increase of nickel prices in the international market, exports by international economic associations accounted for about 59% of total sales of AECEs in 2004.

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143 cost.47 Finally, the share of domestic goods sold to the network of hard currency stores on the island has reached 49% in 2003 (ONE 2004), mainly because of foreign direct investment and cooperative production ag reements in food processing and light manufacturing industry. 0.7 -2.9 -10.7 -11.6 -14.9 0.7 2.3 8.4 2.7 0.2 6.3 6.1 3.0 1.1 2.6 3.0 -20 -15 -10 -5 0 5 10 15 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 beginning of "special period" passage of Helms-Burton law passage of Torricelli law percentage chang e Figure 4-13. Cubas GDP, 1989-2004 (Annual Growth Rates) Source: ECLAC, 1999-2005. *Preliminary figure for 2004. Overall, the Helms-Burton law has been unabl e to detain the flow of foreign capital delivered to Cuba and force major foreign i nvestors to halt their ope rations on the island. Given the importance of these operations for the Cuban economy, it is not surprising that the law has also failed to undermine the proc ess of economic recovery of the communist island (Figure 4-13). The Castro government was able to achieve what it had hoped in the early 1990s: using FDI in selected econom ic activities to stim ulate the development 47 For an analysis of international tourism in Cuba dur ing the 1990s and its effects on the islands economy see: Figueras Prez, Miguel Alejan dro. El Turismo Internacional y la Formacin de Clusters Productivos en la Economia Cubana. In Prez Villanueva, Omar Everleny (ed). Cuba: Reflexiones Sobre su Economia Universidad de La Habana, 2002.

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144 of the country while maintaining nationa l state control wherever possible over investment, areas of business, and strategic sectors. During the deep economic recession that st arted in 1990 (beginning of the special period) and reached the lowest point in 1993, Cubas GDP contracted by 40.1%. Since then, the economic performance of the country has been positive, although the growth rate has fluctuated substantially from year to year. While decreasi ng at an average annual rate of 10% between 1990 and 1993, Cubas GDP averaged about 3.3% during the last decade and 3.7% per year since the enactme nt of the Helms-Burton law in 1996. The economic recovery clearly remains incomplete and far from satisfy ing the needs of the country.48 Yet, the island has steadily recuperated from the severe domestic crisis caused by the collapse of the Soviet Union and manage d rather effectively the external pressure of Helms-Burton. Even some scholars w ho favor the use of unilateral economic sanctions and hold a more negative view of Cubas economic performance recognize that the latter probably has more to do with the economic erro rs of Cuban socialism than with the Helms-Burton legislation (Kaufman Purcell 2002: 16). The Cuban economy is expected to grow about 4% in 2005 thanks to an increase in external financing, the expansion of nickel and oil productions as we ll as international tourism, and some export diversification (EIU, February 2005). Conclusion There is little doubt that the Helms-Burton legislation has complicated the business operations of foreign investors in Cuba. Po ssible links with expr opriated properties and the extreme vagueness of the concept of traffi cking have forced foreign companies to 48 While clawing back most of the ground lost in the early 1990s, the Cuban economy is still below its 1989 level.

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145 keep a low profile, resort to expensive lega l assistance, and disguise or eventually reorganize their activities on th e island. In addition, financin g for investments in Cuba has become much more expensive and difficult to obtain. The confusion and the higher risk introduced by the U.S. law might have convinced some potential investors to w ithhold their projects or look elsewhere for less problematic business environments. It is also conceivable that certain foreign firms with operations in the United States have stayed out of Cuba b ecause of the U.S. policy toward the island, reinforced by Helms-Burton.49 However, the overall invest ment process clearly has not been halted. First, U.S. pressures have been largely ineffective against foreign firms with little or no U.S. exposure. Second, those companie s that have verified that their projects do not involve confiscated properties have moved forward with their investments (McKenna and Kirk 1998: 9). Third, a number of small en terprises entered the Cuban market with the conviction th at, because of their size, th ey can avoid scrutiny of the Helms-Burton laws restri ctions (Campbell 1996: 498). Several foreign companies are engaging in profitable activities in Cuba, expanding their operations on the island, and taking advant age of the lack of U.S. competition. The flow of foreign direct investment remains low, if compared to other Latin American countries, but this seems more a consequence of Cubas limited and sometimes ambiguous commitment to FDI rather than of Helms-Burton. In any case, the main 49 In January 2001, asked to comment on the poor presence of Great Britain in the Cuban market, a British officer gave one of the rare admissions of this particular problem for foreign companies. He reported that Great Britain is the second biggest investor in the world and most of its investments are in the United States; he added that U.S. threat s for possible sanctions have put a brake on the British participation in economic activities on the island. See Opciones Gran Bretagna: Funcionario considera factible incremento de relaciones bilaterales January 28, 2001. More recently Valentn Dez Morodo, president of the Mexican Foreign Trade, Investment and Technology Council (COMCE), said that Mexican entrepreneurs have reduced their investments in Cuba in part because of fear of the Helms-Burton law. See EFE. Empresarios mexicanos no invierten en Cuba por temor a EEUU. January 4, 2005.

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146 economic indicators of international associa tions have shown a constant progress since the early 1990s, thus supporting Cubas claims that the gov ernment has concentrated on investments with results. Foreign investment has helped Cuba find new markets for its main products, increased the competitiveness of Cuban production, and stimulated import substitution. Finally, AECEs and new form s of investment such as cooperative production agreements have boosted domestic supply to the tourist industry and to the increasingly important internal market in hard currency. In summary, the Helms-Burton legislati on has met with some success, but missed its main targets. The law has been modera tely effective in dissuading some foreign companies from entering the Cuban market, but it largely failed to force foreign firms operating on the island to withdraw from their investment. It also failed to hinder the process of economic recovery of the communi st nation and detain the flow of foreign capital delivered Cuba. The presence of foreign direct investment in Cuba has been particularly strong in all the industries that have experienced the hi ghest growth over the past decade, namely oil, electricity generation, telecommunications nickel, and tourism. Substantial amounts of hard currency reaching Cuba from the United States, especially in the form of remittances, also played a major role in re activating the islands economy after the deep recession of the early 1990s. The next chapter provides an analysis of U.S. financial flows in the Cuban economy in the context of tightened U.S. economic sanctions against the government of Fidel Castro.

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147 CHAPTER 5 U.S. FINANCIAL FLOWS IN THE CUBAN ECONOMY During the 1990s, the United States reinfo rced its decades-long economic embargo against Cuba with the enactme nt of the Torricelli law in 1992 and the Helms-Burton law in 1996. Although one of the stated goals of additional sanctions was to offer positive inducements to democratic reforms in Cuba the key objective of U.S. policy was to intensify economic pressure on the Castro government (and eventually hasten its collapse) by curtailing the flow of hard curr ency to the communist island. A spokesman for the U.S. Treasury Department recently ad mitted that sanctions against Cuba were mainly intended to deprive the Castro regime of the financial wherewithal to continue to oppress its people (Kirkpatrick 2003). There has been considerable debate a bout just how effective Washingtons unilateral sanctions against C uba have been in denying hard currency earnings to the Castro government. In light of the availabl e information, it could be argued that the United States has not only been unable to fost er fundamental political reforms in Cuba, but actually has contributed to the recovery of the islands economy from the deep recession of the early 1990s. Despite the ti ghtening of the embargo, significant amounts of hard currency have been channeled in to the Cuban economy through U.S. visitors (mainly Cuban-Americans), remittances sent by Cuban exiles to their families on the island, U.S. telecommunications payments to Cuba, American food exports (sold in government-owned dollar stores), and U.S. investors who hold shares of foreign companies doing business with the government of Fidel Castro.

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148 This chapter begins with an analysis of international tourism in Cuba and the presence of U.S. visitors on the island. It continues with an examination of the importance for the Cuban economy of remittanc es sent from Cuban exiles and payments to the Castro government by U.S.-based co mpanies for telecommuni cations services. Finally, it provides a brief review of recent de velopments in U.S. food sales to Cuba and U.S. investments in foreign companies that ope rate in the Cuban market. Overall, this chapter demonstrates that the United States has played and continues to play quite an important role in the Cuban economy and that a substantial portion of hard currency reaching Cuba is in violation of U.S. regulations. International Tourism and U.S.-Based Travel to Cuba Since the late 1980s, Cuba has targeted tour ism as a priority sector because of its ability to generate foreign exchange. Intern ational tourism is toda y, at least in gross terms, the single most important source of hard currency for the Cuban government. Cuba is again emerging as one of the Cari bbeans most popular hol iday destinations.1 The tourism industry, which was relatively small prior to 1990, has grown at an astounding 13.2% annually (as measured by the av erage increase in the number of tourist arrivals) since the legalizati on of the dollar sector of the economy in 1993, with a period of small decline following the September 11, 2001, terrorist attacks on the United States and a strong recovery in the past two years. Even more important, there has been a si gnificant improvement in the integration between local industries and the Cuban t ourist sector. While ten years ago the overwhelming part of the inputs to the sector had to be imported, local corporations and 1 In 1990, Cuba ranked 23rd among the 25 top tourist destinations in Latin America and the Caribbean. By the end of 2004, the island occupied the eighth place. See Hernndez-Basso Minerva. Dos millones de visitantes cierran el tercer lustro turstico. Opciones December 30, 2004.

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149 especially joint ventures with foreign firm s currently supply a wide range of products (69% of total inputs) such as mineral wate rs, soft drinks and alcoholic beverages, processed meat, omnibuses, air conditioners, te lephones, and electronic equipment. It is estimated that between 100,000 and 150,000 Cubans work directly in the islands tourism industry, with some additional 200,000 indirect work ers (Brundenius, July 2002: 2). 0 500 1000 1500 2000 2500 199319941995199619971998199920002001200220032004 Gross Revenues ($U.S. million) Tourist Arrivals (thousands) Gross revenues per tourist ($U.S. dollar)* Figure 5-1. International Tourism in Cuba, 1993-2004 Sources: Anuario Estadistico de Cuba 2003; Oficina Nacional de Estadsticas (ONE), 2005. Calculations of the author Figure 5.1 reports data on gross revenues fr om international tourism, number of tourist arrivals and gross revenues per tour ist from 1993 to 2004. According to official figures, arrivals rose from 546,000 in 1993 to over a million in 1996, and broke the 2 million mark for the first time in 2004 (up 7.5% from 2003). Similarly, gross revenues from tourism increased from $720 million in 1993 to more than $1.9 billion in 2000, making the tourist industry, as Cuban official s often describe it, the engine of the islands economy. For 2004, the National Stat istical Office (ONE) reported that gross

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150 revenues from tourism were about 2.3 billion, up 18% from the previ ous year. In terms of tourist expenditures, gro ss revenues per tourist per ye ar increased from $948 in 1991 to $1475 in 1995. Since then, however, annual gr oss revenues per tourist have decreased steadily, and in 2001 they were $1037, just 9% a bove the 1991 level. This suggests that if there are not other avenues for the economy to grow in the future outside of tourism, the Cuban economy might plateau once the tourist sector reaches its maturity. In 2004, gross revenues per tourists were appr oximately $1151, only 11% above the 2001 level and about 22% below the 1995 level. Restrictions on travel from the United Stat es to Cuba have been a key component of U.S. policy toward the Castro government for most of the last forty years, although they have changed many times since 1963. During the 1990s, President Clinton repeatedly made changes to travel regulat ions in response to actions by the Cuban government. As a reaction to the balsero crisis of the summer of 1994, he banned family visits by Cuban-Americans, who were previous ly allowed to visit their close relatives on the island, except in cases of extreme human itarian need. In 1996, after the shooting down of two U.S. planes flown by Cuban exiles he suspended direct flights between the two countries (Robyn et al. 2002: 2). However, in 1999, as part of a new policy aimed to promote people-to-people contacts, he streamlined travel procedures for students, athletes, artists, and other groups and individuals to vi sit Cuba. Clintons policy, inaugurated in the wake of P ope John Paul IIs historic visit to Cuba, also allowed resumption of charter flights from Miami to Ha vana as well as new direct flights from New York and Los Angeles. These changes were mainly intended to facilitate family

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151 reunions between Cuban-Americans and th eir families on the island (Eckstein and Barberia 2001: 12). In order to travel to Cuba, individuals s ubject to U.S. law must be authorized by a general license (which requires no written au thorization) or a specific license (which requires approval) from the Office of Foreign Assets Control (OFAC) of the Department of the Treasury. Prior to th e new rules introduced in the su mmer of 2004, the majority of individuals traveling under a general license were CubanAmericans who visited their families on the island. Others who could tr avel without specific documentation from OFAC included U.S. government officials, full -time journalists, prof essional researchers, and academics. Alternatively, a specific license was require d for businessmen, free-lance journalists, and members of religious organizations. In March 2003, the Bush Administration introduced regulations on travel (and remittances) that allowed more Cuban-Americans to visit relatives on the island once a year (a specific license was nonetheless requi red for more than one visit per year) and forbade trips to Cuba that combined non-credit educational activities with people-topeople contacts, which had become a loophole fo r groups to travel to Cuba when the educational aspect was barely evident. The rules eliminated the previously established requirement that Cuban-American visits ta ke place only in cases of a self-defined humanitarian purpose, such as a sick or dyi ng relative, thus easing the conditions under which U.S. citizens of Cuban descent could tr avel to Cuba (Lexington 2003). On June 30, 2004, the Bush administration implemented new measures against Cuba aimed to stem the flow of hard currency reaching the isla nd and to hasten the end of Fidel Castros rule. In addition to further restrictions fo r U.S.-based educationa l travel to the island,

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152 these measures prohibit Cuban-Americans from visiting relatives in Cuba more than once every three years (a specific license is now requi red for every trip), limit their stay to just 14 days, and reduce the amount they can spe nd during their visits from $167 to $50 per day. Table 5-1. U.S. Visitors to Cuba, 1990-1998 (thousands) 1990 199119921993199419951996 19971998 U.S. citizens not of Cuban descent 7.4 11.210.014.717.920.727.1 34.946.8 Cuban-Americans* 2.6 4.614. 619.433.539.358.3 71.794.9 Total 10.0 15.824.634.151. 460.085.4 106.6141.7 Rank** 7 766544 44 Sources: Oficina Nacional de Estadsticas (ONE) 1996, 1998, and 2000; Alvarez A. and Amat D. El mercado emisor turistico estadounidense hacia el Caribe. Unpublished diploma work, Universidad de La Habana, 1996; World Tourism Organization. Yearbook of Tourism Statistics 2003 and previous editions. Estimates of the author ** The rank refers to the position of the United States among nations whose citizens visit Cuba Table 5-1 reports data on U.S. visitors to Cuba for the period between 1990 and 1998. Notwithstanding the travel restrictions, th e number of U.S. visitors to the island has increased significantly during the 1990s. According to official Cuban statistics, which include only U.S. citizens of non-Cuban origin, travelers from the United States rose from about 7,000 in 1990 to more than 46,000 in 1998. Regarding CubanAmericans, the actual number of visitors grew from approximately 2,600 in 1990 to almost 40,000 in 1995. Between 1996 and 1998 (when Clinton banned direct travel), visits by Cuban-Americans to Cuba almost doubled from 58,300 to 94,900.2 In short, whereas in 1990 about 10,000 U.S. citizens trav eled to Cuba, representing the seventh largest group among foreign travelers, in 1998 this number jumped to more than 140,000. 2 Eckstein and Barberia (2001: 13) argue that there is contradictory information about Cuban-American visits to Cuba. According to the authors, while Cuban sources report that individuals of Cuban descent visiting the island between 1994 and 1996 were about 20 ,000 per year, U.S. sources estimate that the actual number was approximately 40,000 in 1994 and 100,000 per year between 1995 and 1998.

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153 By 1995, the United States was already the fourth largest source of visitors to the island after Canada, Italy, and Spain.3 Table 5-2. Tourist Arri vals by Origin, 1999-2003 19992000200120022003 Canada 276,346307,725350,426348,468452,438 United States U.S. citizens (ncd)* Cuban-Americans** 182,44562,345 120,100200,29876,898 123,400203,98978,789 125,200219,34677,646 141,700229,52984,529 145,000 Italy 160,843175,667159,423147,750177,627 Germany 182,159203,403171,851152,662157,721 France 123,607132,089138,765129,907144,548 Spain 146,978153,197140,125138,609127,666 United Kingdom 85,82990,97294,974103,741120,866 Mexico 70,98386,54098,49587,58988,787 Others 373,591424,095416,493358,090406,500 Total 1,602,7811,773,9861,774, 5411,686,1621,905,682 Sources: Anuario Estadistico de Cuba 2003; ONE 2005; EIU 2001 and 2003; U.S.-Cuba Trade and Economic Council, 2002; Cuban Ministry of Tourism, 2003; World Tourism Organization. Yearbook of Tourism Statistics 2004 edition; Conversations with Cuban economists. Individuals not of Cuban descent (ncd) ** Estimates of the author In the last few years, the presence of th e United States in the Cuban tourist market has become increasingly important. Table 5-2 presents data on arrivals to Cuba from selected countries for the period between 1999 and 2003. In 1999, an estimated 182,000 U.S. citizens (about 120,000 were Cuban-Ameri cans) traveled to Cuba, more than from any other country except Canada. Since th en, visits from the United States have increased continually, conso lidating U.S. citizens as th e second largest group among foreign travelers. For instan ce, tourists from some Europe an countries such as Germany and Spain have declined significantly since 2000. Instead, approximately 125,000 3 In 1995, Canada was the most important source of visitors to Cuba (143,541), followed by Italy (114,767), Spain (89,501), and the United States (59,972). In 1998, Canadian travelers to Cuba numbered 215,644, followed by Italians (186,688), Germans (148,987), and individuals from the United States (141,678).

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154 Cuban-Americans and 79,000 U.S. citizens of non-Cuban origin visited Cuba in 2001, representing about 11.5% of to tal arrivals to the island. About 50,000 were tourists who traveled via third countries, with or without their governments aut horization (Economist, January 4, 2003). As observed by a Canadian official, U.S. touris ts are quite visible among visitors arriving in Cuba on flights from Montreal, Toronto, Kingston, Nassau, and Mexico City (USITC 2001). Whats more important, U.S. travelers are believed to spend about $200 million a year in Cuba (Oppenheimer 2002). Thus, even w ith sanctions in place, the United States is a valuable source of hard currency for the Cuban tourism industry, providing almost 11% of its total gross revenues in 2001. While the total number of in ternational arrivals to Cuba declined by 5% in 2002, Cuban-Am ericans were one of the few groups of foreign travelers to the is land (including tourists from the United Kingdom) that registered a substantial growth that y ear. A record number of around 230,000 U.S. citizens visited Cuba in 2003. For U.S. citizen s not of Cuban descent, arrivals peaked at about 85,000 (an increase of 8.9% over 2002), with an additional 145,000 CubanAmericans visiting their families in 2003. Yet, Bushs most recent restrictions on U.S.based travel to the island seem to have ha d a significant impact on the number of trips taken to Cuba from the United States. The U.S. State Department rev eals that, from July to December 2004, the number of reservations on charter flights to Cuba plummeted by more than half as compared to the same period in 2003. The decline was particularly marked during Christmas time, when a 75% drop took place (Lorente 2004). There is no doubt that the increasing numbers of U.S. visitors to Cuba in the last few years have been triggered by Clintons people-to-people contacts policy, inaugurated

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155 in January 1999. However, it is importan t to take into consideration that many individuals from the United States visit Cuba through third co untries without U.S. travel permits, technically violating U.S. economic sanctions prohibiting spending money for unlicensed purposes. Licensed travelers are currently allowed to spend up to $167 per day for hotels, meals, and ground transportation.4 Since 1994, the number of individuals subject to U.S. law traveling to Cuba, but not authorized from OFAC to do so, has increased on average 19% to 21%, while lega l visits rose just by 9% to 11%. For instance, it is reported that approximately 22,000 U.S. citizens visited Cuba in 2000 without authorization from OFAC (USCTEC 2002). Other estimates put the number of illegal visits to Cuba by U.S. citizens between 40,000 and 50,000 per year, representing up to one fourth of total U.S. travel to the island. Cuban auth orities, eager to accept U.S. visitors paying in dollars, do not stamp the pa ssports of Americans, leaving no official trace of their presence (Sullivan 2001). One 33-year old artist from Minneapolis said she was visiting Toronto when she saw there was a flight to Havana. So she bought a ticket and spent a week touring the ci ty. Another U.S. citizen from Minneapolis said he headed illegally for Cuba by way of Cancun, Mexico. He brought gifts for locals and spent about $2,000 in cash during his stay because the tr avel ban prohibits Am ericans from using credit cards on the is land (Moreno 2003). Since President George W. Bush took office in 2001, OFAC has been cracking down on those who travel to Cuba wit hout permission. During the Clinton administration, OFAC took steps to levy fines (the average fine is $5,500) on between 46 and 188 Americans a year. That figure jumped to 700 in 2001 (Houston Chronicle, 4 Licensed travelers can spend additional money for teleph one calls and for transactions directly related to the activities for which a license was issued.

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156 March 9, 2003).5 However, these fines affect fewer than 3% of the total number of violators per year, and they ta rget primarily U.S. citizens of non-Cuban descent. As noted by U.S. Representative Jeff Flake (R-Ariz ona), U.S. authorities pay no attention to Cuban-Americans even as they harass and level fines agai nst Americans who go to the island. While being allowed to travel for a self-defined humanitarian need, their relatives always seem to get sick around the same time, like Christmas and other major holidays (Eaton 2003). In addition, there are several cases of Cuban-Americans who are able to visit Cuba twice a year without asking OFAC for a specific license. Asked to comment about how she was able to visit C uba twice in 2000 to meet a newborn nephew and to take a vacation on the beach, a CubanAmerican replied: Coming to Havana is very easy. Although I am a U.S. citizen, I am required to have a Cuban passport. So I use my (U.S.) passport to enter and leave the United States and the third party country, while using my Cuban passport for the rest of the journey (IPS, November 1, 2001). In short, whether they target U.S. citizens of non-Cuban descent or Cuban-Americans, travel restrictions are unable to stem illegal travel to Cuba. Even admitting that the threat of prosecution might have discouraged some potentia l travelers, it is virtually impossible for the U.S. government to prevent its citizens fr om visiting Cuba and spending money there in violations of U.S. regulations. Remittances to Cuba As a result of the deep economic recession that threatened Cubas survival in the early 1990s, the Castro government decrimin alized both the possession and the use of hard currency (especially U.S. dollars) in August 1993. The government also legalized 5 Information on OFAC civil penalties enforcement for violations of travel-related transactions with respect to Cuba is available at: http://www.ustreas.gov/offi ces/enforcement/ofac/civpen/penalties/index.shtml (last visited November 2005).

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157 dollar-denominated remittances under its 1994 monetary reform program. Since then, family remittances, mainly sent from CubanAmericans, have become an important source of supplemental income for many Cubans Even more important for the purpose of this study, these practices have signifi cantly boosted the domes tic dollar market in Cuba. As observed by Jatar-Hausmann (2000), the legalization of the use of foreign currency encouraged more family remittances, and the high prices at government-owned dollar stores acted as a hidden sales tax on remittances, effectivel y allowing the Cuban authorities to obtain access to that money. In light of this development, several scholars contend that money sent from abroad has been the single most important factor in reactivating the Cuban economy in the second half of the 1990s. Pedro Monreal, an academic from the isla nd, argues that in recent years Cuba has become increasingly dependent on remittances and donations from abroad. He specifies that, in strict terms, the Cuban economy ca nnot be qualified as an economy that depends fundamentally on remittances because other important activities such as tourism and mining have emerged. Nevertheless, he conc ludes that the importance of money sent from abroad is beyond question. In fact, in ne t terms, remittances are the biggest source of foreign exchange for the country, more th an tourism and sugar (Monreal 1999: 50). Many of those who analyze data on reve nues from tourism (about $2.3 billion in 2004) believe that the tourism industry is the main generato r of hard currency for the Cuban economy. However, it must be noted th at these are gross figures. In net terms, revenues are significantly lower. In March 2001, Carlos La ge estimated the cost per dollar of gross income from tourist activities at $0.76.6 This indicator is very high and 6 Lage, Carlos. Declaration on Noticiero Nacional de la Television Cubana (Cuban National Television broadcast). March 18, 2001.

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158 refers only to the direct cost in dollars, not the indirect co st incurred by the state in the tourist sector. Also consid er that domestically produced goods for tourism have an imported (indirect) component in dollars, wh ich implies that the cost per dollar of gross income would be even higher. Direct and in direct costs per dollar have been estimated by some economists at more than $0.80, which w ould mean for the country a net result of just $0.20 for every dollar of gross income from tourist activities (Economics Press Service, May 2001). Such an estimate has been recently confirmed by Cuban Vice Minister of Tourism Marta Ma iz. In May 2003, in an interv iew for the Cuban magazine Bohemia Maiz said that in 2002 income from tourism was $52.2 million less than in 2001, with a cost of USD 80 cents for every do llar captured by the c ountry (Farias and Tesoro 2003). Americans can send no more than $300 every three months to friends and relatives in Cuba. Prior to the OFAC regulations rega rding travel and remittances to Cuba enacted in March 2003, a cap of $300 in remittances wa s also applied to licensed travelers to Cuba, who were required to produce the visa recipients full name, date of birth, and the number and data of issuance of the visa or ot her travel authorizatio ns issued. A licensed traveler was authorized to carry only remittan ces that he or she was authorized to remit and could not carry remittances made by others. Since 1999, the U.S. government has also authorized several companies in the Unite d States to legally tr ansfer money to Cuba by relying on local individuals in Cuba who are contracted to deliver the money. The three most established businesses are West ern Union, MoneyGram, and El Espaol. Within the limit of $300 per trimester, senders in the United States (who must be at least 18 years old) can send smaller amounts, such as $100, more than once in that period. But

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159 they have to pay a fee (around $24 dollars in February 2004) each time the money is transferred. The OFAC regulations of March 2003 allowed U.S. authorized travelers to Cuba to carry as much as $3,000 in household rem ittances, up from $300 each quarter. The increased amount of remittances was intended to help up to 10 households per traveler (San Martin 2003).7 However, the new measures on remittances implemented by the Bush administration on June 30, 2004, reestabl ish the cap of $300 dollars for licensed travelers and limit money transfers only to im mediate relatives, excluding aunts, uncles, and cousins, all of whom were formerly on th e list of cash recipients. Additionally, these measures ban U.S. citizens from including clothing and other such items in their gift parcel deliveries to Cuba; th e parcels contents are limite d to food, medicines, medical supplies, and receive-on ly radio equipment. Estimating the flow of remittances to Cuba is difficult, given the lack of reliable information. Official counts (as report ed by the Economic Commission for Latin America and the Caribbean, or ECLAC) make inferences from net current transfers in Cubas balance of payments, which are mostly made up of remittances and, to a lesser extent, of donations. Nonetheless, it is unclear how the Cuban government records remittances under net transfers. Some Cuban economists contend that these data include only transactions thorough official mechan isms, such as Western Union, Transcard,8 and 7 The OFAC amendments not only increased the limit on the amount of remittances that could be carried to Cuba by an authorized traveler, but also introduced the following techni cal changes: a) authorized licensed remittances to be made from blocked inherited funds; b) restricted quarterly remittances from being sent to senior-level Cuban government officials or senior-lev el Cuban Communist Party officials; c) simplified rules on authorization for certain emigration-related remittances. 8 An ever-increasing number of Cubans are turning to the Transcard (sold by a Canadian company) as a fast, efficient, and less costly alte rnative to receiving remittances via Western Union. Individuals outside of Cuba can establish accounts in any Transcard office throughout the world and designate a Cuban

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160 other services, excluding a vari ety of informal money transfers from abroad carried out through entrusted entrepreneurs (mules), as well as friends and relatives visiting the island.9 Other economists argue th at Cuban authorities use formal transfers only as a reference, to which they add estimates on the basis of sales in dolla r stores, exchanges of dollars for pesos in money exchange houses ( casas de cambio or CADECA), and hoarding (money that people guard in the house fo r preservation or future use). But they quickly recognize that figures should be inte rpreted with caution. According to these economists, calculations exclude sales in tour ist outlets (where Cubans also buy products) and make use of unreliable surveys to estimate the level of hoarding in Cuba.10 Finally, some scholars claim that figures under net tr ansfers are calculated as the turnover of dollar shops minus dollar earnings accounted fo r by official payments of dollars, mainly through incentive scheme s (Barberia 2002: 13). Whatever the method used by the Cuban gove rnment to record transactions under net current transfers, it appears that offici al counts of remittances highly underestimate the amount of money sent from Cubans abroad to their families on the island. Although it is virtually impossible to provide accurate estimates of remittances to Cuba, the best way to proceed is to analyze the main sour ces of hard currency for the Cuban population and its possible uses as pr esented in Figure 5-2. national as the beneficiary, who would then be issued a credit card to access the account and make purchases. See U.S.-Cuba Trade and Economic Council (USCTEC). Economic Eye on Cuba 27 October 1997 to 2 November 1997. It must be noted that transactions with Transcard are routed via Canadian banks, thus avoiding control from U.S. authorities. 9 Interview with a Cuban economist in Havana, June 9, 2003. 10 Interview with a Cuban economist in Havana, May 20, 2003.

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161 Figure 5-2. Main Sources of Hard Currency and Possible Uses for the Cuban Population Source: Authors elaboration from Aguilar Trujillo, Jos Alejandro. Las Remesas Desde el Exterior: Un Enfoque Metodolgico-Analtico. Cuba Investigacin Econmica INIE, v.7, n.3, July-September 2001, p.100. (a) CUC-only stores since November 2004 (b) Exchanges of CUCs for pesos since November 2004 *A thicker arrow indicates a larger amount of hard currency received and used by the Cuban population It should be noted that dolla r stores no longer exist in C uba as the U.S. dollar was taken out of circulation on November 8, 2004. Cuban citizens may continue to possess U.S. dollars, but using the latt er in commercial transactions or retail is now prohibited. Cubans must rely on the convertible peso or CUC for purchases of goods in hard currency stores or purchases of regular pe sos in money exchange houses. The CUC, pegged to the U.S. dollar since its introduc tion in 1994, was revalued by 8% against all international currencies in April 2005 (S padoni, April 18, 2005). In this study, the convertible peso is referred to as hard m oney to distinguish it from the regular peso, which circulates in Cuba at a current rate of 24/25 pesos per CUC. Technically, however, the CUC is not a hard currency because its va lue is not recognized outside the island. SOURCE USE Remittances Income of the private sector for house-rental, restaurants, taxis, and other services Tourism-related tips Contracts abroad and savings in travel abroad Payments for workers in j oint ventures, embassies and foreign offices Incentive payments in convertible pesos (CUCs) Cuban population Purchases in government-owned dollar stores (a) Tax payments and contributions Bank deposits House hoarding Exchanges of dollars for pesos in CADECA (b) Purchases in free farmers markets

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162 Experts believe that remittances benef it as many as 30% of Cubas 11 million citizens and constitute, without any doubt, the most important source of hard currency for the population of the island (Johnson 2003). Seve ral jobs in the tour ist sector can also bring significant amounts of hard currency tips to Cuban workers, su ch as cab drivers, waiters, bartenders, and other hotel employees Similarly, many Cubans in the private sector can earn the equivalent of hundreds of dollars per month for services such as house rental, restaurants, and taxis.11 Finally, Cubans who work in joint ventures, embassies, foreign offices, and in certain key industries such as tourism, nick el, oil extraction, and tobacco, receive relatively small payments in ha rd currency. In short, jobs that can earn hard currency salaries or tips from forei gn businesses and tourists have become highly desirable in Cuba. As to the potential use of hard currency, prior to November 2004 the large majority of Cubans used dollars to make purchases in government-owned dollar stores (mainly for food and clothes) or exchanged them for re gular pesos in CADECA. Currently, those Cubans who receive dollars or other currenc ies from abroad must exchange them for CUCs in order to carry out these transactions Relatively small amounts of hard currency are utilized to make purchases in free fa rmers markets, make tax payments and contributions, and open accounts in local banks. The level of hoarding also may be quite significant, but the lack of information makes it impossible to assess reliably the extent of this practice.12 11 Cubans with contracts abroad such as musicians, technicians, and other professionals may also obtain salaries in hard currency. However, very few people are included in this category and the amount of dollars generated by these activities, while significant at the individual level, remains negligible overall. 12 Interestingly, some Cuban economists argued that the level of hoarding in Cuba could be as high as $500 million in 2003. Interview with a Cuban economist in Havana, May 20, 2003.

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163 Using available information on sales in dollar stores and dollar purchases by CADECA, it is possible to estimate the level of remittances to Cuba. As noted before, remittances are the most important source of hard currency for the Cuban population, but they are not the only one. Thus, in order to estimate the amount of money sent from Cubans abroad to their families in the island, we must consider other ways by which Cubans procure hard currency. Table 5-3 offers a sample calculation of remittances for the year 2001. Figures for sales in dollar stor es are based on official data provided by the Cuban government, while the other amounts ar e estimates based on conversations with Cuban economists. Table 5-3. Calculation Sample of Remittances in 2001 ($U.S. million) Sales in dollar stores 1,220 Dollar purchases by CADECA 100 Total 1,320 From this amount subtract: Income of the private sector of which House-rental Restaurants, taxis, and other services 70-80 45-50 25-30 Tourism-related tips (4-5 dollars a day x 100,000 direct workers in the tourist sector) 145180 Contracts abroad, payments to workers, incentive payments in dollars and convertible pesos, etc. 25-30 Total remittances 1030-1080 Sources: ONE. Ventas de la produccin nacional con destino a tiendas y turismo, 2002; Estimates of the author based on conversations with Cuban economists. Total sales in dollar stores in 2001 were about $1.2 billion, wi th an additional $100 million of dollar purchases by CADECA. From this amount, we must subtract the dollar income of Cubans who provide services such as house rental,13 restaurants, and taxis. 13 It is reported that in 2003 there were 2,705 people with licenses who, charging dollars, rented rooms to foreigners in Havana, where 80-85% of all Cubas dollar-based renters are located. In addition, there were

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164 This amounts to about $70 to $80 million. We must also deduct tourism-related tips (assuming that direct workers in the tourist sector earn on average $4 to $5 dollars a day, the total amount would be approximately $145 to $180 million), contracts abroad, and incentive payments in dollars and conve rtible pesos (about $25 to $30 million). As shown in Table 5-3, total remittances to Cuba in 2001 were an estimated $1,030 to $1,080 million, substantially higher than the amount reported by sources like ECLAC that rely on Cuban government balance of pa yments data. If ECLAC figures (just $730 million for 2001) are correct, then the level of transactions in dollar stores and CADECA ($1,320 million) implies that, in addition to remittances, Cubans should receive about $600 million a year in hard currency revenues. This is highly improbable. Admittedly, hard currency sources unrelated to remittances may not be negligible (to be fair, we can also subtract purchases by diplomats, forei gn residents, and some tourists from dollarstore sales), but they can hardly make up fo r the difference between the amount of money transfers calculated by ECLAC, and the sum of sales in dollar stores and transactions in exchange houses. Cuban economists estimate that foreign exchange income from activities unrelated to remittances can, at best represent about 20% of all dollar revenues of the Cuban population.14 Using sales in dollar stores and dollar purch ases by CADECA as a reference, Table 5-4 provides estimates of remittances to Cuba for 1995 to 2003. Figures from ECLAC are also included for comparison. Since the legalization of dollar holdings in 1993, money remittances to Cuba have increased si gnificantly. ECLAC reports that individuals an estimated 5,200 unlicensed renter s around the country who charged dollars or other foreign currencies. See Grogg, Patricia. Landlords on the verge of a nervous breakdown. Inter Press Service (IPS), July 4, 2003. 14 Interview with a Cuban economist in Havana, June 3, 2003. If remittances represent about 80% of all dollar sources for the Cuban population, then they would be approximately $1,050 million in 2001.

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165 of Cuban descent sent more than $500 milli on to their relatives on the island in 1995. This figure topped out at $740 million in 2000. Almost 90% of remittance dollars arriving in Cuba came from the United States (Orozco 2002: 1). Sa les in dollar stores have experienced a similar expansion, but th ey increased at much higher rates between 1997 and 2001. In 1997, the total value of sales in dollar stores was $867.4 million, while in 2001 it reached $1,220 million. This suggests that the actual amounts of remittances to Cuba for the period 1997 to 2001 might have been much higher than those reported by ECLAC. Whereas remittances, as calculated by ECLAC, increased only 9% during this period, sales in do llar stores rose by more than 40%. Purchases by CADECA also grew by approximately 25% between 1998 and 2001. Table 5-4. Sales in Dollar Stores, Dolla r Purchases by CADECA and Remittances to Cuba, 1995-2003 ($U.S. Million) 1995 199619971998199920002001 2002*2003* Sales in dollar stores 537 7448671,0271,1091,2031,220 1,3201,380 Dollar Purchases by CADECA* -----758290100 100100 Net Current Transfers 646 744792813799740813 820915 ECLAC estimates of remittances 537 630670690700740730 ---Authors estimates of remittances 537 6407508809501,0301,050 1,1301,180 Sources: ONE. Ventas de la produccin nacional con destino a tiendas y turismo. 2002 and earlier editions; Cuban Central Bank, 2002; ECLAC, 2002 and 2003. *Estimates of the author based on conversations with Cuban economists. The author estimates that remittances were $750 million in 1997, $950 million in 1999, and more than $1 billion since 2000. Th e assumption of significant undercounts in the calculation of remittances is also consistent with the grow th of Cuban-American visits to the island after Clintons inauguration of the people-to people contact policy in early 1999 (see Table 5.2). We should remember that a large part of money transfers is

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166 undertaken in the gray area of the informal tourist sector. Unoffi cial estimates for 2002 put total sales in dollar stores at $1.320 m illion and remittances to Cuba at about $1,130 million (up by almost 8% from the previous y ear). Further evidencing such an increase are reports that many new items were sold in dollar stores in 2002, including construction materials (mainly cement), freezers, and f ood products. Only CIMEX, the corporation that runs more hard currency outlets than any other Cuban firm, announced sales of more than $600 million that year.15 CIMEX officers also reveal ed that Western Union, which provides money-transfer services to Cuba so lely from the United States, registered a record of $50 million in remittance transactions in December 2002 alone.16 In 2003, sales in dollar stores and remittances totaled about $1,380 million and $1,180 million, respectively.17 CIMEX sold products to dollars stor es for a total value of approximately $740 million, followed by other major Cuban corporations such as TRD Caribe ($250 million in sales) and Meridiano-Cubalse ($180 million).18 Accurate estimates of remittances to Cuba are inevitably complicated by the existence of well-developed informal mechan isms for money transfers. Instead of making use of formal wire transfer servic es (fees charged by U.S. based companies remitting to Cuba are the highest among all ope rators engaged in legal money transfer to 15 Interview with a Cuban economist in Havana, June 18, 2003. At the end of 2000, the dollar market in Cuba was composed of more than 5,500 establishments, including stores, restaurants, cafeterias, bars, and other commercial services. Fur further details see: Ma rquetti Nodarse, Hiram. El Proceso de Dolarizacion de la Economia Cubana: Una Evalucion Actual. Cent ro de Estudios de la Economia Cubana (CEEC), April 2004. 16 Interview with a Cuban economist in Havana, May 20, 2003. 17 The Economist Intelligence Unit reports that sales in dollar stores peaked at around $1.3 billion in 2003. Economist Intelligence Unit (EIU). Country Profile Cuba 2003/2004. October 2003. Cuban sources notes that the total value of sales could have been higher. For instance, Hiram Marquetti Nodarse, an academic from the island, obse rves that, according to estimates for the end of 2003, total sales in retail stores operating in dollar exceeded $1,350 million. Marquetti 2004. 18 Interview with a Cuban economist in Havana, June 22, 2004.

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167 Latin American countries),19 U.S. citizens of Cuban descent tend to rely on relatively inexpensive and more user-friendly informal remittance channels (Eckstein 2003: 15). It is well known that a huge flow of remittances arrive on the island in the luggage of friends, relatives, or entruste d agents. The latter, usually referred to as mules, are entrepreneurs who travel frequently to the island as tourists and without a license to operate as a business. They carry both m oney and packages of goods to Cuban relatives of the senders for cheaper fees than the one s charged by official ag encies. A November 2001 survey carried out by the Inter-Ameri can Development Bank (IADB) shows that only 32.1% of U.S. citizens of Cuban descent use Western Union to transfer remittances, while more than 46% prefer to send money w ith persons who are traveling to the island. In terms of the volume of the economic tran sactions, it is estimated that informal mechanisms capture up to 80% of the total fl ow of money transfers to Cuba from the United States (Orozco 2002: 4-5). Some analysts have attempted to estimate the amount of remittances sent to Cuba by tracking the activities of money transfer companies operating on the island from the United States and Canada, and by carrying out extensive interviews with officials of those companies, travel agents, and other entrepreneurs. Rece nt figures from IADB, which do not differ significantly from the aut hors estimates, put the total amount of remittances to Cuba at $930 million in 2001 and $1,138 million in 2002, an increase of about 22% over the previous year (IADB 2003) These findings are extremely surprising in light of the economic downturn of the U.S. economy following the terrorist attacks of 19 In February 2004, the cost of sending $200 in remittances to Cuba from the United States through formal transfer services was 12.11%, as comp ared to an average cost of 7.9% for the entire Latin American region (IADB 2004).

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168 September 2001. The IADB also reports th at remittances to the island were $1,194 million in 2003, up around 5% from 2002 (IADB 2004). There is some evidence that money transf ers from the United States oftentimes violate the limit of $1,200 per year on remitta nces to Cuba. Whereas more than 50% of Cuban respondents in the November 2001 IADB survey said they send less than $100 per transaction, interviews with mules said that, on average, they carry more than $200 per individual package.20 Given that most of the mules travel twice a month using different routes, it is likely that transacti ons with these entrepreneurs frequently exceed the $1,200 annual cap on remittances for U.S. c itizens. As further proof, Cuban sources indicate that the number of U.S. citizens of Cuban descent sending money back home might be as high as 520,000 (Aguilar Trujillo 2001: 98). If we divide the authors estimates of remittances (to be more pr ecise, we can deduct 10% because not all remittances come from the United States) by the estimated number of Cuban-Americans who regularly send money to their families, we can see that money transfers to Cuba from the United States were on aver age $1,817 per person in 2001, $1,955 in 2002, and $2,042 in 2003. Confirming these results, so me experts have argued that Cuban Americans currently send an annual aver age of $2,000 per person to Cuba using nontraditional channels such as mules or other entrusted agents (Economics Press Service, February 2004). It is well known that many Cuban-American s use services in foreign countries to engage in special transactions that circumvent the cap on remittances. Asked to comment about his remittance activities, a Cuban exile from New Orleans revealed in 20 Personal conversation with Manuel Orozco, Project Director for Central America, Inter-American Dialogue, April 5, 2003.

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169 1997 that he had sent $200 dollars back home to Cuba every month for the past 15 years using a Canadian company (Hegeman 1997). Unlimited informal transactions are currently facilitated by the emergence of a new web-based money transfer service, Cash2Cuba, which reduces commissions and incr eases the speed of transfers to Cuba. The service, based in Canada, facilitates informal practices by providing registered Cuban recipients a card to make cash withdraw als. More specifically, the remitter can send money that the recipient in Cuba withdraws in cash at banks or official exchange businesses with a local credit card i ssued by the Cuban corporation CIMEX. Merchandise can also be purchased by credit ca rd in Cubas retail st ores in hard currency (Arreola 2002). In its first month of ope ration in December 2002, Cash2Cuba reported a volume of transfers of $320,000 and 10,000 regi stered users (EIU, February 2003). As stated before, U.S.-based travel to Cuba appears to have dropped considerably last year, mainly as a result of Presiden t Bushs new restrictive measures on Cuban American visits and remittances to the isla nd implemented in the summer of 2004. With fewer U.S. citizens traveling to Cuba, and tig htened rules on money transfers, one would expect a sharp fall in hard currency flows reaching the island from abroad. A recent study by ECLAC, instead, suggests that remittan ces to Cuba have increased in 2004, thus raising doubts on the overall e ffectiveness of U.S. policy. According to ECLAC, net current transfers in Cuba's balance of paym ents were about $1 b illion in 2004 (ECLAC 2004: 128), up almost 10% from 2003 ($915 million). Although official counts as reported by ECLAC remain questionable for th e reasons previously discussed, there are at least three plausible explanations for such potential development.

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170 First, many U.S. citizens of Cuban descen t anticipated Bush's restrictions, which were announced in early May but went into effect two months later, by delivering more money to their relatives on the island. For instance, it is concei vable that many CubanAmericans who traveled to Cuba in early su mmer, to beat the June 30 deadline, carried enough remittances to satisfy their family member s' needs for the rest of the year. Prior to the deadline, U.S. authorized traveler s to Cuba could carry as much as $3,000 in remittances. The cap was then reduced to just $300. In addition, those Cuban-Americans who had planned family visits to Cuba, but were unable to travel because of the new rules, found themselves with a dditional money to remit to th eir relatives. It cannot be excluded, therefore, that some exiles tried to remit not onl y the amount of dollars they can usually afford to transfer, but also part of the money they saved on a trip that never came. And since U.S. regulations allow American citizens to send only $300 every quarter to immediate family members in Cuba, stiffened rules on travel and money transfers might have stimulated illegal remittances through unofficial mechanisms. Finally, the potential growth of remittances to Cuba could have been triggered by money sent either by the incr easing number of Cubans resi ding in Europe or by U.S. citizens who use businesses located in third countries, such as Canada-based Transcard and Cash2Cuba, to circumvent U.S. restrict ions. In August 2004, the Castro government launched a new money-transfer service (SerCuba) that allows people in the United States or elsewhere to forward remittances to Cuba n nationals via Spain and Italy or through the company's Web site (Bachelet 2004). In late December 2004, the Swiss company AWS Technologies inaugurated its own Web site for money transfers to the island, through which any user can send funds to relatives in Cuba by using a credit card (EFECOM,

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171 December 24, 2004). In sum, ECLAC's latest figures on money transfers to Cuba are preliminary estimates that should be taken with caution. Yet, if confirmed, they highlight an extremely worrisome scenario for the United States. If remittances were indeed higher in 2004, then U.S. policy would have succeeded in keeping Cuban families apart while doing little to stem the hard currency flowi ng into the hands of Cuban nationals, and from there into the coffers of the Castro government. Limitations on remittances are perhaps the most contradictory element of current U.S. policy toward Cuba. While being part of a series of U.S. restrictions intended to squeeze the Castro government economically, re mittances were Cubas fastest growing hard currency source during the 1990s. To put things into perspective, Figure 5.3 provides rough estimates of Cuba s four largest sources of hard currency revenues (net figures) in 2001 and 2002. The total amounts are based on the authors data, figures released by the Cuban Vice President Carlos Lage and Cuban Vice Mi nister of tourism Marta Maiz, and calculations of some Cuban economists. Remittances are a source of fresh capital for the Cuban population, but in terms of revenues, they do not constitute a net benefit for the Castro government. The latter obtains access to remittances mostly thr ough sales in dollar stores (now CUC-only stores), and obviously there are costs involved in proc uring the goods exchanged in these transactions. In selling products at dollar st ores, the Cuban government applies an ideal mark-up (hidden tax) of 240%. This mean s an item that costs $1 dollar to produce domestically (or import), with a 240% tax, would sell for $2.4 dollars (Eckstein 2003: 17). Thus, net revenues of dollar stores are a bout 58% of total sales. Some remittances also end up in CADECA, farmers markets, a nd hoarded stashes. Nova Gonzlez (2001),

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172 an economist from the island, has estimated th at net revenues from remittances are about 63-64% of the total amount of money sent to Cuba. 672368 219 93 723354 176 84 0 100 200 300 400 500 600 700 800 20012002 Remittances* Tourism** Sugar*** Nickel Figure 5-3. Rough Estimates of Cubas Ma in Sources of Hard Currency in 2001 and 2002 (net revenues in $U.S. million) Sources: Anuario Estadstico de C uba 2002; Nova Gonzlez, Armando Continuar la Dolarizacin? Economics Press Service, 2001; Declaration of Carl os Lage on Cuban National Television, March 18, 2001; Economics Press Service. Cuba: economa y tu rismo. N.10, May 31, 2001; Declaration of Carlos Lage in Mayoral, Julia Mara. El pas tiene confianza en su avance social y econmico. Granma Internacional April 5, 2003; Declaration of Marta Maiz in Farias, Gilda and Te soro, Susana. Turismo: Monedas al aire. Bohemia Ao 95, no. 10, May 16, 2003; Conversations with Cuban economists Net revenues are calculated as 64% of total transfers from abroad ($1050 in 2001 and $1130 in 2002) ** Assuming the cost per dollar of gross income from tourist activities at $0.80 or 80 cents. *** Considering average costs and international market prices, net revenues from sugar are estimated as 40% of gross revenues From Figure 5-3, we can see that net hard currency revenues to the Cuban government from family remittances (about $723 million in 2002) are today greater than its profit from tourist activities ($354 m illion), sugar ($176 million), and nickel ($84 million) exports combined. Calculations based on preliminary figures for 2003 are even more striking. While net revenues from re mittances peaked at $755 million, net profits from tourist activities might have been lowe r than the previous year, even if gross revenues increased by 13%. In fact, some Cuban economists estimate that, in 2003, the

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173 cost per dollar of gross income in the t ourist sector increased from $0.80 to $0.83, which would mean a net result of just 17%, or $340 million (Economics Press Service, December 2003). These figures are not surprising. Unha ppy about loose spending and corruption that have limited profits, Cuban authorities fired several top executives from the islands largest tourism group, Cubanacan, in late 2003. Early in 2004, they replaced the Tourism Minister, Ibrahim Ferradaz, with Manuel Marrero Cruz, who at the time of his designation was heading the Gaviota touris m group, one of the countrys major hotel corporations (Frank, May 30, 2004). It is repor ted that Gaviota, which is linked to the Cuban Defense Ministry, managed to obtain in its establishments an average cost per dollar of gross income of just $0.64 in 2003. Cuban authorities hope to achieve similar efficiency levels in the othe r tourist groups, whether they own three-, four-, or five-star hotels.21 As for nickel exports, net profits s hould have been higher in 2003 since gross revenues increased from about $500 million to $650 million. However, net profits from sugar exports were significantly lower as total production dropped by almost 40% and generated only $300 million in gross revenues, compared to $430 million in 2002.22 In sum, although the accuracy of these estim ates should be taken with caution, the importance to the Cuban economy of money sent from abroad is undisputable. Even if remittances are intended to provide the Cuban population a much-needed source of additional income, they end up in the hands of the Cuban government, thus allowing the 21 Interview with a foreign correspondent stationed in Havana, May 26, 2004. 22 Economic Mission of the French Embassy in Havana. La lettre de la Havane. N.34, March 2004.

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174 latter to meet the most urgent needs of th e country and pay unavoidable short-term debts with high interest rates.23 Finally, it should be noted that recent curre ncy changes in Cuba will increase the foreign exchange liquidity of the Castro government and practically neutralize the negative impact of the Bush ad ministrations latest economic measures against the island. In November 2004, Havanas authorities banned th e circulation of the U.S. dollar in Cuba in favor of the convertible peso a nd applied a 10% comm ission on dollar/CUC exchanges. In order to avoid the 10% ch arge, which was announced a few weeks earlier, Cubans rushed to exchange an estimated $500 to $600 million24 they hoarded at home for CUCs or opened accounts in local banks as hard currency deposits made prior to November 14, 2004, can be withdrawn at any time either in dollars or convertible pesos without having to pay the 10% commission. Cubas decision in early April 2005 to reevaluate the CUC by 8% against all international currencies will also generate si gnificant amounts of hard currency revenues to the islands government. First, the raised value of the CUC means that the government will obtain an 8% growth of its net profits from remittances and tourist activities. As gross revenues from international tourism were about $2.3 billion in 2004 and the flow of remittances from abroad more than $1 billi on, such an increase might be worth almost $300 million a year. Second, this currency ch ange stimulated many Cubans who still hoarded U.S. dollars at home to exchange them for CUCs before the new measure went into effect. Those Cubans who had not turned in their dolla rs in November 2004, probably decided that an additional 8% re duction in their purchasing power was too 23 Interview with a Cuban economist in Havana, June 5, 2003. 24 Interview with a Cuban economist in Havana, November 7, 2004.

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175 much to ignore. In brief, whereas Washingt on is using new restrict ions on U.S.-based travel and remittances to deny hard currenc y resources to the Castro government, the latter is squeezing more prof its out of these resources.25 According to Cuban officials, the island's balance of payments account (which refers to international trade in goods and services, transfer payments and short-term cr edit) registered in 2004 its first surplus since 1994 and is expected to exhibit anothe r surplus in 2005 (AP, March 29, 2005). U.S. Telecommunications Payments to Cuba The development of the telecommunications sector has been a high priority for the Cuban government since the early 1990s. Th e telecom industry, which had received only minimal investment since 1959, was in need of modern digital technology and foreign capital as the island s entire phone network still operate d on analog systems. During the last decade, this sector of the Cuban economy has been the target of some of the biggest investments by foreign companies. In partic ular, two major joint ventures with foreign partners were established to expand and digitalize fixed-line service and develop a dollarpriced cellular phone service. Nevertheless, it must be stressed th at telecommunications services remain state monopolies. Cuba simp ly allowed foreign investors to participate in those monopolies (Peters 2001: 4). In mid-1994, Mexicos Grupo Domos and It aly-based Telecom Italia (through its subsidiary Stet International Netherlands) en tered in a joint vent ure (ETECSA) with the Cuban telephone company Emtel for the m odernization and expansion of Cubas 25 While there is a possibility that remittances to Cuba from the United States will decline as a result of the recent devaluation of the U.S. dollar against the convertible peso, Havana s authorities seem confident that Cuban exiles will send a bit more money to make up the difference. During a television broadcast in early April 2005, President Fidel Castro claimed many Cubans abroad obtained good jobs due to Cubas free and excellent educational system, so they not only coul d send more dollars but should out of gratitude, even if the state took 20 percent off the top. See Frank, Marc. Dollars purchasing power dwindles in Cuba. ABC News April 7, 2005.

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176 telephone system. ETECSA has a monopoly on Cubas fixed line communications and international switching. Mostly due to fina ncing problems, Grupo Domos withdrew from its investment in 1997, while Telecom Italia increased its stake in ETECSA to 29%. The remaining four shareholders were three sepa rate Cuban government-owned or -controlled corporations with a combined 59% share and a Panamanian-registered corporation, Utisa, with a 12% share. At the end of 2002, Tel ecom Italias shares in the company were valued at $469 million (USCTEC 2004). In February 1998, Sherritt Internatio nal Communications, a wholly-owned subsidiary of Canadas She rritt International, purchased a 37.5% interest in the Cuban cellular carrier Telefonos Celulares de C uba (Cubacel) for approximately $38.25 million (Reuters, February 28, 1998). During the fi rst quarter of 2000, the Canadian corporation paid an additional $4 million to increase its ownership to 40%.26 Until 2003, Cubacel and another small Cuban carrier, state-ow ned Celulares del Caribe (C-Com), had exclusive rights to frequencies in the isla nds dollar-priced cellu lar phone market, which was only available to tourists and other fore ign visitors. However, in late 2003, ETECSA took over both Cubacel and C-Com in a majo r business operation aimed to create an integrated fixed-mobile telecommunications operator and to expand the wireless service to the local population. Sherri t International sold its 40% interest in Cubacel for $45.1 million. As a result of the merger, Telecom Italias investment was reduced to 27% of the share capital of the new integrated operator.27 ETECSA now has a monopoly on Cubas entire telecommunications sector. 26 See Sherritt International Corporation. A nnual Information Form. March 15, 2001. 27 See Telecom Italia. Third Quarter Report 2003. http://www.telecomitalia.it/trimestrale0309/Eng lish/B03.html (last visited November 2005).

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177 Cubas telecommunications indicators have improved significantly in recent years, although they are still among th e lowest in Latin America.28 Specifically, phone density increased from 3.18 telephone sets per 100 inhabitants in 1994 (when ETECSA was established) to 6.40 in 2003 (Hoffmann 2004: 190),29 and it is projecte d to reach 12 to 14 within four or five years. While in 1995 only 4% of all lines we re digital, by 2003 about 80% of Cubas telephone network was digita lized. In addition, the communist island currently has an estimated 20,000 cellu lar phone subscribers, 270,000 personal computers, more than 750 Internet sites, and more than 480,000 e-mail accounts (Rosabal 2004). For the purpose of this study, it should be emphasized that the United States has played an important role in financing th e development of Cuba s telecommunications sector. As observed by the Cuban Minister of Information Technology and Communications, Ignacio Gonzales Planas, in January 2004, a portion of the revenues derived from telecom services is being syst ematically set aside for investments that enhance this infrastructure (Rosabal 2004). While basic residential phone service in Cuba is relatively inexpensive as consum ers pay in regular pesos, ETECSA collects dollar revenues from two additional business areas: business and tourist activities, and international service. Curiously, while U.S. policy prohibits American companies from investing in the improvement of Cubas tel ecommunications sector, a significant portion 28 Worldwide statistics on telecommunications indicators for the period between 2001 and 2003 are available on the website of the International Tel ecommunication Union (ITU) a t: http://www.itu.int/ITUD/ict/statistics/ (last vi sited November 2005). 29 The development of the telecommunications sector in Cuba still presents profound spatial disparities between its capital, Havana, and the rest of the is land. At the end of 2003, about 47% of main line telephones were concentrated in Havana. The latter had a phone density of approximately 15 telephones per 100 inhabitants, as compared to just 4.2 telephones per 100 inhabitants in the rest of Cuba.

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178 of ETECSAs hard currency revenues, whic h are used to upgrade telecommunication services, come from dollar ch arges applied to incoming calls from the United States. Prior to the enactment of the Cuban De mocracy Act (CDA), or Torricelli law, of October 1992, phone service between Cuba and the United States was available but U.S. payments to the island were made to a blocked account pending future changes in U.S. embargo policy. As the CDA authorized the U. S. President to allow payments to Cuba under specific licensing on a caseby-case basis (a change that took effect in late 1994), a number of U.S. carriers successfully negotiated agreements to provide telecommunications services be tween the two countri es, consistent with policy guidelines that were developed by the Department of State and the Federal Communications Commission. While none of the existing li censes permit payments from a blocked account, there are currently eight licensed U.S. carriers engaged in transactions incident to the receipt or transmissi on of telecommunications between Cuba and the United States: AT&T Corporation, Sprint Communica tions Company, WorldCom Inc., LTXC Corporation, TeleCuba Inc., Telefonica Larga Distancia de Puerto Rico, iBasis Inc., and Catalyst Network. The Cuban and U.S. governments agreed to pay each other $60 cents for every minute of traffic originating in their respective territories (Peters 2001: 7). There are currently about 49 minutes of conversations or iginating in the United States (mostly calls from Cuban Americans to family members in Cuba) for every minute from the island.30 Therefore, U.S.-based carriers end up payi ng Cuba as much as $86 million per year to settle charges under traffic agreements. As shown in Table 5-5, between 1995 and 2002, U.S. telecommunications payments to Cuba totaled $478.3 million (an average of almost 30 Personal conversation with Philip Peters, Vice Pr esident of the Lexington Institute, May 17, 2004.

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179 $60 million a year), representing about 67% of the islands total investments in its fixedline telecommunications sector ($712.2 million). Table 5-5. U.S. Telecommunications Paym ents to Cuba and ETECSAs Investment, 1995-2002 ($U.S. Million) 1995 1996 1997 1998 1999 2000 2001 2002 Total U.S. Payments to Cuba 50.4 63.7 72.8 86.0 15.2* 77.9 55.7** 56.6**478.3 ETECSAs Investment 14.7 29.1 110.6 133.594. 8 107.0132.0 90.5 712.2 Sources: Federal Communications Commission, 2002; U.S.-Cuba Trade and Economic Council, 2003; Prez Villanueva, Omar Everleny. El Papel de la Inve rsion Extranjera en el Desarrollo Economico: La Experiencia Cubana. Centro de Estudios de la Economia Cubana (CEEC), March 2003, p.89; Cuban Ministry of Information Technology and Communications (MIC), 2003. ETECSA suspended direct dial telephone service betw een U.S. and Cuba. Service was reinstated in 2000. ** Payments by U.S. companies to third countries, as ETECSA suspended direct-dial service between the United States and Cuba in 2001. This was due to the enactment of a U.S. law that allowed the distribution (for non-commercial purposes) of U.S.$93 million held in U.S. financial institutions on behalf of Cuba (to be used to settle commercial claims against the Cuban government). Finally, a major operation recently announ ced by official media in Havana will help Cuba receive increasing amounts of ha rd currency from the United States for telecommunications services. In early March 2004, ETECSA said it will begin to offer cellular phone service in regular pesos (no longe r reserved only to foreigners at dollar prices) to up to 300,000 local residents as new technology makes it easier and quicker to install wireless systems than fixed-line systems (Frank, March 1, 2004). Cellular phones will be distributed to Cubans through a join t venture between a Chinese company and the Swedish-based Ericsson group. Like the fixe d-line network, the pe so-priced wireless system will be subsidized, for the most part, through expensive dollar charges placed on incoming calls from the United States, where many Cuban residents have relatives. While having a very limited range (similar to that of cordless phones), the new cellular phones are set up to receive calls from abroad and will be offered only to Cubans who do

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180 not have a fixed-line phone.31 As Hoffmann aptly states, mobile phones will come as an addition to their already existing main line tele phone connections, not as an alternative to it (Hoffmann 2004: 196). By raising the num ber of users receiving international calls, the government of Fidel Castro is planni ng to obtain the hard currency needed to modernize its telecommunications sector, in crease the islands telephone density, and provide better service to the Cuban population. U.S. Food Sales to Cuba In the last few years, economic sanctions against Cuba have been under fire in the U.S. Congress. As a result of growing skepti cism on the utility of economic coercion, as well as lobbying efforts by U.S. business and agricultural communities (in particular food exporters), an increasing number of lawmak ers have pushed for a relaxation of the 40year-old embargo and the be ginning of a new trade rela tionship with the Castro government. In October 2000, the U.S. Congress passed the Agriculture, Rural Development, Food and Drug, Ad ministration, and Related Agen cies Appropriations Act, 2001. Title IX of the bill (Trade Sanctions Reform and Export Enhancement Act, or TSRA), signed into law by President Clinton a few weeks later, includes provisions that allow sales of U.S. food and ag ricultural products to Cuba for the first time in nearly forty years. It should be noted that a clause inserted in the final version of the bill prohibits U.S. companies and financial institutions fr om providing credits for such transactions, thus obligating the Cuban au thorities to complete their purchases only with cash payments or through financing provided by a third-country company. Enraged by that restriction, the Cuban governme nt initially said it w ould not buy any food until the embargo was completely lifted. 31 Interview with a foreign correspondent stationed in Havana, May 26, 2004.

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181 Indeed, for about a year after the passage of the U.S. law, Cuba refused to buy a single grain of rice from the United States But after hurricane Michelle caused widespread damage to the island in Novemb er 2001, the Castro government began to take advantage of the law and buy American food to replenish its reserves. The first contract between a U.S. firm and the Cuban government, worth about $40 million, was signed on December 16, 2001. Since then, Cuba has purchased approximately $820 million of American food products.32 Table 5-6 reports the values of Cubas food imports from the United States in 2003 compared to total Cuban imports of the same products. Table 5-6. Cubas Food Imports from th e United States in 2003 ($U.S. million) Product Imports from U.S. (USCTEC) Total Imports (ONE) U.S. Imports vs. Total Imports Soybean Oil 50.8 52.6 96.5% Poultry 37.2 76.0 48.9% Wheat 36.7 93.8 39.1% Corn 35.6 49.3 72.2% Soybeans 34.5 34.6 99.7% Soybean Oil Cake 21.5 41.6 51.7% Rice 10.8 85.1 12.7% Total Imports (USCTEC) 256.9 710.0 36.2% Total Imports* (ONE) 327.1 948.0 34.5% Sources: U.S.-Cuba Trade and Economic Council (USCTEC) 2004; Anuario Estadistico de Cuba 2003 (ONE 2004). *USCTEC reports that data from Cuban sources may present multi-year cumulative values and include transportation, insurance, an d currency transaction fees The United States is becoming an increasi ngly important tradi ng partner for Cuba, ranking first among the islands sources of im ported food since 2002, the first full year of U.S. sales under TSRA (Snow 2003). In 2003, according to the U.S.-Cuba Trade and Economic Council, the Cuban government bought $256.9 million worth of American 32 The figure refers to purchases between December 2001 and February 2005. Statistics on U.S. food exports to Cuba are available at: http://www.fas.usda.gov (last visited November 2005).

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182 food products, including poultry ($37.2 m illion), wheat ($36.7 million), corn ($35.6 million), and soybean products ($106.8 millio n). One company alone, Illinois-based Archer Daniels Midland, reported agricu ltural exports to Cuba valued at about $128 million in 2003, accounting for approximately 50% of all TSRA-authorized exports to the island (USCTEC 2004). Cuba has signed contra cts with 84 other U.S.-based firms from 24 different U.S. states. It is important to note th at, by the end of 2003, the Unite d States had already won more than one-third of total Cuban food impor ts. According to Cuban official figures, which include transportation, taxes, and othe r additional costs, U.S. food sales ($327.1 million) represented 34.5% of all agricultural goods ($948 million) that the island imported that year. Cuban authoriti es estimate that the U.S. share could rise to about 60% with a complete lifting of the embar go (Jordan 2003). In 2004, Cubas imports of U.S. food products were $380.2 million, up by around 48% from 2003. Cuba has become the 22nd largest food market for the United States (Siegelbaum 2005), and probably the safest one because of the cash-in-advance provision. To some extent, the Castro governments decision to buy products from the United States may be seen as part of a political at tempt to encourage anti-embargo forces in the U.S. Congress. Even so, Cubas economic c onsiderations in terms of price competition were also a factor in the d ecision. As recognized by a senior official in Havana, the proximity of U.S. Gulf ports saves freight and warehousing storage costs, which give U.S. exporters the equivalent of up to 20% price advantage (Fra nk, October 15, 2002). American food sales to Cuba have alr eady affected the islands key trading partners among them Canada, France, and Spain. Ca nadas official statistics report that

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183 wheat and poultry exports to Cuba we re down by 79.2% and 60.9%, respectively, in 2002. More specifically, Canada exported to Cuba about $14.9 million of wheat and $12.4 million of poultry in 2001. In 2002, Canadian sales of wheat and poultry dropped to $3.1 million and $4.8 million respectively. In 2004, Canada exported only $1.7 million of wheat and less than $1 million of poultry to Cuba.33 Similarly, the French government declared that in 2002, food and agri cultural sales to the island decreased by 39.3% from 117.2 million euros in 2001 to 71.2 million euros. For wheat alone, French sales were down by approximately 47%. In 2004, Frances food and agricultural exports to Cuba were just 23.9 million euros, about 66% below their 2002 level.34 Finally, the Spanish government reports that the total value of all expor ts to Cuba dropped by 23.7% in 2002 and that the islands purchases of food products from Spain plunged by more than 40% that year (Europa Press, June 13, 2003). As shown in Table 5-6, the value of U.S. poultry ($37.2 million) and wheat ($36.7 million) sales to the Castro government ra nked second and third, respectively, among all U.S. agricultural products exported to Cuba in 2003. By that year, the United States had already captured a significant share of Cubas poultry (48.9%) and wheat (39.1%) markets. In 2004, as U.S. sales of thes e two products increased by 58% and 57%, respectively, the negative impact of U.S. food exports to Cuba on the islands key trading partners continued. For instan ce, wheat sales to Cuba declined substantially last year.35 33 For further information see Statistics Canada, June 29, 2003 at: http://strategis.ic.gc.ca 34 See Economic Mission of the French Embassy in Havana. La lettre de la Havane. N.24, March 2003. Also see Economic Mission of the French Embassy in Havana. La lettre de la Havane. N.45, March 2005. 35 Statistics on France-Cuba trade in 2004 are available on the website of the Economic Mission of the French Embassy in Havana at: http://www.missi oneco.org/cuba/ (last visited November 2005).

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184 How do U.S. food sales generate ha rd currency revenues for the Cuban government? This is quite simple. Although th e majority of U.S. commodities exported to Cuba go into ration stores, about 5% e nd up in local hard currency shops (Veloz, November 2, 2003). Just as an example, it is reported that th e variety of products exported to Cuba by Indianabased Marsh Supermarket and sold at government-owned retail stores continues to rise. Since October 2002, Ma rsh brand cereals, gelatin desserts, instant pudding, pie filling, and hot cocoa mi x have been available in Cuba, with additional items reaching the local hard cu rrency market since January 2003 (USCTEC 2003). As stated previously, the price ma rk-up for imported food in state-run hard currency stores is about 240%. Therefore, the 5% of U.S. food sales ($1.2 billion, including fees, between December 2001 and April 2005),36 worth approximately $60 million, that reached Cubas retail stor es would sell for about $144 million, thus generating as much as $84 million in hard cu rrency revenues for the government of Fidel Castro. In other words, since December 2001, U.S. trade activities with Cuba have generated a growing amount of foreign exch ange revenues for the islands government, once generated by products imported from other countries. In March 2005, however, the Office of Foreign Assets Control (OFAC) reinterpreted the cash-in-advance provision for U.S. food sales to Cuba and banned fairly smooth operations that had allowed Cuban offi cials to pay for the shipment within 72 hours of its arrival at Havana's port. Argui ng that the delay is the equivalent of an extension of credit to Cuba, OFAC establis hed that payments must occur before the goods leave the United States. More restric tive payment procedures, which raise costs and create severe logistical problems, mainly aim to disrupt commercial practices that are 36 See Veloz, Marta. Ante nuevas barreras, ms negocios. Opciones May 7, 2005.

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185 increasingly at odds with the Bush admini stration's attempt to squeeze economically the communist island. Forced to spend more of its scarce foreign ex change, and fearing possible confiscations of its shipments befo re they leave American ports to pay for pending U.S. settlements against Cuba, the Ca stro government has warned that it could halt purchases of U.S. food (Boadle, February 24, 2005). The new export rules, therefore, have implications well beyond the mere interpretation of cash payments. By jeopa rdizing U.S. food sales to Cuba, OFAC's unilateral action clearly defies the will of Congress and spar ks a rift between the White House and Capitol Hill on the ge neral direction of U.S. policy toward the island. The passage of TSRA in 2000 represented a change of strategic beliefs and policy preferences with respect to Cuba. Many Republicans a nd Democrats in Congress began to realize that incremental sanctions had done little to undermine the Castro government, while hurting U.S. companies in terms of forfeited business with the island. They successfully pushed for a relaxation of trade restricti ons that would benefit U.S. producers and enhance American influence on Cuba. Just to cite a few emblematic examples U.S. Senators Max Baucus (D-MT), Pat Roberts (R-KS), Byron Dorgan (D-ND), and Arlen Specter (R-PA), who had previously supported a strengthening of sa nctions against Havana, have become leading advocates in Congress for the removal of trade and travel restrictions on Cuba. Baucus and Roberts, who had voted for Helms-Burton, now argue th at the Cuban embargo is a hopelessly ineffective tool (Senate Record, July 26, 2000) and that agricultural exports to the island help U.S. farmers, feed hungry people and sp read the seeds of de mocracy (Senate Press Release, April 11, 2002). Dorgan and Specter's rethinking of U.S. policy toward Cuba is

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186 even more evident. In 1992, then-U.S. Representative Dorgan was one of the cosponsors of the Torricelli bill, and he also voted for Helms-Burton four years later. In September 2001, after successfully leading the effort in Congress to lift the ban on U.S. food sales to Cuba, he declared: We are real ly shooting ourselves in the foot with a continued embargo that does not work and, in a bizarre way, actually helps Fidel Castro keep his hold on powerUsing food and medicine as a weapon is, in my view, entirely immoral (Newsweek, September 7, 2001). Si milarly, in June 1995, Specter commended the authors of Helms-Burton for introducing it and noted that it was very important to put the maximum pressure on Fidel Castro, the dictator of Cuba, to try to achieve his ouster at the earliest possi ble time (Senate Record, J une 14, 1995). More recently, though, Specter has made clear that the United States should not wait for a change of power in Cuba to cultivate exchanges that can benefit both countries (AP, June 3, 1999). In short, it is likely that OFAC's new ru les on cash payments for U.S. food exports to Cuba will galvanize anti-embargo forces in Congress. Faci ng a potential drop of multimillion-dollar sales, a bipartisan group of 22 U.S. Senators (including Baucus, Roberts and Dorgan) has introduced a new legi slation, in February 2005, that would ease trade restrictions with Cuba by defining cash in advance as payment before delivery, allowing direct transactions between Cuban and U.S. banks, and facilitating U.S. travel to the island for business purposes (Bauza and Lo rente, February 8, 2005). As the greatest leverage to seek a relaxation of sanctions lie s in the hands of worri ed but delighted Cuban officials who are threatening to choke o ff purchases worth almost $400 million in 2004, the Bush administration's latest attempt to increase economic pressure on its communist neighbor could easily backfire in Congress.

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187 U.S. Indirect Investments in Cuba The presence of American investors in fore ign firms that trade with or invest in Cuba is an increasingly important and largel y unexplored aspect of U.S.-Cuba economic relations that defies the logic of economic sanctions and undermines their main goals. Under the embargo, direct investments in Cuba are prohibited for U.S. entities. But the U.S. Department of the Treasur y authorizes individuals and fi rms subject to U.S. law to invest in a third-country comp any that has commercial activitie s in Cuba, as long as they do not acquire a controlling interest of that company and provided that a majority of the revenues of the thirdcountry company are not produced from operations within the communist island (USCTEC 2000). Thus, if the investment is an indirect one, a U.S. entity should have no problem in build ing a Cuba-related stock portfolio. In order to give a sense of the importan ce of U.S. indirect business connections with Cuba, Table 5-7 provides data on the pr esence of U.S. shareholders in selected foreign companies that operate in the isla nds market. As observed by John Kavulich, U.S. companies have affiliations with and U.S. citizens have investments in Sol Meli, Unilever, Accor, Alcan, Fiat, Daimler Chrysler, and Nestl among many other companies, which have commercial activities with in Cuba. He also notes that most of the largest U.S. financial institutions a nd investment banks provide services for companies that have commercial activities within Cuba (Reuters, July 28, 2001). Obviously, Table 5-7 is just a sample based on public info rmation, and the presence of American investors in certain compan ies could be even higher than that reported. The key aspect is that, in an in creasingly globalized world, the na tionality of a specific firm may become almost irrelevant.

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188 Table 5-7. U.S. Investments in Selected Foreign Companies Operating in Cuba Year Company Country Type of Operations in Cuba Presence of U.S. Investors (%) Major U.S. Investors 2000 Hotetur Spain Management contracts in 3 hotels 26%(a) Florida-based Carnival Corporation 2000 Iberia Airlines Spain Two Joint ventures in cargo terminal + aircraft maintenance 2% Texas-based American Airlines Inc. 2000 Mitsubishi Motors Japan Exporter of vehicles 10.41% California-based Capital Research and Management Co. 2000 Sol Meli Spain 23 Management contracts and 4 equity interests in tourist sector 16% --2000 Telecom Italia Italy Joint venture in telecommunications 3%(b) New York-based Lehman Brothers Holdings Inc. 2001 Alcan Canada Exporter of aluminum products 23% --2002 Fiat Group Italy Exporter of vehicles 20% Michigan-based General Motors Corporation 2002 Leisure Canada Canada Developer of luxury multi-destination resorts 30% California-based Robertson Stephens Inc. 2002 LG Electronics Investment South Korea Exporter of refrigerators, washing machines, air conditioners, televisions 6.6% New-York based Goldman Sachs Group 2003 Accor France Several ma nagement contracts in tourist sector 16% --2003 Repsol YPF Spain Oil exploration in Gulf of Mexico waters 21.7% --2004 Altadis Spain/France Joint venture in tobacco sector (cigars) 25.9% New York-based Chase Manhattan Bank 2004 Nestl Switzerland Mineral water and sodabottling joint venture 20% --2004 Souza Cruz Brazil Joint venture in tobacco sector (cigarettes) 5.5%(c) --2004 Sinopec China Oil production in Pinar del Rio province 14% Texas-based Exxon Mobil Corporation Sources: Compilation of the author based on data from U.S.-Cuba Trade and Economic Council (20002002) and financial reports of individual companies (Leisure Canada, Sol Meli, Accor, Repsol, Souza Cruz, and Sinopec). (a) In 2000, Carnival Corporation owned 26% of U.K.-based Airtours PLC, which owned 50% of Hotetur. (b) In 2000, Lehman Brothers owned 3% of Italy-based Olivetti S.p.A. Telecom Italia is a subsidiary of Olivetti. (c) In March 20 04, U.K.-based British American Tobacco (BAT), which also has U.S. capital, held 75.3% of the shares of Souza Cruz.

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189 Here are some details of specific U.S. indi rect business links w ith Cuba as reported by the U.S.-Cuba Trade and Economic Council and by financial reports of individual companies. Interestingly, the potential application of the Helms-Burton law against several foreign firms investing in Cuba could a ffect U.S. entities that hold publicly traded shares of those firms. In 2000, individuals subject to U.S. law held approximately 16% of the shares of Spain-based Sol Meli, the largest hotel co mpany in Spain and the leader in Cubas tourist sector with eq uity interests in 4 hot els and 23 management c ontracts. In addition, Texas-based American Airlines Inc. owned about 2% of Spai n-based Iberia Airlines, and California-based Capital Research and Ma nagement Co. owned 10.41% of Japan-based Mitsubishi Motors (USCTEC 2000). Iberia Airlines has a joint venture (Empresa Logistica de Carga Area S.A.) with the Cuban company Aerovaradero S.A. in a new freight terminal in the vicinity of the Jos Mart International Airport, and another joint venture (Empresa Cubano-Hispana de Mant enimiento de Aeronaves IBECA S.A.) for aircraft maintenance (Comellas 2002). Mitsubishi sells automob iles, spare parts, and accessories to Cuba through the Panamanian company Motores Internacionales del Caribe S.A. In 2000, New York-based Lehman Brothers Holdings Inc. purchased 3% of the shares of Italy-based Olivetti S.p.A. Telecom Italia S.p.A., a subsidiary of Olivetti, has a joint venture (ETECSA) with the Cu ban telephone company EMTEL for the development of Cubas fixed-line and mobile telephone systems. In terms of capital invested, ETECSA is one of the most important joint ventures operating in Cuba. Also in 2000, Florida-based Carnival Corporation incr eased indirect minority presence in Cuba

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190 with the purchase by United Kingdom-base d Airtours PLC of 50% of Spain-based Hotetur Club S.L. Carnival Corporation owns 26% of the shares of Airtours PLC (USCTEC 2001). Hotetur Club has management contracts in three ho tels in Cuba, the Deauville in Havana, the Hotetur Palma Real and the Hotetur Sun Beach in Varadero.37 In 2001, U.S. investors held approximately 23% of Alcan of Canada, which exports aluminum products to Cuba (Reuters, July 28, 2001). In 2002, New York-based Goldman Sachs Group had a 6.6% interest in South Korea-based LG Electronics Investment, Mi chigan-based General Motors Corporation had a 20% interest in Italybased Fiat Group, and Californi a-based Robertson Stephens Inc. owned about 30% of the shares of Ca nada-based Leisure Canada (USCTEC 2002). LG Electronics has a strong presence in the Cuban market. A variety of its products, including refrigerators, washing machines, air conditioners, and televisions are assembled and sold on the island. The Fiat Group esta blished a dealership on the island in 1995 (Agencia Cubalse Fiat) in conjunction with Cubas government-operated Cubalse S.A. Since then, the Italian company has sold t housands of vehicles every year to Cuba, including automobiles, industrial vehicles, a nd agricultural machinery. Leisure Canada is developing five-star hotels, timeshare c ondominiums, and PGA golf courses in Cuba, with an estimated plan of investment of $400 million. Curiously, Leisure Canada announced in one of its brochures that th e company is positione d to capitalize on the current growth of Cuban tourism, and the future growth fueled by the United States, following the inevitable normalization of U.S.-Cuba relations. It also specifies that it is 37 Additional information on Hotetur hotels in Cuba is available at: http://www.hotetur.com (last visited November 2005).

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191 perfectly legal for U.S. potenti al investors to purchase shar es of the Canadian company, and that U.S. investment banks alrea dy control over 20% of Leisure Canada.38 In December 2003, U.S. investors held 16% of the shares of the French group Accor.39 The Accor group manages several hotels in Cuba with establishments that operate under the Novotel, Sofitel, Coralia, and Mercure Brands. For instance, Accor runs the Sofitel Sevilla hotel in Havana, th e Mercure Cuatro Palmas hotel in Varadero Beach, and the Sofitel Casa Granda Hotel in Santiago de Cuba. The French group, which will complement its actions with the Coralia Club Bucanero Hotel in Santiago de Cuba, expects to run over 15 faciliti es on the island under the consortiums different brands.40 In 2004, U.S. investment funds and indivi dual shareholders owned more than 25% of the French-Spanish conglomerat e Altadis (Expansin, April 28, 2004),41 about 20% of Switzerland-based Nestl (Judd 2004), and 5.5% of Brazil-based Souza Cruz. United Kingdom-based British American Tobacco, or BAT, which also has significant U.S. capital, owned 75.3% of the Brazilian comp any. In April 1995, Souza Cruz signed a 38 On June 11, 2003, Leisure Canada reported that the company had created a hotel brand (Mirus Resorts and Hotels) to use on properties within Cuba. For instance, the Canadian firm has been given the right to manage the Monte Barreto hotel in Havana under its own new brand. According to the company, the development of a hotel brand that can quickly transfer to a North American hotel chain, once the doors to Cuba open, further establishes Leisure Canadas ver tically integrated gateway to Cuba (USCTEC 2003). Also see Leisure Canadas website at: http://www.lei surecanada.com (last visited November 2005). 39 At the end of 2002, U.S. entities held more shares (16.7%) of the French group Accor than any other international investor. As of D ecember 31, 2003, only investors fr om the United Kingdom owned more shares of Accor (16.8%) than U.S. entities. Other ma jor international investors in the French group were from Germany (5.3% of the shares), Belgium (4.9%) Luxembourg (3.7%), and Switzerland (2.3%). For further information see Accors website at: http ://www.accor.com (last visited November 2005). 40 Accor: Big groups turn eyes toward Cuba. Directorio Turstico de Cuba, 2003. It is reported that the Novotel Miramar in Havana, run by Accor since 2000, is now managed by the Spanish group Occidental Hotels & Resorts. See Hoteles-Occidental entra en Cuba y baja ventas un 11% en 2002. Granma Internacional June 9, 2003. 41 In late April 2004, New York-based Chase Manhattan Bank held 15.057% of the shares of Altadis. In addition, the U.S. investment funds Fidelity Interna tional Limited and Franklin Resources Inc. Delaware owned 5.84% and 5.003% of the French-Spanish group, respectively.

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192 joint venture (BrasCuba S.A.) with Cubas Unio n del Tabaco. With an initial investment of $7 million, BrasCuba renovated an existing cigarette factory in Havana and started producing and selling several brands of cigarett es for the domestic market as well as for external markets.42 Today, after nine years of opera tions on the island, Brascuba has a virtual monopoly of cigarettes in Cubas hard currency stor es and for exports (Spadoni 2002: 167). Altadis has invested almost $500 million in a 50-50 joint venture with Cuba's Habanos S.A. for the exclusive right to market Cuban cigars internationally. Nestle owns several mineral water bottling pl ants in Cuba and has a joint venture (Los Portales S.A.) with the Cuban company, Cora lsa, that produces and markets the highest selling soft drinks and mineral waters on the island (Prez Villanueva 2005: 188). Finally, U.S. indirect business links with Cuba have become even more important in recent months, mainly thanks to new operations on the island by multinational oil companies. American entities own approxima tely 22% of Spain-based Repsol YPF, a substantial amount of shares of Brazil-base d Petrobras, and even about 14 percent of communist China's Sinopec.43 Between June and July 2004, Repsol spent about $50 million drilling for oil in Cubas virgin Gulf of Mexico waters. Repsols search yielded signs of high quality crude oil, but its first well was not commercially viable. The firm said it would continue studying the area and could begin drilling again next year (Marx 42 The Havana factory used by BrasCuba had been nationalized in 1960, and it belonged to the American Tobacco Company. Executiv es of Souza Cruz said they are not wo rried for the expropriation because in 1994 American Tobacco Company was bought by Brown Williamson, anothe r subsidiary of BAT. See AP. Capitales extranjeros en Cuba, pero todav a manda el socialismo. July 10, 2001. 43 The most important U.S. investors in Sinopec are Texas-based Exxon Mobil Corporation, New Yorkbased J.P. Morgan Chase & Co., and New-York-based Morgan Stanley. For further information on Sinopec and Repsol YPF shareholders see: http://e nglish.sinopec.com; http://www.repsolypf.com (last visited November 2005). As for Petrobras, it is re ported that, in September 2004, the Brazilian oil firm issued $600 million in global notes in the international ca pital markets. More than half (54%) of the issue was placed with U.S. investors. Pet robras raises US$ 600 million in th e international market. Available at: http://www2.pet robras.com.br/atuacaointernaci onal/petrobrasmagazine/neg oc_eng.html (last visited November 2005).

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193 2004). Petrobras is also considering explor ation in the same area and has announced it will invest $20 million to build a lubrican ts plant in Cuba. In early 2005, Sinopec, China's second-largest oil company, signed an agreement with Cuba's state-run Cubapetroleo (CUPET) to jointly produce oil on the coast of western Pinar del Rio province. It is quite difficult to offer a comprehens ive analysis of U.S. indirect business connections with Cuba, given that private co mpanies are not required to make public the list of their shareholders. Such an endeavor is also complicated by the fact that with millions of dollars moving around the world via el ectronic transactions, the real origin of financing for specific business operations is often unknown. As Prez Villanueva reminds us, there are many companies in C uba that are based in the Bahamas, other Caribbean islands, Spain or Britain, and you rea lly cant tell if these companies receive U.S. funds attracted by the high interest rates we (Cubans) pay (Reuters, July 28, 2001). Nevertheless, the information presented in Table 5-7 shows that U.S. entities hold publicly traded shares of several major fore ign firms engaged in business activities with the government of Fidel Castro. While prof its from the Cuba-related stock portfolios may not be particularly significant for some U.S. investors in terms of their global revenues, American investments in foreign co mpanies that operate on the island are just another example of gaping holes in the Unite d States effort to economically isolate Cuba. As multinational corporations headquart ered in a foreign country can rely on U.S. capital to help finance thei r business activities on the island, one is left wondering if it makes any sense for the United States to k eep using economic sanctions as a tool to achieve ambitious foreign policy goals. And if we consider that some of these foreign

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194 firms have provided Cuba much-needed capit al, technology, management expertise, and new markets for its main exports, then the importance for the Cuban economy of U.S. indirect business operations on the island appe ars evident. Cuba's front door may be closed to U.S. investors, but the back door is wide open. Conclusion From the analysis presented in this chapter, we can fairly argue that, in spite of the tightening of the embargo, the United States has contributed in a significant way to the recovery of the Cuban economy following th e deep recession of the early 1990s. While intended to stimulate democratic reforms and exercise pressure for regime change in Cuba by stemming the flow of hard currency to the Caribbean island, U.S. economic sanctions have achieved neither of these goals. Admittedly, the role of the United States in the Cuban economy would have been much more important in the absence of sanctions. However, even with restrictions in place, substantial amounts of hard currency have been channeled into Cuba through direct and indirect means of travel, remittances and, to a lower extent, telecommunications payments, food sales, and secondary investments. Washingtons policy toward Havana ended up throwing a lifeline to the same government it was supposed to undermine. Even more importantly, formal and info rmal activities by the Cuban-American community, the most vocal group in the United St ates in favor of the embargo, have been a major factor in keeping afloat the Cuba n economy. For instance, of approximately 220,000 U.S. citizens who traveled to Cuba in 2002, with or without their governments approval (they were the largest group of foreign visitors afte r Canadians), more than 60% were Cuban-Americans. Furthermore, remittances sent from U.S. citizens of Cuban descent to their relatives on the island, mainly through info rmal mechanisms, have been,

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195 in net terms, Cubas most important source of foreign exchange during the past decade. As argued by Eckstein (2003: 16), the re mittance economy reflects a society that is transnationally grounded, able, willing, and wanting to operate according to its own networks and norms, in defiance both of U. S. and Cuban official regulations that interfere. Finally, between 1995 and 2002, U. S.-based carriers paid the Castro government, on average, about $60 million a year for telecommunications services, mostly as a result of international calls by Cuban-Americans to family members in Cuba. Overall, this study has demonstrated that the ability of U.S. unilateral economic sanctions to place a sufficientl y large financial burden on C uba, and stimulate political changes on the island, is greatly inhibited by transnational linkages that sustain hard currency flows across national borders. Without performing detailed empirical analyses, the next chapter applies some of the conceptual tools drawn from the Cuban case to other cases of U.S. unilateral sanctions. It mainly focuses on remittances to and foreign direct investment in specific target countries, as activities carried out by migrant entrepreneurs and multinational corporations have played a crucial role in mitigating the negative impact of the U.S. embargo on the Cuban economy.

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196 CHAPTER 6 TRANSNATIONAL LINKAGES IN OTHE R CASES OF U.S UNILATERAL SANCTIONS Since the end of the Second World War, th e United States has been the dominant user of economic sanctions as a foreign policy tool. In order to pr omote political changes in specific countries, Washington has applied a variety of restrictions on U.S. citizens and entities dealings with targ et governments, including the suspension of foreign aid or limitations on exports of narrow categories of goods and technologies (limited sanctions), limitations on more broadly defined categories of trade or finance (moderate sanctions), and prohibitions of most trade and financia l flows (extensive sanctions). The United States has also imposed or threatened sancti ons against foreign companies or institutions that invest in or pr ovide financial supports to certain countries. The success or failure of economic sancti ons obviously depends on their scope and the goals they are intended to achieve, as we ll as on the size of the target country and its relationship with the sender. According to Elliott (1997), sanctions ar e most likely to be effective when they are imposed quickly and decisively to maximize impact, their goals are relatively modest, the target country is economically weak and much smaller than the sender, and when the sanctioner and target conduct substantial trade prior to the imposition of restrictions. However, th ere seems to be general acceptance among scholars of international re lations that economic sanctions, mainly when they are unilateral, are often unable to achieve am bitious foreign policy objectives such as changing the behavior or governments of targ et countries (Wagner 1988; Hufbauer et al.

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197 1990; Pape 1997; Drury 1998). Th e United States, above all, is no longer as dominant in the world economy as it was in the aftermat h of the Second World War and at least until the early 1970s. In addition, th e utility of economic coercion and the leverage of a single country have declined significantly in the last few decades as a result of the effects of globalization. In an increasingly interdepende nt global economy, it is easier for target governments to minimize the impact of sa nctions by tapping inte rnational trade and capital markets and finding alternative suppl iers of goods and capital (Schott 1998). Thus, there is little reason to assume that the success rate of unilateral sanctions will show any substantial improvement in the near future. As the Cuban case demonstrates, the utility of sanctions is greatly affected by the existence of multiple ties and interactions linking people, firms, and institutions across national borders. Multinational corporations and migrant entreprene urs, in particular, engage in economic activities that sustain transnational flows of hard currency and provide target states and th eir citizens with desperately needed sources of external financing. This chapter explor es the role of corporate a nd migrant transnationalism in other sanctions situations. It begins with a brief historical overview of U.S. unilateral sanctions and their success ra te. It continues with a more detailed analysis of Washingtons comprehensive sanctions progr ams against Sudan, Myanmar (Burma), and Iran. Although U.S. restrictive measures ha ve certainly hurt th e latters economies and lessened investor confidence, the relatively sizab le flows of foreign direct investment and remittances to these countries and their pote ntial impact on economic growth suggest that business activities carried out by transnational actors might have played a major role in the overall effectiveness of economic coercion.

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198 Effectiveness of U.S. Unila teral Economic Sanctions During the last sixty years, the United St ates has made extensive use of unilateral economic sanctions against a broad range of countries for a wide variety of reasons. Besides joining some multilateral attempts and participating in sanctions taken by the United Nations Security Council, Washington has frequently resorted to unilateral coercive measures including the blocking of assets and prohibitions on trade to and investment in a target country, the withholdi ng of financial assistance or U.S. government procurement, and the opposition by U.S. re presentatives in international financial institutions to loans or financial aid to th at country (Carter 2002) However, since the demise of the Soviet Union in the early 1990s, there has been a signifi cant decline of new cases of U.S. unilateral actions against target countries. While the United States remains the most active sender in absolute terms, broad coalitions revo lving around the United Nations are playing a bigger role in sanctions diplomacy (Hufbauer 1999). To reliably assess the usefulness of econo mic sanctions as a foreign policy tool, one must first conceptualize them and take in to account the specific goals they set out to accomplish. According to Pape (1997: 93-94), economic sanctions seek to lower the aggregate economic welfare of a target state by reducing internationa l trade in order to coerce the target government to change its political behavior . Papes view is that effective economic coercion should alter objec tionable actions of other countries and force them to make concessions either di rectly, by placing a strong economic burden on a target government, or indirectl y, by stirring popular pressure for change or eventually a popular revolt that overthrows th at government. Thus, he concluded that the aggregate Gross National Product or GNP (and Gross Do mestic Product or GDP, as the two terms

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199 tend to be used almost interchangeably)1 loss of a target country over time is the most important indicator of the intensity of ec onomic sanctions (Pape 1997: 94), and arguably a sign of their success. Other scholars, instead, contend that the concept of sanctions should encompass all aspects of economic statecraft rather than being limited to economic coercion aimed to change the policies of the targ et government. Baldwin (1985: 32) noted that the goal of the sender could be to redire ct the course of ongoing trade relations (trade dispute), engage in economic warfare to weaken the adversarys military capabilities, make a symbolic statement about its own identity and moral beliefs, show its disapproval of what the target country is doing, and satisfy domestic politic al interests. While recognizing that policymakers may have an incentive to publicly portray their goals as less ambitious than they really are in order to facilitate a claim of victory at a la ter date, Baldwin argued that sanctions could be considered successf ul when they achieve one of these policy objectives (Baldwin 1999-2000: 89). Regardless of the specific conception of economic sanc tions goals and success, there is substantial evidence about their declining utility as a tool of statecraft, particularly when they are imposed unilate rally. The most cited and comprehensive database on the effectiveness of sanctions is that compiled by Hufbauer, Schott, and Elliot (HSE), who found sanctions to be succe ssful in about one-third, or 34% of the 115 cases initiated between 1914 and 1990. More specifically, episodes involving the destabilization of a target c ountry, usually small and sha ky, succeeded in 52% of the cases, and those involving modest objectives and attempts to disrupt minor military 1 The GDP is the primary indicator of the status of the economy. It refers to the total final value of goods and services produced in a national economy over a particular period of time, usually one year. The GNP does not include goods and services produced by foreign producers.

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200 adventures were successful 33% of the time. Nevertheless, efforts to impair a foreign adversarys military potential or change its policies in a major way reached their objectives in only 20% and 25% of the cases, respectively, lead ing the authors to observe that economic sanctions are of limited uti lity in achieving foreign policy goals that depend on compelling the target country to take actions it stoutly resists (Hufbauer et al. 1990: 92-93). It should be emphasized that the overall success rate found by HSE and the standards utilized to arrive at such figur e have been disputed both as being too lenient (Pape 1997, 1998), and too strict (Baldwin 1985; Van Bergeijk 1997). Table 6-1. Effectiveness of Economic Sanctions Against Target Countries Total number Number of successes Success ratio* (as % of total) All cases** (multilateral and unilateral) 1914-99 1914-44 1945-69 1970-89 1990-99 170 12 41 67 50 49 6 18 16 15 32 50 44 26 29 Unilateral U.S. sanctions 1945-99 1945-69 1970-89 1990-99 68 16 40 12 17 11 5 2 25 69 13 17 Sources: Hufbauer Gary Clyde, Schott Jeffrey J. and Elliott Kimberly Ann. Economic Sanctions Reconsidered: History and Current Policy. Washington D.C.: Institute for International Economics (IIE), 1990; Hufbauer, Gary Clyde. Trade as a Weapon. IIE, April 1999; Hufbau er, Gary Clyde and Oegg, Barbara. Capital-Market Access: New Frontier in the Sanctions Debate. IIE, May 2002. Percentages may differ slightly in some periods from calculations based on the numbers in the other columns because assessments are not yet complete for several new cases. ** The U.S. was involved in about 70% of the cases, usually as the leading sanctioner and often alone. Table 6-1, which combines HSE figures with more recent findings, provides evidence for the declining effectiveness of sanctions by showing their success rate at different periods of time during the twentieth century. Sanctions (both multilateral and unilateral) launched between 1914 and 1944 succeeded in half of the cases, and those initiated between 1945 and 1969 contributed to positive foreign policy outcomes, from

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201 the perspective of the sender government(s ), in 44% of the cas es. Between 1970 and 1989, however, the success rate dropped to just 26% of all cases. During the 1990s, economic sanctions continued to perform poorly as they were about as successful (29%) as those imposed over the previous two decades (Hufbauer and Oegg 2002). The results for U.S. unilateral coercive attempts, those in which American policymakers received little or no cooperation from other countries, are even more striking. Since the end of the Second World Wa r, the United States acted as the only sanctioner against target countries in 68 occas ions, representing about 45% of all cases of economic sanctions initiated since then. Whereas their success rate in 16 episodes between 1945 and 1969 was about 70%, U.S. un ilateral economic sanctions succeeded in only 13% of the 41 cases launc hed during the 1970s and 1980s, and in about 17% of the 12 cases initiated during the 1990s. In contrast cases involving the United States as part of a sanctions coalition were successful 23% of the time over the last three decades (Elliott and Oegg 2002). As observed by Elliott (1997), if sanctions are to have any chance at all of producing favorable outcomes, they must be multilateral, they must be carefully formulated, and they must be vigorously enforced. In effect, comprehensive multilateral sanc tions applied by a group of countries or by an international orga nization should be more likely to reach major policy goals than unilateral ones, as they inflict higher costs on the targ et government. In this regard, Stremlau noted: Washington, along with mo st everyone else, has learned important lessons about the efficacy of sanctions in the post-Cold War era. The most important is that the broader the international support, the more likely that the regime will be effective (Stremlau 1996). The crucial probl em, especially for a dominant user of

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202 sanctions like the United States, is that multilateral agreements are difficult to achieve due to diverse security interests of poten tial coalition countries and often requires watering down the sanctions imposed (Hufbauer et al 1990: 96; Hufbauer 1999). During the 1990s, the United Nations and European Union countries have been resorting to economic coercive measures with much more frequency than in previous decades. Since the end of the Cold War, the UN has imposed mandatory sanctions 11 times as compared to only twice (against Rhodesia and South Africa) prior to 1990, and EU countries 19 times as compared to just 9 in the previous two decades. Yet, most United Nations actions are weakly enforced arms embargoes, and several European sanctions involve relatively minor aid cutoffs (Elliott and Oegg 2002). As the fairly limited scope of these measures seems suita ble for the achievement of modest policy objectives, the use of unilateral sanctions (even if they rare ly work) could be in some cases the only option available to U.S. policymak ers to pursue major fo reign policy goals. And when the U.S. goals are more modest, they could simply be pursued unilaterally from the outset since there is less need fo r international coopera tion. After all, HSE found that, in general, the greater the number countries n eeded to implement sanctions, the less likely it is that they will be effective (Hufbauer et al 1990: 95). In the post-Cold War era, the United Stat es has continued to rely on unilateral sanctions as a tool of forei gn policy. To some degree, the declining number of new cases of U.S. unilateral actions in the last decade is due to the fact that, by 1989, Washington already had sanctions in place against a large number of target countries. During the 1990s, high profile cases were launched against India and Pakistan (nuclear sanctions), and some existing sanctions programs (notably with respect to Cuba, Libya, Iran, Burma,

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203 and Sudan) were strengthened. Nevertheless, the decline of new initiatives is also the result of growing concerns among U.S polic ymakers and corporate leaders about the effectiveness of unilateral sa nctions in an increasingly in terdependent global economy and their costs for American businesses (Carter 2002).2 Furthermore, U.S. efforts to combat terrorism and drug trafficking, promot e human rights, reduce ethnic conflicts and protect the environment led to a proliferation of smart sanctions that target specific individuals and organizations rather than entire countries (Cortri ght and Lopez 2002). Before proceeding with the analysis of sp ecific cases of U.S. unilateral sanctions, namely against Sudan, Myanmar and Iran, it is us eful to discuss some potential effects of globalization on the utility of economic coercive measures. On the one hand, globalization and the growing in terdependence of countries ma ke the latters economies more vulnerable to comprehensive and fully enforced multilateral sanctions. Today, this kind of foreign pressure is potentially more harmful to target countries than it was a few decades ago as the worlds economies are in creasingly connected through international trade in goods and services, transnational capital flows (f oreign direct and portfolio investment, loans and aid), and cross-border remittances by migrant entrepreneurs (Van Bergeijk 1995: 448). However, as men tioned above, comprehensive multilateral sanctions are extremely rare due to the di fficulty of building consensus on a target 2 In a rapidly changing global economy, Washingtons unilateral economic sanctions are not only decreasingly useful, thus undermining the credibility of U.S. leadership, but also increasingly costly to the sender. It is reported that U.S. sanctions against 26 target countries cost the United States as much as $15 billion to $19 billion in forgone merchandise exports in 1995, that would mean a reduction of more than 200,000 jobs in the export sector and a consequent loss of about $1 billion annually in export sector wage premiums. Hufbauer Gary Clyde, Elliott Kimberly Ann, Cyrus Tess and Winston Elizabeth. U.S. Economic Sanctions: Their Impact on Trade, Jobs, and Wages. Washington D.C.: Institute for International Economics, April 1997. A recent study also found that U.S. sanctions against 8 countries (Afghanistan, Cuba, Iran, Iraq, Lybia, North Korea, Sudan, and Yugoslavia) cost the United States about $9 billion in forgone merchandise export in 1999. For more details see Hufbauer, Gary Clyde and Oegg, Barbara. The Impact of Economic Sanctions on U.S. Trade: Andrew Roses Gravity Model. Washington D.C.: Institute for International Economics, April 2003.

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204 governments behavior. For instance, the United States has been unable to convince other nations that Irans behavior, includi ng its support for terrorism, subversion, and opposition to the Middle East process, calls for the enactment of strong economic penalties (Haass 1998: 6). On the other hand, the same transnational li nkages that could enha nce the impact of multilateral coercion on a target country also ma ke the latter less vulnerable to unilateral sanctions with little or no international c ooperation. With the decl ining dominance in the world economy of the United States,3 most American unilateral sanctions simply transfer business from U.S. companies to foreign comp etitors in the same market. Interestingly, HSE revealed that in several episodes either provoked or derived from East-West rivalry during the Cold War, adversaries of the sende r country (referred to as black knights) assisted the target, thus eroding the chances of sanctions success. They argued that, with the end of the Cold War, black knights may in the future be less likely to appear on the sanctions scene to rescue target countries (H ufbauer et al. 1990: 96-97). But in the late 1990s, Schott (1998) observed: Too often the economic impact of our (U.S.) sanctions is offset by alternative suppliers of goods and capitals whose governments agree with our goals but not the tactics to achieve them. In other words, transnational actors such as multinational corporations and migrant entrepreneurs, usually based in countries that share the sa me objectives of most U.S. sanctions, could be the black knights in t odays global marketplace as their activities sustain huge flows of capital across national borders, including to target nations. And in 3 It should be noted that the world export shares of several leading export countries, not only the United States, have decreased during the last decade. Betw een 1993 and 2002, the seven top exporters (United States, Germany, China, Japan, France, United Kingdom, and Italy) lost 5% of their combined share in world exports. This trend is not due to a decline in the exports of leading nations, but to a significant and rapid expansion of exports of other countries (Askari et al. 2005: 43-44).

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205 some cases, as the importance of Cuban American remittances in the Cuban economy suggests, rescuers might be located in the same country that has placed economic coercion at the center of its foreign polic y. Although the fundamental assumption of most research on sanctions is that they are an activity between states (Morgan and Bapat 2003: 65), transnational actors practices a nd their economic impact on target nations should receive greater attention in a gr owingly interconnected global economy. The Case of Sudan Since June 1989, Sudan has been governed by what is in effect an alliance between the two main forces that had backed the milita ry coup of that year, the Islamist-oriented military leadership and the National Islamic Front (NIF), which espouses an Islamist platform (Niblock 2001: 199). Lieutenant-G eneral Omar Hassan Ahmed al-Beshir took power as president of the Revolutionary Command Committee soon after the coup and was sworn in as national president in 1993. He was elected in March 1996 for a five-year term and re-elected in December 2000. The Sudanese leaders of the so-called Salvation Revolution of 1989 abolished all the existing executive and legislative in stitutions of government, suspended the Constitution, arrested many prominent civilian politicians, restricted freedom of the press, and banned all political par ties and partisan political activity.4 Above all, this turn of events exacerbated the ethnic and religious struggles that had plagued Sudan since its independence from Great Britain in 1956. As the new Islamic military junta set out to merge religious indoctrination and conversion with education, social services, economic development, and political mobilization, the traditionally fierce conflict between the 4 The National Congress (NC), known as the National Islamic Front (NIF) until it changed its name in 1998, is Sudans ruling party.

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206 Muslim Arab north and the African Christian south worsened dramatically. Furthermore, the governments attempt to enforce Ar abization and Islamization along narrowly sectarian lines led many Muslim groups to join the opposition under a single, multiethnic command. By 1999, this new force, called the National Democratic Alliance (NDA), included several armed and unarmed groups opera ting all over the country. In Connells words, What started in the 1950s as a battle between the Arabized, Islamic north and the non-Muslim, African south has become a contest between an extremist Islamic movement that controls the countrys cen ter and a diverse alli ance of peoples and political groups that challenge it from the periphery (Connell 2001). In effect, even if the conflict in the south came to a formal close on January 9, 2005, with the signature of a peace agreement between southern rebels a nd the central government (and the promise to establish soon a new Government of Nationa l Unity), another violent crisis erupted in February 2003 when the non-Arab Muslims in Sudans Western Darfur region mobilized and took up arms against the Khartoum regime. Over the past 15 years, the Sudans ci vil war has been ch aracterized by an incremental ferocity. It has displaced mo re than four million people, leading to widespread malnutrition and starvation, cause d the deaths of nearly two million, and forced 600,000 into exile (USCRI 2005). Th e prevalence of extensive human rights violations, in particular the de nial of religious freedom and the persecution of people with different religious beliefs, was one of the main reasons behind the United States decision to impose comprehensive unilateral sanctions on Sudan in 1997 (Hufbauer et al. 2001). However, sanctions were also applied because of the Sudanese regimes active support for international terro rism and its efforts to destabilize neighboring governments.

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207 Sudan has been on the United States list of state sponsors of terrorism since 1993, after being accused of providing sanctuary, safe passage, military training, and financial support to radical Islamic groups primarily of Middle Eastern origin such as Egypts Islamic Jihad, Irans Hezbollah, and the Pale stinian Hamas. The Saudi-born Osama Bin Laden residence and activiti es in Sudan during the 1990s,5 the Khartoum regimes connections with Iran, and its alleged involvement in th e attempted assassination of Egyptian President Hosni Mubarak in June 1995 in Addis Ababa (Ethiopia) were additional elements cited by Washington to proc laim Sudan as a player in the world of international terrorism (Ousman 2004: 92). Soon after the assassination attempt in A ddis Ababa, Egypt, with the collaboration of Ethiopia and strong support from the Unite d States, sought international condemnation of Sudans behavior and put fo rward a resolution before the UN Security Council. In an attempt to force the Sudanese government to abandon its terrorist activities and extradite three Egyptian suspects involved in the att ack on President Mubara k, the United Nations imposed sanctions against Sudan in April 1996. But these penaltie s fell well short of what Washington had favored. (Niblock 2001: 2 06). They simply required all states to reduce the number of Sudanese embassy and co nsular staffs and restrict the entry or transit in their respective territories of member of Sudan's government, civil service and armed forces. Whereas the United States favor ed stronger sanctions (and was one of the few nations to honor the diplomatic ones) to lo wer the risk of further instability in the Eastern African region, the Middle East and wi thin Sudan, Egypt managed to block more severe measures that would have threatened Sudan's territorial integrity and victimized 5 Osama Bin Laden resided in Sudan between 1991 and 1996. In May 1996, under increasing pressure from Saudi Arabia, Egypt and the United States, Sudan expelled him to Afghanistan.

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208 its people (Mideast Mirror, Ap ril 29, 1996). And some of the major Security Council members, namely Russia and China, refused to support any kind of penalties against the Khartoum regime. Another UN resolution adopt ed in June 1996 that established a ban on Sudanese aircraft never went into effect be cause the Council failed to set a date for its entry into force.6 Being unable to build support fo r vigorous multilateral sanctions on Sudan, the U.S. government was left with no choice but to pursue unilateral measures. On November 3, 1997, President Clint on signed executive order 13067, imposing comprehensive economic sanctions on Sudan. Then U.S. Secretary of State, Madeleine Albright, specified that penalties had b een applied because the UN Security Council measures had failed to stimulate a favorab le response from the Sudan regime (EIU, November 1997). Washingtons sa nctions establish that goods and services of Sudanese origin may not be imported in the United States either directly or through third countries without a license, ban all U.S. exports to S udan (except regulated sales of agricultural commodities, medicine, and medical devices), and prohibit U.S. investment there. They also block all Sudanese assets in the Unite d States and forbid U.S. banks from extending loans to Sudan. Licensed U.S. money servic e businesses are allowe d to send and receive personal remittances to and from Sudan, provi ded that such transfers are not processed through a bank owned or controlled by the Khartoum government. According to a U.S. State Department o fficial, economic sanctions against Sudan were more a statement of principle than anything else (EIU, November 1997). They simply expressed disapproval of Khartoums behavior and harbor ed little hope of 6 Since then, even Egypt and Ethiopia have supported ending the sanctions against Sudan (Reuters 2001). On September 28, 2001, the UN Security Council adopted Resolution 1372, by a vote of 14 in favor to none against, with one abstention (the United States), in which it decided to lift the diplomatic sanctions imposed in 1996.

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209 exercising a strong economic pressure on Suda n due to the relatively minor trade and financial dealings between the latter and th e United States (EIU, November 1997). Yet, as previously observed, the public proclamati on of achievable goals, even when they are less impressive than the real ones, is a co mmon tactic used by policymakers to avoid criticism for an eventual failure. Indeed, Al bright admitted that U.S. sanctions aimed to deprive the Khartoum government of the fina ncial and material benefits of U.S. trade and investment, including... in Sudan's petr oleum sector (Mideast Mirror, November 6, 1997). Considering the wide scope of U.S. restrictions, and Washingtons subsequent attempts to discourage foreign companies from investing in the Sudanese market, it is conceivable that the actual objectives of U. S. policy were far more ambitious than the stated ones. In December 1997, for instan ce, Albright met with Sudanese opposition figures in Uganda and called for a change of regime in Sudan (Mideast Mirror, December 16, 1997). Table 6-2. Sudan: Foreign Direct In vestment, Remittances, and GDP Growth Average 1990-97 1998 1999 2000 2001 2002 2003 Average 1998-03 FDI ($U.S. Million) 22 371 371 392 574 713 1349 628 Remittances ($U.S. Million) 174 686 664 638 730 970 1218 818 GDP Growth (annual % change) 4.7 5.7 6.5 6.9 6.1 6.0 6.0 6.2 Sources: UNCTAD, World Investment Report, 2002 an d 2004; IMF, Balance of Payments Statistics Yearbook, 2004 and previous editions; IMF, World Economic Outlook, 2005 and previous editions. As exemplified in Table 6-2, the overall impact of U.S. unilateral sanctions on Sudans economy has been negligible. Offici al figures show that both foreign direct investment and remittances to Sudan have increased substantially since the imposition of U.S. penalties in November 1997. Betw een 1990 and 1997, the country received an annual average of just $22 million in FDI and $174 million in remittances. Since then,

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210 FDI has averaged $628 million per year, and remittances about $818 million per year. Not surprisingly, the annual rate of growth of the Sudanese economy also experienced an improvement in recent years.7 The GDP grew at an aver age rate of 6.2% between 1998 and 2003, as compared to 4.2% between 1990 and 1997. Mainly driven by a remarkable performance of the oil industry, Sudan s GDP increased by 7.3% in 2004, and is projected to expand by more than 8% in 2005 (EIU, June 2005). The bulk of FDI into Sudan is concentrated in the oil sector and, to a lower extent, power generation and telecommunications. While Sudan has extensive oil reserves, estimated to be at 563 million barrels in ear ly 2004, the exploitation of these resources has been delayed for a long time because of the civil war and the high-risk nature of investment deterring potential foreign fina nciers. Since the mid-1990s, however, several foreign companies have entered the Sudane se market as the Khartoum government actively courted overseas investors to complete an oil export pipe line and develop its southern oilfields. Commercial export of oil, which began only toward the end of 1999, currently accounts for over 70% of Sudans to tal export revenues (Middle East 2005: 18). Companies from China, Malaysia and India ar e the most important foreign investors in the African country. Oil activ ities in Sudan, in fact, are dominated by the Greater Nile Petroleum Operating Consortium (GNPOC), a joint venture comprised of China National Petroleum Corporation or CNPC (40%), Mala ysias Petronas Carigali (30%), Indias ONGC Videsh (25%), and Sudans Sudapet (5%). GNPOC, formed in March 1997, is estimated to spend $350-450 million per year on oil exploration and development, and 7 Just to give an idea about the growing importance of foreign capital inflows in Sudans economy, foreign direct investment and remi ttances combined represented 10.7% of the countrys GDP in 2001, more than 12% in 2002, and approximately 16% in 2003.

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211 slightly less on operating costs.8 Over the past two years, CNPC, ONGC Videsh and Petronas won additional contra cts to conduct new oil explor ations, build new pipelines, upgrade existing refineries, and open retail ou tlets in Sudan. As a result of these operations, the Sudanese government should re ceive an average of $1.2 billion per year in oil revenues until the end of the decad e (U.S. Department of State, March 2004).9 The imposition of comprehensive U.S. sanc tions against Sudan in late 1997 is hardly coincidental. At a time in which Khartoum was granting oil concessions to a number of foreign companies, Washington m oved rapidly to prevent U.S. corporations from entering the Sudanese market. A fe w years later, given that U.S. unilateral measures had had no serious economic impact on Sudan, and being unable to obtain cooperation from allies and trading partners American policymak ers tried to impose secondary sanctions on firms located in th ird countries. As the State Department Spokesman James Rubin said in early 2000, We are very concerned th at investment in Sudans oil sector strengthen the capacity of the Khartoum regime to maintain and intensify its brutal war against its own pe ople (Oil & Gas Journal, February 2000). The June 2001 House version of the Sudan Peace Act, aimed to persuade the Sudanese government to enter into peace negotiations with the southern rebels,10 included a provision that prohibited any entity engage d in the development of the oil sector in Sudan from raising funds in a ny capital market in the Unite d States. Although the Senate 8 The GNPOC venture is exploring and developing oil reserves previously identified by the U.S.-based Chevron Corporation. The latter operated in southern Sudan between 1975 and 1990, when it was forced to abandon the country due to the eruption of fighting between central government and rebel forces. 9 These figures do not take into account the earl y 2005 peace agreement in Sudan, which entitles the government of the south to half of the revenues from the countrys burgeoning oil industry. 10 The Sudan Peace Act of October 21, 2002, requires the U.S. president to make a determination and certify within six months of enactment, and every six months thereafter, that the government of Sudan and the southern rebels are negotiating in good faith and negotiations should continue.

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212 omitted this provision in its version of th e bill (enacted in October 2002 without the capital market restrictions), some Western o il companies withdrew fr om their investment in Sudan under increasing U.S. pressure. But th ey were quickly replaced by Asian firms. In 2003, Canada-based Talisman Energy Inc. so ld its 25% stake in GNPOC to Indias ONGC Videsh for over $750 million, and Sweden-based Lundin Oil sold its 40% stake in a southern block to Malaysias Petronas for $140 million (EIU, September 2003). Thus, the Khartoum regime experienced little diffi culty in finding new foreign partners willing to take up positions in the countrys oil sect or. And even if the capital market sanctions proposed by the House had been enacted, foreign investors in Sudan would still be able to sell stocks and raise funds in non-US capital markets (Hufbauer and Oegg 2002). Washingtons economic sanctions agains t Sudan not only prohibit U.S. direct investment there, but also gr eatly complicate money transfers to the African country from the United States by establishing that financial institutions linked to or owned by the Khartoum regime cannot process these transactio ns. It is difficult to assess the impact of U.S. penalties on the flow of remittances reach ing Sudan from abroad due to the lack of comprehensive and reliable statistics. Official figures on remittances to Sudan, as recorded by its central bank, show a notable increase in recen t years. But these figures are likely to grossly underreport remittance leve ls, as informal transfers (funds are often sent by hand or picked up in neighboring c ountries) are estimated to account for about 85% of total remittance receipts (Sander and Munzele Maimbo 2003: 13). A substantial portion of remittances to Suda n is sent from Egypt and the oil-rich Arab countries (mainly Libya, Iraq, Saudi Ar abia, and Qatar), wher e many highly skilled and white-collar Sudanese workers have migr ated since the early 1980s. Nevertheless,

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213 the exodus of refugees to neighboring African countries, the United States, Canada, and Europe also increased after the military c oup of 1989 (Abusharaf 1997: 520). Thus, it is possible that remittances from these nations are making a growing contribution to the total flow of money tr ansfers to Sudan from abroad, im proving the recipients well being and stimulating the overall development of the country. A recent study on southern Sudanese Dinka men and women who resett led to the United States (San Diego, California) found that these refugees rely heavily on remittances to support an everincreasing number of kin afar. In fact, the amount of money they ha ve available to them at any given time is significantly lower than the sum of their remittance obligations and other financial responsibilit ies (Riak Akuei 2005: 8). After almost eight years since the enactme nt of U.S. unilateral sanctions on Sudan, several important problems in the African country remain unresolved. The comprehensive peace accord of January 2005, which brought an end to the decades-old civil conflict between the Arab-dominated government in Khartoum and African-led rebels in the south, is certainly a positive development, and arguably a success for the United States. However, while sharing pow er in the national government, the current regime will retain the largest share of seats in government, parliament, and other political bodies during a six-year interim period, after which the south will hold a selfdetermination ballot on whether to remain part of a unified Sudan. Even more important, the ongoing crisis in Sudans Western Darfur region continues to dominate the political scene. About 400,000 people died between February 2003 and April 2005, 250,000 as a result of diseases in inte rnally displaced and refug ee camps, and 150,000 as a direct consequence of violence (EIU, June 2005). Finally, Sudan has recently shown some

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214 willingness to cooperate with international c ounter-terrorism efforts, but it continues to reject calls for the extradition of three suspects in the assassination attempt on Egyptian President Mubarak in 1995 and for the end of its support to Isla mic terrorist groups (Hufbauer et al. 2001). As the analysis in this section reveals, foreign direct investment and remittances have practically nullified the overall impact of U.S. unilateral sanctions on Sudans economy. Hence, it cannot be excluded that th e limited success of U.S. policy toward the Khartoum regime might be the result of activ ities carried out by transnational actors. Further research on this pot ential outcome should focus on the operations of foreign investors in Sudans key sectors such as oil, energy, and tel ecommunications, and the flow of remittances from the oil-rich Arab countries and the United States. Moreover, the U.S. House of Representatives attempt to im pose capital market sanctions with respect to Sudan raises the need for an examination of the presence of U.S. shareholders in foreign companies that have invested in the Sudanese market. The Case of Myanmar (Burma) Since 1962, Burma has been ruled by highly authoritarian military governments dominated by members of the majority Bu rman ethnic group, which accounts for about 70% of the countrys population. On September 18, 1988, amid violent student demonstrations and workers riots in re sponse to the worseni ng ethnic conflict and economic situation,11 General Saw Maung, commander of the Burma Army, seized 11 Since its independence from Great Britain in 1948, Burma has witnessed a series of civil wars between the central government and ethnic minority militias, located for the most part in the eastern half of the country. By the 1980s, mainly as a result of increasing military contro l, there was no major ethnic group that did not have some element of its population in revolt (Steinberg 2001: 185). This situation was further exacerbated by the governments sweeping demonetization program of 1987, mainly aimed to combat inflation and eliminate the growing black market by declaring illegal all high-denomination banknotes (and no compensation was to be paid for them). The action rendered 60-80% of money in

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215 power in a military coup. Soon after the c oup, the new regime dissolved the previous single legal party, the Burma Socialist Progr am Party (BSPP) of General Ne Win, banned the constitution, and established a new ruli ng junta called the State Law and Order Restoration Council (SLORC). In an effort to restore order, it also initiated a brutal suppression of popular discont ent that killed over 2,000 dissenters and forced some 10,000 students and young people to flee to Th ailand, where many sought refuge, or to the Indian and Chinese borders (Steinberg 2001: 2-3). In 1989, the SLORC changed the countrys name from Burma to Myanmar, and that of its capital from Rangoon to Yangon.12 After almost two years of martial law, the people of Myanmar clearly expressed their will in the relati vely free national parliamentary elections that were held on May 27, 1990. Voters overwhelmingly supported antig overnment parties, with the National League for Democracy (NLD) led by Aung San Suu Kyi winning more than 60% of the popular vote and 82% of the parliamentary se ats (Smith 2001: 17). It should be noted that the NLD won the general elections even though its leader, who had become the most important and influential figure of the democratic opposition in Myanmar, was under house arrest. But the SLORC refused to allow a new parliament to form on the basis of the election results. Rather than releas ing Aung San Suu Kyi (she is currently under house arrest after being detained and rele ased several times over the last decade)13 and circulation worthless. Coupled with higher prices of most basic products, in particular rice, this decision led to a drastic worsening of economic conditions in Burma and sparked massive demonstrations that were suppressed by the military with violent means (Kurlantzick 2002). 12 Both the United States and the opposition in Burma do not recognize the name Myanmar or the military regime that represents it. 13 Under normal circumstances, Aung San Suu Kyi, the daughter of General Aung San, who negotiated Burma's independence from Britain in 1948, would have assumed the office of Prime Minister because of

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216 transferring power to the elected civilian government, the military junta arrested thousands of NLD members a nd continued to violate human rights by preventing prodemocracy forces to convene for the appr oval of a new constitution and limiting the activities of ethnic minorities. In Nove mber 1997, the State Peace and Development Council (SPDC) replaced the SLORC as the domi nant political entity in Myanmar, but this change did not transform the fundamenta l nature of executive recruitment, which remains a designative act within the military apparatus. In 2000, Myanmar became the only country to be sanctione d by the International Labour Organization for the use of forced labor and for providing safe haven to drug traffickers (Thawnghmung 2003: 39).14 While maintaining a strict control over Myanmars society, after 1988 the SLORCSPDC government abandoned some of the econo mic policies of the previous socialist regime and embarked on a gradual process of economic liberalization. This process aimed to improve living standards and spur economic growth by expanding the role of the private sector, limiting the scope and extent of state in tervention, and stimulating the countrys integration with the global ec onomy (Collignon 2001: 84). The new set of market-oriented economic reforms, implemented in the late 1980s and in the first half of the 1990s, included the promotion of foreign investment (under the Union of Myanmar Foreign Investment Law of November 30, 1988), the reduction of restrictions on exports of agricultural products (with the exception of rice), and the expa nsion of the private sector in manufacturing and tr ade activities. In additi on, the government legitimized foreign exchange transactions, simplified th e tariff system and reduced duties, and her partys victory in the 1990 elections. Suu Kyis struggle for democracy and human rights in Burma won her a Nobel Prize in 1991. 14 Myanmar is one of the most important trading houses for narcotics in the Asian region. It is number two in worldwide heroin production after Afghanistan, and is becoming a leading manufacturer of amphetamine-type-stimulants (ATS) to meet growing demand, mainly in Southeast Asia.

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217 implemented a modest program of privati zation of small state economic enterprises (ADB, November 2001). Some scholars, though, argued that the pr ivate sector in Myanmar was never allowed to work effectively due to the omni present role of the st ate and the lack of autonomous institutions. In fact, the military has attempted both to co-opt and to control the economy through the formation of a numb er of state-owned corporations that dominate key economic sectors (namely ener gy and heavy industry) and participate in joint ventures with foreign companies, through a network of military procurement factories, and through an endle ss list of regulations and hortatory statements (Steinberg 2001: 135). The 1995 World Bank assessment of economic reforms in Myanmar is emblematic in this regard: The stringent re strictions on private sector participation in economic activity have been reduced, and a range of fiscal incentives extended to domestic private businesses. Despite the many legislative measures that have been implemented, however, the earlier biases have no t yet been redressed in all areas, and the picture that emerges is one of patchy reform rather than of coordinated systemic change (World Bank 1995). The militarys intention to retain a substantial degree of economic control is also demonstrated by the fact that Myanmars transition toward a market-based economy has taken more steps backward than forward over the last ten years. Liberalization efforts began to stall in the second half of the 1990s and, more recently, some reversals took place when the government decided to raise impor t taxes (imports of non-essential goods had been prohi bited in 1996) and ban exports of several agricultural commodities (EIU, August 2004).

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218 The immediate reaction of the United States to the military coup of September 1988 in Yangon, and the ensuing massacre of unar med demonstrators in the streets of the capital, was the suspension of all U.S. arm sa les and assistance, except humanitarian aid, to Myanmar (Lintner 1988: 17).15 The European Community took a similar decision with respect to its development aid. And a few months earlier, the two largest foreign aid donors to Myanmar, Japan and West Germa ny, respectively, had already suspended all assistance to the Asian nation on the grounds that the military government was violating basic human rights.16 Therefore, Washington was initially able to build considerable international support for its attempt to stim ulate democracy and the respect of human rights in Myanmar (and force th e latter to undertake anti-nar cotic activitie s) through the imposition of aid sanctions against Yangon. Yet, U.S. subsequent efforts to significantly expand economic penalties on the Burmese regi me did not receive the same degree of international cooperation. Whereas the United States suspended Myanmars eligibility for benefits under Generalized System of Preferences (GSP)17 in 1989, and placed addi tional restrictions on U.S. financing to the Asian nation in the mid-1990s, Japan resumed development aid to the Burmese government in 1995. That year, Japan first provided $10 million in agricultural assistance to Myanmar as a carrot to en courage the liberation of opposition leader Aung San Suu Kyi. Then, after her rele ase from house arrest in July, rewarded the 15 In the aftermath of the military coup, Washington stopped a scheduled delivery of ammunition for the Burmese armys U.S.-made carbines and M-79 grenade launchers. 16 For further details on the events that preceded General Saw Maungs takeover in Burma see: Lintner, Bertil. Backdown or Bloodbath. Far Eastern Economic Review v.141, n.38, September 22, 1988. 17 The U.S. Generalized System of Preferences (GSP), a program designed to promote economic growth in the developing world, provides preferential duty-free entry for more than 4,650 products from 144 designated beneficiary countries and territories.

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219 Burmese generals with an additional $16.25 million grant to fund repairs to a nursing school in Yangon (Barr 1995). While refusing to lift aid sanctions on Myanmar until further strides toward restoring democracy had been made, even the United States and the European Union began to develop different st rategies on how to promote such an outcome. Between 1996 and 1997, the EU introduced a vi sa ban (following a similar U.S. ban) on members of the Burmese military regime and withdrew Myan mars GSP privileges due to the countrys forced labor practices. The United States, instead, attempted to build international support for investment sanctions on Myanmar and imposed secondary boycotts against those countries that supplied goods or capital to the military regime of Yangon. It should be noted, however, that secondary sancti ons were not applied by the U.S. federal government but by state and local governme nts. In June 1996, for instance, the Commonwealth of Massachusetts passed a legi slation that barred state agencies from buying goods or services from both U.S. a nd foreign companies doing business in the Burmese market (AP, June 25, 1996). Eleven U.S. cities, including San Francisco, Oakland, and New York, followed this in itiative by adopting similar laws. Unable to convince or force other nations to place restrictions on investment activities in Myanmar, and facing a challenge at the World Trade Organization from the European Union and Japan over the Massachus etts law (declared unconstitutional by the U.S. Supreme Court in 2000), Washington decided, once again, to act unilaterally. On May 20, 1997, President Clinton imposed a comp rehensive ban on new U.S. investment in Myanmar, and prohibited U.S. persons from purchasing shares of foreign firms whose profits are predominantly derived from busines s operations in that country. Clintons

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220 decision was met with skepticism and hostility from Southeast Asian nations that had invested heavily in the Burmese market. It also generated some anxiety among traditional American allies such as the EU Australia, and Canada, which feared the possibility of further secondary boycotts against their companies in case of failure of U.S. policy to bring about democratic ch anges in Myanmar (Hadar 2001: 418). In order to evaluate the economic impact of U.S. unilateral sanctions, Table 6.3 presents data on foreign direct investment and remittances to Myanmar, and the countrys GDP annual growth, before and after 1997. It must be emphasized that, until recently, Washington had no restrictions in place on mone y transfers to people in Myanmar. Yet, in July 2003, President Bush issued an executi ve order freezing the U.S. assets of senior Burmese officials and severely limiting all re mittances to the Asian nation. He also signed a legislation banning the import of Burmese products. In explaining the sanctions, Bush stated: By denying these rulers the ha rd currency they use to fund their repression, we are providing strong incentives for democr atic change and human rights in Burma (U.S. Department of State, Ju ly 2003). Currently, U.S. indi viduals are authorized to send a maximum of $300 in remittances per Burmese household every three months, regardless of the number of individuals comp rising the household, and provided that no beneficiary is a person whose property is blocked in the United States. Washingtons unilateral measures agains t the Burmese regime have had little impact on the flows of foreign direct investment and remittances to Myanmar. They also seem to have had no discernible adverse e ffect on the Asian nations overall economic performance, although official GDP data prov ided by its military junta are deemed as highly unrealistic by internat ional observers (Dudley 2003: 4). Between 1990 and 1997,

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221 Myanmar received an annual average of $222 million in FDI and $54 million in remittances. Since then, FDI has averaged $248 million per year, and remittances about $88 million per year. Furthermore, acco rding to Yangon, the Burmese economy has witnessed a notable improvement since the im position of U.S. investment sanctions in May 1997. While Myanmar remains one of the poorest countries in the World,18 its GDP grew at an average rate of 11.2% between 1998 and 2003, as compared to 5.5% between 1990 and 1997. The Economist Intelligence Unit however, estimates that the countrys real GDP growth was significantly lowe r in recent years (EIU, August 2005). Table 6-3. Myanmar: Foreign Direct I nvestment, Remittances, and GDP Growth Average 1990-97 1998 1999 2000 2001 2002 2003 Average 1998-03 FDI ($U.S. Million) 222 684 304 208 192 191 128 284 Remittances ($U.S. Million) 54 137 97 77 86 82 52 88 GDP Growth (annual % change) 5.5 5.8 10.9 13.7 11.3 12.0 13.8 11.2 Sources: UNCTAD, World Investment Report, 2002 an d 2004; IMF, Balance of Payments Statistics Yearbook, 2004 and previous editions; IMF, World Economic Outlook, 2005 and previous editions. As shown in Table 6-3, the flow of FDI into Myanmar increased substantially in 1998 ($684 million), soon after President Clinton s decision to apply investment penalties on the Asian country. This is mostly due to the fact that, in early 1997, several U.S. firms anticipated the imminent ban on new invest ment in Myanmar by signing contracts with the Burmese regime, mainly in the oil and ga s sector. Even some European companies, warned by American officials that Myanma r is not a good place to do business if you do so in the U.S. (Bardacke 1997), rushed to co mplete agreements with the government of Yangon. Given that Washingtons restrictions allowed existing business deals to be 18 Myanmar has a population of 52 million and a GDP per capita of just around $300 dollars. See Myanmar makes achievements in absorbing foreign investment. Xinhuanet May 26, 2003.

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222 fulfilled, but not to be modified and expanded, U.S. firms secured contracts worth $339 million in February 1997 alone,19 compared with a total of just $21.4 million in 1995 and 1996 combined (Hadar 2001: 416). For instan ce, California-based Unocal and Francebased Total signed a major production-shari ng agreement with Myanmar Oil and Gas Enterprise (MOGE) to expand offshore natura l gas exploration in the Andaman Sea and build a gas pipeline between Myanmar and Thailand (Richardson 1997). By April 30, 1998, Myanmars military junta had approved 26 U.S. investment projects worth about $582 million (Steinber 2001 : 154). Since then, new U.S. investment has been zero, and European countries have largely stayed away from the Burmese market. Moreover, a number of existing fo reign investors pulled out of Myanmar as a result of U.S. sanctions. Facing the thr eat of market boycotts at home under the Massachusetts law, American companies su ch as Apple Computers, Kodak, HewlettPackard, Levi Strauss, and Pepsi Cola left the Asian nation in 1996. Additional firms that pulled out between 1997 and 1998 include th e U.S. corporations Texaco, Compaq Computers, Liz Claiborne, Amoco, and R eebok, and European companies such as Heineken, Ericsson, Seagrams, Carlsberg, a nd Phillips Electronics (Boyd 2002). But FDI has continued to flow into Myanmar in rece nt years as major investors from Western countries were quickly replaced by entities from East Asian nations. Just to cite a few examples, Texaco sold its share in an offshore oil and gas field to Malaysias Petronas. A Chinese firm, instead, won a contract for a port development project in Yangon after a U.S. engineering company (which had done preliminary work) renounced to a formal bid because of U.S. sanctions (Preeg 1998). 19 In terms of capital involved, U.S. contracts repres ented almost half of all foreign investment projects ($694 million) authorized by the Burmese regime in February 1997.

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223 Since 1997, new foreign investment in Myan mar has come almost exclusively from Asian countries. Currently, the bulk of FDI is centered in the oil and gas sector and, to a lower degree, manufacturing, tourism, real es tate, and mining. In stock terms, according to official figures, the most important fo reign investors are fro m Singapore (about $1.6 billion in 66 projects as of March 31, 2004), United Kingdom ($1.4 billion), Thailand ($1.3 billion), and Malaysia ($660 million).20 And FDI data published by Myanmars military junta do not include substantial Chinese investment in mining, manufacturing, and infrastructure projects in the northern region of the country (McCarthy 2000: 243). As a further proof of the grow ing importance of Asian firms in the Burmese market, it is reported that in 2002 and 2003, apart from a $27 million British project in transportation, new investment in Myanmar came primarily from South Korea ($32.3 million in oil and gas and $2.6 million in fisheries), Thailand ($22 million in oil and gas), and China ($2.8 million in manufacturing).21 Thus, the economic impact of U.S. investment sanctions will remain minimal as long as Asian compan ies are willing to sign major business deals with the Yangon regime. As many nations cont inue to invest in Myanmar and import the countrys high-value products such as natural gas and timber, U.S. officials have recently admitted that some countries' governments are unlikely to do more than offer public support for a democratic transition (in Burma) (U.S. Department of State, May 2004). Even the European Union, which adopted a Common Position in October 2004 prohibiting EU firms from investing in Burmes e state-owned enterprises, omitted from its 20 It should be noted that these figures do not refer to the capital actually invested in Myanmar but only to the value of investment projects approved by the Burmese government. In 1999, the U.S. Department of State estimated that only about 28% of approved investments had been realized (Steinber 2001: 153). 21 For further details on the latest developments of foreign investment in Myanmar see: U.S. Department of State. Burma (Myanmar) Commercial Guide FY 2005. February 23, 2005. The section 005 Investment Climate Burma is available at: http://www.state.gov/e/eb/ifd/2005/41990.htm (last visited November 2005).

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224 list a number of Burmese entities in key s ectors such as oil, gas, timber, and telecommunications (BCUK, December 2004). Finally, official flows of remittances to Myanmar over the past decade and a half were substantially lower than FDI levels, but th e U.S. decision in July 2003 to stem these transactions suggests that mone y transfers from abroad could play quite an important role in the Burmese economy. That year, former U.S. Secretary of State Colin Powell stated: It's time to ban remittances to Burma so that the SPDC cannot benefit from the foreign exchange (Powell 2003). Washingtons latest restrictions agains t Yangon, in effect, virtually ban all dollar remittances to Myan mar because U.S. banks are no longer allowed to clear money transfers to that country. Nevertheless, the Asian nations military junta quickly reacted by instructing all government organizations a nd private businesses to use euros rather than dollars for internati onal transactions (BBC, August 15, 2003). In addition, a large share of overseas remittances to Myanmar, mostly coming from Thailand, are sent through unofficial mechanis ms due to the governments strict control over foreign exchange. The most popular method of transferring funds is the Hundi system (Vicary 2004: 35), an underground paym ent system that relie s on the pervasive social network of migrants to offer doo r-to-door service. With about one million Burmese people currently working abroad (EIU, October 2002), it cannot be excluded that remittances might help keep Myanmars economy afloat despite renewed U.S. pressures. So far, U.S. unilateral sanc tions against the Yangon regi me, and additional coercive measures implemented by the European Union, have done little to promote democratic changes in Myanmar. While these sanctions certainly hurt the country s already troubled

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225 economy, there is no sign of meaningful political and economic reforms. Notwithstanding its promises to restore democracy and systematically hand over state power to the public, the Burmese government continues to strengthen the role of the military and deny freedom to political prisoners, use forced labor on a large scale, engage in narcotics production, and resist economic liberaliza tion (EIU, August 2005). As investors from China, Thailand, South Korea, and India increased their presence in the Burmese market, and arguably helped the survival of the current military regime, further research should explore the effects of FDI activities, mainly in the natural gas sector,22 on Myanmars economic performance. A co mprehensive survey of Burmese people working abroad, especially in Thailand, would also shed light on the methods and size of remittances to Myanmar, and their role in mitigating the economic intent pain of U.S. sanctions. The Case of Iran The United States has maintained various economic penalties against Iran since 1979, following the countrys Islamic revolution and the seizure of the U.S. embassy in Tehran that year. Washingtons incremental sanctions on the Iranian regime over the past 25 years are one of the most emblematic exampl es of a U.S. unilateral attempt to achieve ambitious foreign policy objectives with little or no multilateral assistance. Since the early 1990s, the European Union has favored a policy of engagement or critical dialogue with Iran (and encour agement of moderate forces th ere) as the more effective route to changing the latters questionable behavior, especially its alleged support for international terrorism, its efforts to underm ine the Middle East peace process, and its 22 Between 1998 and 2002, Myanmars annual revenues from natural gas exports were about $200 million, or 11% of the country's total export earnings. See Natural gas contributes much to Myanmars economy. Xinhuanet September 3, 2002.

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226 drive for nuclear weapons. The UN Secu rity Council, instead, has never applied economic sanctions on Teheran, mainly because of China and Russias disagreement with the U.S. evaluation of Irans behavior. Beij ing and Moscows arm sales to and extensive energy-related interests in Iran also played a role in this regard (Clawson 1998: 89-90). The Iranian revolution of 1979, carried out by Islamic rebels under the leadership of the Ayatollah Ruhollah Khomeini, overthr ew the regime of Mohammad Reza Shah Pahlavi, a staunch and powerful ally of the United States (Alikhani 2000: 20). The revolutionaries dismantled the shahs secu lar monarchy, put an end to the countrys symbiotic relation with Washington, which ha d helped sustain the latters economic and political interests in the Persian Gulf region, and establis hed the Islamic Republic of Iran. On November 4, 1979, militant Islamic students stormed the U.S. embassy in Teheran and took 52 Americans in hostage. The Khom eini government did nothing to prevent this action, voiced its support for the occupa tion, and branded America as the Great Satan. The students demanded that Pahlavi, who had fled the country and was at the time receiving treatment for cancer in th e United States, stood trial in Iran.23 Washington responded to these developments with a series of economic measures, including the freeze of $12 billion of Iranian assets (mainly deposits and se curities held by U.S. banks and their overseas branches), and a ban on imports of Iranian products. After almos15 months of intense negotiations, and a U.S. failed attempt to free the embassy staff in 1980 in which eight U.S. soldiers died, the crisis ended in January 1981 with the release of the American hostages. Most Iranian assets we re immediately unfrozen and bilateral trade between the two countries resu med (OSullivan 2003: 48-49). 23 Once his course of medical treatment in the United States had finished, Pahlavi lived for a short time in Panama and then went to Egypt, where he died in Cairo on July 27, 1980.

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227 Throughout the 1980s, Irans support of terro rist groups and it s hostile stance toward the United States and other countries of the region triggered new U.S. coercive measures against the Khomeini regime. In January 1984, due to the alleged Iranian involvement in the bombing of a U.S. Mari ne base in Beirut, Lebanon, three months earlier,24 the State Department added Iran to the li st of nations sponsoring terrorism, thus imposing more stringent controls on U.S. expor ts to that country. Over the next few years, following the beginning of the Iran-Ir aq war and the action by a fundamentalist Shiite faction with ties to Iranian leaders that took several Americans hostage in Beirut in 1985 (many were released after almost thr ee weeks in captivity), President Ronald Reagan imposed a number of restricti ons on U.S. trade with Teheran. In 1984, Reagan banned U.S. exports to Iran of five substances that could be used to produce chemical weapons and denied license applications for exports of aircrafts, helicopters, and other related parts (Flemi ng 1984). Then, in 1987, he prohibited U.S. sales of additional types of potentially militarily useful goods (including inboard and outboard motors, mobile communications equi pment, electrical generators, and hydrofoil vessels) and banned all imports from the Midd le Eastern nation. As a result, Iranian exports to the United States, mainly oil, came virtually to a halt, but U.S. pressures on other nations to curtail their oil purchases from Iran failed to produce any meaningful results. An American plan to send a senior o fficial delegation to the capitals of friendly consuming countries such as Japan, Italy, and West Germany was dropped because U.S. officials recognized that cooperation was un likely to be obtained (Johns 1987). By 1989, when Khomeini passed away and was repl aced by Ali Akbar Hashemi Rafsanjani, 24 In October 1983, a suicide bomber detonated his truck at the U.S. Marine base in Beirut, Lebanon. The death toll was 241 Americans, including 220 marines, 18 navy personnel, and 3 army soldiers. Almost simultaneously, a similar attack on the base of French peacekeepers killed 58 paratroopers.

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228 Washingtons relations with Teheran had remained tense, although President George Bush unfroze $567 million of Iranian assets that year hoping to receive Irans help for the release of the remaining U.S. hostages in Beirut (Reuters, November 9, 1989).25 During the 1990s, the United States intensif ied its economic sanctions with respect to Iran. In October 1992, the U.S. Congress passed the Iran-Iraq Arms Non-Proliferation Act, which extended to Iran the same expor t and licensing prohibitions that had been imposed on Iraq after its invasion of Kuwait in 1990. The legislation banned the export of any goods, technology, or expertise contri buting to the acquisiti on by Iran (or Iraq) of nuclear, chemical, biological, or advanced conventional weapons. It also called for sanctions, including the suspension of govern ment contracts and U.S. military and financial assistance, against any foreign government or person conducting operations contrary to this policy. Indeed, Washington s threats prevented so me Western countries from supporting the Iranian governments attemp t to develop nuclear capabilities. Yet, they were unable to convince other nations, mainly Russia, to sell Teheran weapons or equipment that could have military use. In early 1995, for instance, Russia signed a major deal ($940 million) to complete a commer cial nuclear power pl ant near the Iranian town of Bushehr despite U.S. warning that such a project would contribute to the proliferation of nuclear weapons by help ing Iran assemble an atomic arsenal (Schwarzback 1997: 62)26 25 Two American hostages in Lebanon, Robert Polhill and Frank Reed, were released in late April 1990. Terry Anderson, the Associated Press chief Middle East correspondent, was the last U.S. hostage in Beirut to be freed in December 1991. 26 The United States and some other Western countries had serious doubts about the official Iranian assertion that a nuclear power plant worth nearly $1 billion was going to be used only for electricity generation and not for military purposes. Irans explo itation of its enormous reserves of natural gas and other fossil fuels, in fact, represented a more cost-eff ectively solution to the countrys serious shortage of electrical generating capacity.

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229 Between 1995 and 1997, as a consequence of Irans active pursu it of weapons of mass destruction and its continuous sponsorsh ip of international terrorism, the United States implemented additional economic m easures that significantly expanded its sanctions program against Teheran. The U.S. effort to change Ira ns behavior through economic warfare had long been frustrated by the fact that American firms were among the biggest buyers of Iranian oil. More specifically, oil purchases by U.S.-owned corporations such as Exxon, Mobil, and Coastal generated revenues for the Iranian regime worth billions of dollars a year thus undermining the whole purpose of Washingtons sanctions. It should be noted th at these companies could easily circumvent the 1987 U.S. ban on all imports from the Mi ddle Eastern nation by shipping Irans crude to refineries in Europe or Asia. In other word s, they were able to make large profits even if the oil never entered the United States (Lippman 1995).27 Besides, the Iranian government had just begun negotiations with se veral foreign corporations aimed to attract foreign direct investment for its petroleu m industry and stimulate the overall economy. In March 1995, therefore, Pres ident Clinton issued an executive order barring U.S. individuals and firms from financing, s upervising, and managing oil development projects in Iran. A few months later, he announced that American companies could no longer sell Iranian oil to third countries and virtually banned all direct U.S. trade with Iran by imposing further restrictions on U.S. exports of goods, technology, and services to that country (Fayazmanesh 2003: 222). Washingtons unilateral economic sanctions had an immediate negative effect not only on U.S. purchases of Iranian oil but also on the potential invol vement of American 27 By the end of 1994, the value of Iranian oil purchased by subsidiaries of U.S. companies, and then sold to a third country, had reached an estimated $3.5 billion a year (Lelyveld 1995).

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230 companies with petroleum development in Iran. Clintons executive or der, in particular, blocked a major investment by Houston-base d Conoco Inc. in two Iranian oil and gas fields in the Persian Gulf. The termination of Conocos contract, si gned in early March 1995 and valued at about $1 bil lion, sent a strong discouragin g signal to other American oil firms that had been eager to increase th eir business dealings w ith Iran (Southerland and Devroy 1995). However, U.S. officials re mained aware that such restrictions had little chance of exercising significant economic pressure on Teheran as long as other countries were willing to purchase Irans oil and i nvest there. In effect, French, German, and British officials called U.S. sanctions the wrong approach and reiterated their commitment to a policy of critical dialogue with the Iranian regime, or to joint rather than unila teral action on trade (Far bash 1995). Similarly Japan, the largest buyer of Iranian oil, refused to join the U.S. embargo on trade with Iran, arguing that efforts to isolate the latter economically and diplomatically would only worsen its behavior (Sanger 1995). By August 1995, several European and Asian countries had increased their imports of Ira nian crude. And a month earlier, Francebased Total had become the first foreign company to invest in Iran since the 1979 revolution by signing a $600 million deal to deve lop the same two oil fields that Conoco had planned to exploit (Southerland 1995). Frustrated by the lack of international cooperation, and given that Iran was actively courting foreign companies to invest in its energy sector, the United States, then, deci ded to extend the reac h of its unilateral measures by imposing secondary sanctions on firms located in third countries. On August 5, 1996, Washington enacted the Ir an and Libya Sanctions Act (ILSA), which requires the U.S. President to impos e economic penalties on foreign firms that

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231 make substantial investments in Irans oil and gas sector.28 In a message to Americas allies, Clinton observed: You cannot do business with countries that practice commerce with you by day while funding or protecting the terrorists who kill you and your innocent civilians by night. That is wrong (Mitchell 1996). Finally, on August 19, 1997, Clinton issued a new executive order practically ba nning all trade (direct and indirect) and investment activities with Iran by a U.S. citizen or company (Clawson 1998: 89). Meanwhile, campaigning for improved human rights, freedom of the press, domestic tolerance, and economic reforms, moderate leader Mohammed Khatami had been elected President of Iran by a wide margin on May 23, 1997 (Kinzer 1997). There is little doubt that Washingtons comprehensive unilateral sanctions on Iran have had some notable economic impact on th at country. After Clinton barred American firms from selling Iranian cr ude to third countries in J une 1995, Teheran incurred a loss of many millions of dollars over a three-month period during which it was forced to sell oil at a discount of 30 to 80 cents per barrel in order to find alternative buyers (OSullivan 2003: 66). In addition, U.S. sanctio ns caused an immediate decline of Irans non-oil exports, led foreign lenders such as commercial bankers and government export credit agencies to reduce their loans to Tehe ran, and prevented Ameri can oil corporations from signing investment contracts with th e Iranian regime (Clawson 1998: 93-94). To make things worse, ILSA created a riskier investment environment in Iran and limited the latters ability to attract FDI. Nevertheless, U.S. coercive measures did not deliver a fatal blow to Iran in the sense of triggering its economic collapse or depriving it for long of capital and goods essential to its broader de velopment. By the end of 1995, the Iranian 28 ILSA establishes that a variety of sanctions (including the denial of U.S. loans, credits, and procurement) must be applied against foreign firms investing over $40 million in one year in Iran's oil and gas sector. After one year, the annual investment limit triggering sanctions drops to $20 million.

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232 regime had already located substitute market s for its energy products. Since then, it has been able to secure deals with several fore ign firms to exploit it s oil and gas fields, helped by the fact that penalties under ILSA were never applied due to international opposition (Frank, February 1, 2001). Even more important, and perhaps related to these economic developments, sanctions have not pe rsuaded Iran to change the behavior to which Washington objects. Table 6-4. Iran: Foreign Di rect Investment, Current Tr ansfers, and GDP Growth Average 1990-95 1996199719981999200020012002 2003 Average 1996-03 FDI ($U.S. Million) -17 26 53 24 35 39 55 276 120 78 Current Transfers ($U.S. Million) 1839* 471 400 500 508 539 850 1,305 1,200 722 GDP Growth (annual % change) 5.9 7.1 3.4 2.7 1.9 5.1 3.7 7.5 6.6 4.7 Sources: UNCTAD, World Investment Report, 2002 an d 2004; IMF, Balance of Payments Statistics Yearbook, 2004 and previous editions; IMF, World Economic Outlook, 2005 and previous editions; EIU 2005. *The average refers to the 1990-1994 period. Current Transfers for 1995 are not reported Table 6-4 gauges the economic impact of U.S. unilateral sanctions against Teheran by presenting data on foreign di rect investment in Iran and it s GDP annual growth before and after 1995. It also includes balance of payments figures on current transfers, which are mostly made up of remittances from abroad,29 to show the importance for the countrys economy of other kinds of exte rnal financial flows. Between 1990 and 1995, the flow of FDI into Iran was nearly zero because its government did not accept new foreign investment.30 During this period, the annual average of current transfers was about $1.8 million. Since the imposition of U. S. investment sanctions in 1995, FDI has 29 The International Monetary Fund (IMF) does not incl ude annual figures on remittances to Iran in its balance of payments series. It does, however, estim ate the annual average of remittances to Iran between 1990 and 2003 in a recent report, which will be briefly analyzed later in this section. 30 The negative sign of FDI flows into Iran between 1990 and 1995 is mainly the result of disinvestments from existing projects.

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233 averaged $78 million per year, and current transfers little more than $700 million per year. Both indicators, however, have increas ed in recent years. Furthermore, Irans GDP grew at an average rate of 4.7% between 1996 and 2003, as compared to 5.9% between 1990 and 1995. Over the past decade, the c ountrys economic performance has been mixed with erratic fluctuati ons, but the situation has impr oved substantially since 2002. Mostly driven by soaring revenues from oil exports, Irans GDP increased by 5.5% in 2004, and is projected to expand by appr oximately 5% in 2005 (EIU, May 2005). Between 1996 and 1998, foreign enthusiasm fo r investment in Iran was hindered by the threat of sanctions unde r ILSA. Although the Iranian regime had offered eleven oil projects to potential foreign investors be fore the passage of the U.S. legislation (OSullivan 2003: 72), only a few of those deals had been concluded by mid-1998. In terms of capital involved, the most important one was the $2 bill ion contract that Frances Total, Russias Gazprom, and Malaysia s Petronas signed with Teheran in late 1997 to develop the Iranian South Pars natural gas field (Owen and de Jonquieres 1997). Nevertheless, the deterring e ffect of ILSA virtually ende d in May 1998, when the Clinton administration, fearing a possible trade war with Europe (and a split with Russia), waived the imposition of economic penalties against the aforementioned firms and promised additional waivers for future European invest ments in Iran (Lippman 1998). As ILSA lost its momentum and the likelihood of being sanctioned by Washington appeared increasingly remote, a number of European companies, including UKs Premier Oil, Frances Elf Aquitaine, Italys ENI Spa, a nd the Anglo-Dutch Roya l Dutch/Shell group, signed contracts worth billions of dollars to exploit various Iranian oil fields after the 1998 waiver (Bahree 1999; Molavi 1999).

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234 Curiously, while overseas oil companie s have become involved in several multibillion projects in Iran since the late 1990s, figures on the amount of foreign direct investment delivered to the country remained re latively low. This is due to the fact that large oil deals are framed as servicing agreemen ts or buy-back contracts rather than FDI. These contracts are arrangements in which the foreign contractor funds all investments, receives remuneration from the state-owned Na tional Iranian Oil Company (NIOC) in the form of an allocated producti on share, and then transfers ope ration of the field to NIOC after the contract is complete d. If the buy-back oil projects are included, foreign capital is clearly playing a crucial role in the de velopment of Irans energy sector (EIU, May 2003), and arguably of its overall economy. In fact, buy-backs averaged a remarkable $1.2 billion per fiscal year (March 21 -March 20) between 2000 and 2004 (IMF, September 2004). As a sign of an improved economic situation, in mid-2002 Iran issued its first international bond since the 1979 Islamic revolu tion. Despite Washingtons regulations making Iranian secu rities untouchable to U.S. financial entities, Teheran sold almost 500 million euros (and later offered an additional 125 million euros) worth of five-year government bonds, with European in vestors, mainly from the United Kingdom, Germany, France, and Switzerland, buying 42% of the issue. About 53% of the issue was sold to investors in the Middle East, and the remaining 5% to Asian banks (IMF, November 2003).31 In addition to the recent flows of buy-b ack and portfolio investments, Iran has attracted sizable amounts of remittances from ex patriate Iranian workers. Official figures on current transfers to the c ountry, whose main component is remittances, indicate that 31 Irans international bond issue, launched on July 10, 2002, was lead-managed by Germany's Commerzbank and Frances BNP Paribas (Dinmore and Ostrovsky 2002)

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235 the latter have grown significantly since 2001. According to the Inte rnational Monetary Fund (IMF), Iran was among the 20 largest reci pients of remittances in the world between 1990 and 2003, receiving an annual aver age of about $1.2 billion worth of these funds during this period (IMF, April 2005). It must be emphasized that Washingtons regulations allow U.S. depository ins titutions to handle non-commercial family remittances involving Iran, provided the transf ers are routed to or from non-U.S., nonIranian offshore banks. Furthermore, all tran sactions ordinarily in cident to American travel to Iran are permitted under U.S. law. T hus, given that about one third of the three million Iranian workers currently residing abroad are in the United St ates (Killgore et al. 2000), it cannot be excluded that formal a nd informal U.S.-based remittances might represent a critical source of foreign exch ange for Iran, helping re duce poverty there and improve the countrys development prospects. Fo r instance, it is reported that substantial sums of investment capital from the Iranian diaspora enter Irans economy informally each year, contributing to major constructi on projects in Teheran and elsewhere (EIU, May 2003). Iranian workers living in the Un ited States, who know th e Iranian territory and maintain close family connections ther e, are the most likely source of these investments (Killgore et al. 2000). In sum, U.S. comprehensive unilateral sa nctions against Teheran have inflicted some damage on Irans economy, but largely fa iled to hurt the countrys finances enough to reduce its ability to spons or terrorism and acquire w eapons of mass destruction. Without international cooperati on, and despite the threat of secondary sanctions against firms located in third countries, the chief re sult of U.S. tighter trade and investment restrictions was to surrende r business to American companies European and Asian

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236 competitors. Buy-back and portfolio investment s in Iran, in particular, simply reveal the more globalized international competition th at exists today, which makes unilateral sanctions less likely to advance major forei gn policy goals. There is also some evidence that large flows of remittances from abroa d, mainly from the Iranian diaspora in the United States, helped buoy Irans economy and allowed for increased physical investments in the country s real estate sector. In the light of these developments, it comes as little surprise that the Iranian regime has not changed its behavior on any of the issu es of major concern for the United States. American officials recently acknowledged that Iran remained the most active state sponsor of terrorism in 2004 (U.S. Departme nt of State, April 2005). Moreover, the election of conservative Mahm oud Ahmadinejad as the new Ir anian president in August 2005 will likely reinforce Teherans support for Islamic terrorist groups and its effort to develop nuclear weapons (Wright 2005). Furthe r research on U.S. sanctions with respect to Iran should provide a more specific asse ssment of the positive impact of foreign investment on the countrys oil sector and th e socioeconomic effects of remittances from overseas workers. While U.S. coercive m easures have attempted to promote political changes by increasing economic pressure on th e Iranian regime, external financing by corporations and migrant entrepreneurs coul d bear a major responsibility for fostering Irans economic growth or eventually smoothi ng crises that Washi ngtons sanctions had prompted. Along with an analysis of U.S.-b ased remittances to Iran and their economic benefits, the proposed research should al so focus on U.S. indirect or secondary investments in the Iranian oil industry, given that American investors own shares of all

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237 major European companies that have become engaged in oil development projects in Iran.32 Conclusion The globalizing world economy of the postCold War era, in which countries are growingly connected through tr ansnational linkages that sustain capital flows across national borders, clearly poses a wide array of obstacles to th e successful use of unilateral sanctions against target govern ments. Although the United St ates, usually acting alone or with little international assistance, continue s to rely on economic coercive measures to confront states that sponsor terrorism, pur sue weapons of mass destruction, resist democratization, and engage in violations of human rights, the inability of these attempts to produce major changes in line with Wash ingtons interests has become increasingly evident. Mainly intended to deny foreign exchange resources to hostile regimes and thus alter their questionable behavior, U.S. sanc tions often ended up transferring business from American firms to foreign competit ors in the same market. Multinational corporations located in third countries m oved in quickly to displace U.S. trade and investment, or eventually took advantage of a target governments strategic decision to allow foreign investment as a way to cope with increased U.S. pressure. In addition, remittances from overseas workers have come to represent an important channel through which rising global migration flows affect the socioeconomic welfare of developing countries, including embargoed ones, despite regu lations that may interfere. In short, while the Soviet Union frequently served as a black knight dur ing the Cold War, 32 For further information on the presence of U.S. investors in European oil companies that have signed buy-back contracts with the Iranian regime see the financial reports of UKs Premier Oil (www.premieroil.com), Frances Total (www.total.com) and Elf Aqu itaine (www.elf.com), Italys ENI Spa (www.eni.it), and the Anglo-Dutch Royal Dutch/Shell group (w ww.shell.com) (last visited November 2005).

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238 replacing the United States as an alternative source of financial aid to sanctioned nations, multinational corporations and migrant entrepreneurs might perform a similar function in todays global marketplace. The three case studies analyzed in this chapter reveal how difficult it is for the United States to obtain multilateral support fo r its sanctions policies even when most other nations share the same U.S. objectiv es. They also demonstrate that without international cooperation U.S. sanctions re main for the most part toothless. Washingtons comprehensive measures against Sudan, Myanmar (Burma) and Iran produced some negative effect s on the targeted economies, but they mostly failed to exercise enough economic pressure to change their leaders behavior. When the latter began to lure foreign capital to develop th eir extensive oil and natural gas reserves, several European and Asian companies se ized the opportunity and launched major investment operations in these countries. And the U.S. subsequent threats to impose penalties on third parties that invest ther e achieved only limited success. Furthermore, substantial flows of family remittances to these countries, mainly to Sudan and Iran, mitigated the economic intent pain of U.S. sanctions and undermined their main goals. It cannot be excluded that transnational activ ities carried out by Am erican citizens and companies also played a role in this regar d. As previously observed, a large portion of remittances to Iran is coming from the United States and U.S. investors own shares of all major European corporations i nvesting in Irans oil industry.

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239 CHAPTER 7 CONCLUSION Economic sanctions are foreign policy t ools used by governments to constraint business activities across national borders a nd lower the aggregate economic welfare of a target state, thus coercing the latter to change its politic al behavior. Over the past century, sanctions have been imposed on ma ny occasions for a variety of political purposes. Until the early 1960s, they were usua lly deployed to force a target country to withdraw its troops from border skirmishes and desist from military adventures, or eventually to destabilize a hostile regime and hasten its demise. Since then, however, several other foreign policy goals have been pursued, including efforts to protect human rights and promote democracy, stem nuclear proliferation, and fight international terrorism (Hufbauer et al. 1990: 5-7). Th roughout the whole period, the United States has been the dominant user of economic sanctions, acting alone in most cases and occasionally as part of a coalition of states. The usefulness of sanctions as an instrume nt of foreign policy has declined steadily over the last few decades. Between 1914 and 1969, economic coercive measures were at least relatively effective at achieving modest and narrowl y focused policy objectives. Their utility, yet, proved more elusive in ex ercising enough pressure to significantly alter the behavior of a target c ountry, especially when the se nders goal was to compel the target to take actions it stou tly resisted. The success rate of sanctions, mainly when they are applied unilaterall y, has dropped considerably since the early 1970s as the globalizing world economy makes capital and goods of th e coercer state more easily replaceable by

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240 those from other sources. And successful cases have become even more rare in the postCold War era due to a remarkable accelerat ion in the pace of globalization and the expansion of transnational linkages. Transnational practices by multinational corporations and migrant entrepreneurs play a fu ndamental role in this regard. In recent years, the liber alization of most countries investment regimes, the integration of national capital markets, growing international migration and transnational family ties, and advances in informati on and communications t echnology have spurred massive capital flows across national borders in the form of foreign direct investment (FDI), portfolio investment, and remitt ances. Currently, FDI from multinational corporations and remittances from overseas workers are crucial sources of external financing for many developing countries (S oubbotina 2004), including embargoed ones. These transnational activities tend to mitigat e the impact of economic coercion against target states by providing the latter with the fi nancial wherewithal that sanctions are set to deny. To sum up, if sanctions achieved very limited success during the 1970s and 1980s, they are even less likely to be effective in todays global marketplace in which a target country can readily obtain the resources it needs by promoting foreign investment, stimulating remittances, or tapping international capital markets. Intuitively, comprehensive multilateral sanctions, if properly applied and enforced, should produce a far greater economic impact than unilateral ones because they make it harder for a target country to find altern ative suppliers of goods and capital. But concerted efforts are difficult to undertake du e to diverse security interests of potential coalition countries as well as their different views on the targets behavior and the best strategy to promote political changes. As one state is usually the driving force behind the

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241 call for economic penalties, it will often ha ve to make concessions and water down the sanctions in order to obtain international cooperation. Th erefore, unilateral measures could be in some cases the only option availa ble for a leading user of sanctions like the United States to pursue ambitious foreign pol icy objectives. Former U.S. Undersecretary of State Stuart Eizenstat, fo r instance, observed a few years ago: "If we are unsuccessful in building a multilateral regime, and important national interests or core values are at issue, we must be prepared to act unilatera lly. We cannot permit other countries to veto our use of sanctions by their fail ure to act." (Paulson 1999) Unable to rally other states to the defense of its national security interests, the United States initiated several new cases of unilateral sanction s during the 1990s and significantly expanded some existing sanctions programs, mainly against Cuba, Sudan, Myanmar (Burma) and Iran. And when allies and trading partners refused to cooperate with U.S. policies and increased their trade and investment relations with these target countries, Washington tried to extend the reach of its sanctions by threatening or imposing penalties against firms located in third countries. The forty-three year old American embargo against Cuba is perhaps th e most emblematic example of a failed U.S. attempt to generate critical economic pressu re on a target government and induce major changes in its behavior (or eventually hasten its demise) through the use of comprehensive unilateral coercive measures, in cluding restrictions on investment, trade, travel, remittances, and the appl ication of secondary sanctions. After the fall of the Soviet Union in 1989 and the end of the special relationship between Moscow and Havana, the United Stat es intensified its economic sanctions on Cuba. In 1996, in particular, U.S. Presiden t Bill Clinton signed the Cuban Liberty and

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242 Democratic Solidarity Act, popularly referred to as the Helms-Burton law. The objective of the law is to discourage fo reign investment in Cuba throug h the threat of lawsuits and the imposition of travel restricti ons against foreign firms or ot her entities that traffic in U.S. properties expropriated during the early days of the revolution. There seems no question that Helms-Burton, at the very least, has made it more difficult, potentially risky and, in terms of obtaining financing, more expe nsive to invest in th e communist island. As a result of this, it has had a deterrent ch ill effect on potential new investment there, but largely failed to force major foreign companies already operating in the Cuban market to pull out of the country, detain the flow of foreign capital delivered to Cuba, and hinder the islands slow but constant economic upturn following the deep recession of the early 1990s. After all, there is a particular ly strong presence of FDI in all the Cuban industries that have exhibited the best ec onomic performance over the past decade. Hence, it is not surprising that U.S. sanctions also failed to promote a democratic change in the behavior of the Cuban government and undermine Castros hold over the political apparatus. The United States, however, has not only been unable to stymie the recovery of the Cuban economy from its post-Soviet crisis, but has actually contri buted in a significant way to that recovery. Desp ite tighter U.S. sanctions, mainly aimed to deny foreign exchange earnings to the Castro regime American citizens and companies have channeled substantial amounts of hard currency into Cuba through direct and indirect practices involving travel, remittances, paym ents for telecommunications services, food exports, and secondary investments.

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243 More specifically, U.S. citizens were the fourth largest group among foreign travelers to the island between 1995 and 1998, a nd the second largest one after Canadians between 1999 and 2003. More than 60% of U.S. visitors were Cuban Americans traveling to Cuba with or without their governments approval. Even more important, remittances from abroad (estimated at more than $1 billion a year and mostly sent through informal mechanisms) are today, in net terms, the most important source of hard currency revenues for the Castro government. The vast majority of these funds are sent by Cuban exile community in South Florida, the most active group in the United States supporting the embargo, to relatives on the is land. South Florida cash to Cubans may indeed make the life of the latter more bear able, but it also benefits Havanas authorities which capture the vast majority of remittances through transactions in exchange houses and then through sales in stat e-owned hard currency stores where the elevated price mark-up (240% on average) acts as a hidde n tax on spending. Additional profits are generated by U.S. food exports to Cuba that are sold in these outle ts and expensive dollar charges placed on incoming calls from the United States (mainly calls from Cuban Americans to family members in Cuba). Fi nally, American entities hold publicly traded shares of several major foreign firms that have invested in the Cuban market. In brief, FDI operations in Cuba by companies located in third countries are just one of the potential reasons why Washingt ons sanctions against Hava na have not worked. The analysis presented in this st udy suggests that such an outcome might be the result of transnational activitie s carried out by actor s of the same country that has devised unilateral sanctions as an e ffective tool to increase economic pressure on target governments and change their questionable behavior.

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244 In light of this situation, two possible options are availa ble to U.S. decision-makers for a more successful policy toward Cuba. The first option is to strengthen current restrictions on travel and remittances by significantly reducing the number of U.S. citizens authorized to visit the island and the amount of m oney that Cuban Americans can legally send to their families. In order to be effective, these measures should increase the level of scrutiny for potential violations on travel and mone y transfers as well as hold citizens of Cuban descent to the same standa rds as any other Amer ican. While such a policy may be unpopular and quite expensive to implement, it makes no sense to make exceptions for a specific group of U.S. citi zens that channel into Cuba more hard currency than any other group. In effect, recent rule changes on travel and remittances introduced by the Bush administration on June 30, 2004, aim to deny hard currency resources to the Cuban government by targeting Cuban American activ ities. The new regul ations allow Cuban Americans to visit relatives in Cuba only once every three years, instead of annually, reduce the authorized per diem to $50 fr om $167, and limit remittances only to immediate relatives. However, these measures will have limited impact on the Cuban economy for two main reasons First, following Washingtons announcement of tightened rules on Cuba, Fidel Castro raised pric es in hard currency stores, put an end to the circulation of the U.S. do llar on the island in favor of th e convertible peso (CUC) and applied a 10% fee on dollar/CUC exchanges, a nd then decided to re-evaluate the CUC by 8% against all intern ational currencies. With an average price increase of 15.4% (and therefore a higher markup) in retail outlets, and higher profit s from remittances collected in exchange houses, net revenues to the C uban government will be largely unaffected by

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245 a potential decline of U.S. financial flows reaching the island.1 If U.S. officials are genuinely committed to implement measures aimed to squeeze the Cuban economy, then they should cut remittances altogether or at least reduce drastically the annual cap on money transfers. Additionally, Cuban exiles may circumvent restri ctions by traveling to the island through third countries and delivering remittances, as they always did, through mules or other informal mechanisms. As a result of th is, illegal remittances to Cuba, and probably unlicensed trips there, will raise considerably. Indeed, although the U.S. Department of the Treasury recently said that the total numbe r of U.S. citizens legally visiting Cuba had dropped by about 60% between July 2004 and J une 2005 as compared to the previous year (Cancio Isla 2005), preliminary figures from Cuban sources reve al that remittances from abroad increased in 2004. The reality is that, even with tightened enforcement and perhaps additional restrictions, U.S. policy towa rd Cuba could be eff ective in halting hard currency flows only if Cuban Americans are pr epared to respect the rules. If Cuban exiles are, in fact, willing to do whatever it takes to intensify pressure on the Castro government, then they should stop visiting re latives on the island, stop sending money to them, and even stop calling them. A second option, which is not necessarily mo re politically viable, but is certainly less expensive than the first one, is to promote a rapprochement with Havana and a gradual removal of the major provisions of the embargo in recognition that economic 1 Mainly as a result of stiffened rules on remittances and family visits by Cuban Americans, U.S. officials estimate that these measures, if properly enforced, coul d deprive the island of up to $150 million a year. See Associated Press. U.S. Begins New Sanctions Against Cuba. July 1, 2004. Some Cuban exiles, in a more optimistic view, calculate that the reduction of U.S. financial flows in the Cuban economy could be between $200 and $250 million a year. See BBC Mundo. Cuba: La Efectividad de las Medidas. July 1, 2004.

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246 sanctions have not achieved their main goals. The elimina tion of Washingtons restrictions on trade, invest ment, and travel with respect to Cuba would serve U.S. political and economic interests by impr oving the living standa rds of the Cuban population and allowing American firms and c itizens to enter the islands market and influence its society. It would also incr ease pressure on the current government in Havana by preventing Fidel Castro from using his traditional argument that the United States promotes economic deprivation in Cuba and seeks to constrain Cuban sovereignty. In short, unless significant steps are taken in one of the proposed directions, the United States will have no choice but to wait until Castro passes from the scene by natural causes, and hope his successor will be less resilient than him, or perhaps more inclined to introduce extensive democratic re forms. To conclude, consider a recent quote by U.S. president George W. Bush that exem plifies the great irony of economic sanctions with respect to Cuba. In May 2002, Bush st ated: The sanctions the United States enforces against the Castro regime are not just a policy tool, but a moral statement. It is wrong to prop up a regime that routinely stif les all the freedoms that make us human.2 If this is the case, then th e findings of this study demonstrate that U.S. policy toward Cuba in the post-Cold War era has been nothing other than a wrong policy. It should be noted that other instances of U.S. unilateral sanctions highlights transnational dynamics that are similar to those seen in the case of Cuba. In particular, there is evidence that sanctioned countries such as Sudan, Myanmar and Iran have been quite successful in attracting relatively sizable amounts of foreign investment despite Washingtons comprehensive measures imposed on them. In recent years, they have 2 See U.S. Department of State, International Information Programs. The United States and Cuba. Available at: http://usinfo.state.gov/regional/ar/us-cuba/indexold.htm (last visited November 2005).

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247 granted concessions to a numb er of Asian and European investors to develop their extensive oil and natural gas reserves as a way to offset the potential negative effect of U.S. restrictions on American firms invol vement. Thus, it cannot be excluded that foreign corporations have delivered much-n eeded capital to the aforementioned target countries and stimulated their economies at a time in which U.S. measures were beginning to exercise some significant pressu re. Reflecting a familiar pattern in the recent history of U.S. unilate ral initiatives, the United Stat es subsequent attempts to threaten penalties on companies located in thir d countries were largel y unable to force the latter to curtail their business relations w ith Sudan, Myanmar, and Iran. Moreover, the significant flows of overseas remittances to th ese countries provided them with additional resources to weather the economic intent pain of U.S. coercive actions. Finally, the magnitude of U.S.-based remittances reach ing Iran and the presence of American shareholders in all major European oil companies investing there suggest that transnational activities carried out by citizens and firms of the coercer state also played a role in the failure of Washingtons sa nctions to change Teherans behavior. Overall, in an increasingly interc onnected global economy, a coercer states effective use of sanctions as a tool of fo reign policy is undermined from from above by multinational capital and from below by mi grant workers connections with their places of origin. Multinational corporati ons, which tend to escape governmental control because of their size and supra-national char acter, channel substant ial amounts of capital and other resources into embargoed nations as they search for the best returns on their investments and take advantage of the diminished international competition created by the imposition of sanctions. They also rais e funds in capital mark ets to finance their

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248 global investment activities, includi ng those in target states. At a more local level, huge flows of cross-border remittances by migrant entrepreneurs, mostly centered on family ties, mitigate the economic impact of sanctions by reducing social suffering in the recipient countries and stimul ating physical investments there. Given the findings presented in this study, further research on th e usefulness of sanctions in the context of globalization and transnationa l linkages should examine the specific impact of foreign investment on key industries of sanctioned st ates, with a focus on economic performance in terms of production and export earnings, and the role of secondary or indirect investment operations by entities of the coer cer country. It should also provide a more detailed assessment of the positive effects of overseas remittances on the consumption patterns of recipient families, which presumably make the la tter less likely to pressure their governments for political and economi c changes, and the mechanisms through which money transfers from abroad promot e economic development in beneficiary countries. The proposed research might o ffer additional evidence to corroborate this studys main contention that transnational activities by mu ltinational corporations and migrant entrepreneurs constitute one of the chief reasons why economic sanctions, especially unilateral ones, rarely wo rk in todays global marketplace.

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275 BIOGRAPHICAL SKETCH Paolo Spadoni was born in Rimini, Ital y, in 1968. He graduated from the University of Urbino, Italy, with a Laurea in political science. He holds a masters in Latin American studies from the Center for La tin American Studies at the University of Florida, and a PhD in political science (international relations) from the Department of Political Science at the Universi ty of Florida. He lives in Gainesville, Florida, with his wife, Ines Aviles-Spadoni.


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Copyright Date: 2008

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EFFECTIVENESS OF ECONOMIC SANCTIONS IN THE CONTEXT OF
GLOBALIZATION AND TRANSNATIONAL LINKAGES: THE CASE OF CUBA

















By

PAOLO SPADONI


A DISSERTATION PRESENTED TO THE GRADUATE SCHOOL
OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT
OF THE REQUIREMENTS FOR THE DEGREE OF
DOCTOR OF PHILOSOPHY

UNIVERSITY OF FLORIDA


2005





























Copyright 2005

by

Paolo Spadoni

































This document is dedicated to my wife Ines.















ACKNOWLEDGMENTS

I owe a very special debt to Dr. Terry L. McCoy and the Center for International

Business Education and Research (CIBER) at the University of Florida for providing me

an assistantship from Fall 2001 to Summer 2005, which enabled me to complete my PhD

program. I deeply appreciated the guidance of my committee members, Dr. Terry L.

McCoy for his patience, inputs to the project, and constant support, Dr. Philip J.

Williams, Dr. Leann Brown, and Dr. Ido Oren for their suggestions and comments, and

Dr. Jose Alvarez for his deep concern with my study and extraordinary knowledge of

Cuban issues. I also acknowledge a major debt to William A. Messina Jr., for his

enthusiastic support, kind words, and generous help.

I would like to express my gratitude to the Cuban government, Cuban officials at

the Ministry of Foreign Investment and Economic Cooperation (MINVEC), economists

and foreign investment analysts at several centers of investigation located in Havana, and

Cuban journalists and foreign correspondents posted in Havana. Their generosity,

willingness to help with the research, and oftentimes special friendships made it possible

for me to carry out such a stimulating study. My appreciation goes also to the librarians

of the Latin American Collection at the University of Florida.

I want to give special thanks to my good friend Luca Gaudenzi for nurturing my

interest on Cuban issues and providing precious suggestions. I will always cherish our

great conversations in Cattolica and Gradara (Italy) as well as our unforgettable trips to

several Latin American countries during the 1990s.









I would like to thank my father Luigino and my mother Maria Pia for their

unconditional love, generosity, and understanding of my desire to study abroad, and my

brother Mirco for being always supportive and good to me. A special thank you goes

also to my father-in-law Dr. Alberto Aviles and my mother-in-law Lucy Aviles for

treating me as their own son and for their generosity and matchless hospitality.

Finally, I want to express my gratitude (and love) to my beautiful wife Ines for

believing in me, and for being such an amazing partner and friend. Her unconditional

love, loyalty, patience, and support gave me the strength to complete this work.

My heartfelt thanks go to all mentioned above and to many others who provided

me with help in various ways.
















TABLE OF CONTENTS



A C K N O W L E D G M E N T S ................................................................................................. iv

L IS T O F T A B L E S ...................................................................... .......... .. ............. ...... v iii

LIST OF FIGURES ......... ......................... ...... ........ ............ ix

A B ST R A C T .......... ..... ...................................................................................... x

CHAPTER

1 IN T R O D U C T IO N ................. .................................. .... ....... .. ............. .

The U.S. Embargo Against Cuba in the Post-Cold War Era .................................3
Limitations of Current Research on Economic Sanctions ......................................6
Hypotheses and Contributions of the Research........... .... ............. ............... 10
Sources of Data...................... ................................... 13
O organization of This Study........................ ............... ................. ............... 14

2 TRANSNATIONAL LINKAGES AT GLOBAL AND LOCAL LEVELS ..............17

Transnationalism "From Above" and "From Below" ...............................................18
Transnational Corporations and the Movement of Capital.............. ...............29
Migration, Family Linkages, and Remittance Decisions..............................37
Economic Impact of Remittances................................... ..... ............... 45
Conclusion .............. .. ................. ..... ..... ....................... 52

3 THE U.S. EMBARGO AND THE HELMS-BURTON LAW................................54

The Origins of the U.S. Embargo Against Cuba ............... .................................. 54
The 1970s: Efforts Toward Normalization..................................................57
The 1980s: Renewal and Intensification of Economic Sanctions ............................ 60
The 1990s: U.S. Approach Toward Cuba in the Post-Cold War Era.........................64
The Torricelli Law .................... ...... ................................... 67
The H elm s-B urton L aw ....................... ....... ..................................... ............... 72









4 IMPACT OF THE HELMS-BURTON LAW ON FOREIGN INVESTMENT IN
C U B A ................................................................................................................... 8 4

Foreign D irect Investm ent in C uba.................................................. .....................86
O their F orm s of Investm ent................................................................................ .. 10 1
The Effects of Helms-Burton on Potential and Existing Investors...........................107
A application of Title IV ............................................. .... .... ................ 113
W withdrawals from Investments in Cuba .... .......... ........................................117
Reorganization and Relocation of Activities ..........................................................120
The Sol M elia Case............... .... ........ ................. .........124
H elm s-Burton: Failure or Success? ................................ .. ......................... 128
Conclusion ................................... ................................. ......... 144

5 U.S. FINANCIAL FLOWS IN THE CUBAN ECONOMY ................................... 147

International Tourism and U.S.-Based Travel to Cuba ...........................................148
R em ittances to Cuba ............... .. ....... .................. 1....... 156
U.S. Telecommunications Payments to Cuba................................ ...............175
U .S. Food Sales to Cuba ............................................... .... .. .......... .......... .... 180
U .S. Indirect Investm ents in Cuba....................................... ......................... 187
Conclusion ................................... ................................. ......... 194

6 TRANSNATIONAL LINKAGES IN OTHER CASES OF U.S UNILATERAL
SA N C T IO N S ...................................... .............................................. 196

Effectiveness of U.S. Unilateral Economic Sanctions................... ..... .......... 198
The Case of Sudan ............ .... ........ .. ... ............ ....... ......... 205
The C ase of M yanm ar (B urm a)...................................................................... .... 214
T he C ase of Iran ........................................................................................... ....... 225
C onclu sion .............................................................................................. ....... 237

7 C O N CLU SIO N ................................................................................................ .....239

L IST O F R E F E R E N C E S ........................................................................................... 249

BIOGRAPH ICAL SKETCH .................................................................. .............. 275
















LIST OF TABLES


Table page

3-1. UN Vote on Resolutions Against the U.S. Embargo on Cuba................................71

3-2. Ten Largest Certified U.S. Claims ($U.S. million)...........................................79

4-1. Annual Foreign Direct Investment in Cuba in $U.S. million (1994-2003) ..............91

4-2. Impact of Helms-Burton on Selected Foreign Firms Operating in Cuba..............133

5-1. U.S. Visitors to Cuba, 1990-1998 (thousands)............... .................... .................152

5-2. Tourist Arrivals by Origin, 1999-2003.............................................................. 153

5-3. Calculation Sample of Remittances in 2001 ($U.S. million) ...............................163

5-4. Sales in Dollar Stores, Dollar Purchases by CADECA and Remittances to Cuba,
1995-2003 ($U .S. M million) ........................................................ ............. 165

5-5. U.S. Telecommunications Payments to Cuba and ETECSA's Investment, 1995-
2002 ($U .S. M million) ................ ............................ .. .............. .... .... .................179

5-6. Cuba's Food Imports from the United States in 2003 ($U.S. million) ....................181

5-7. U.S. Investments in Selected Foreign Companies Operating in Cuba....................188

6-1. Effectiveness of Economic Sanctions Against Target Countries............................200

6-2. Sudan: Foreign Direct Investment, Remittances, and GDP Growth.......................209

6-3. Myanmar: Foreign Direct Investment, Remittances, and GDP Growth................221

6-4. Iran: Foreign Direct Investment, Current Transfers, and GDP Growth..................232
















LIST OF FIGURES


Figure page

4-1. Active International Economic Associations (1993-2004) .......................................88

4-2. Associations with Foreign Capital by Sector in 2003 ............................................ 90

4-3. Associations with Foreign Capital by Country in 2003 .........................................92

4-4. Number of Audits of AECEs (1997-2001).............................. ............... 94

4-5. AECEs with Profits and Losses in 2002......................................... ............... 95

4-6. AECEs Operating Abroad by Geographical Area (percentage as of June 30,
2 0 0 3 ) ........................................................................... .9 9

4-7. Cooperative Production Agreements by Sector in 2003 ......................................104

4-8. Free Trade Zones: Number of Operators and Export Values, 1997-2003...............105

4-9. Authorized and Dissolved Associations by Year of Dissolution (1988-2004) .......130

4-10. Main Indicators of AECEs, 1993-2002 ............................... ...........136

4-11. Exports of AECEs, 1995-2002 (as percentage of Cuba's total exports of goods
an d serv ices)............................. .................................................... ............... 13 8

4-12. Exports and Domestic Market Sales of AECEs, 1995-2002 (as percentage of
total sales of AECEs) .................... .............................. ...... ............... 141

4-13. Cuba's GDP, 1989-2004 (Annual Growth Rates)...........................................143

5-1. International Tourism in Cuba, 1993-2004 .................................. ............... 149

5-2. Main Sources of Hard Currency and Possible Uses for the Cuban Population ......161

5-3. Rough Estimates of Cuba's Main Sources of Hard Currency in 2001 and 2002
(net revenues in $U .S. m million) ............................... ......... .................... ......... 172















Abstract of Dissertation Presented to the Graduate School
of the University of Florida in Partial Fulfillment of the
Requirements for the Degree of Doctor of Philosophy

EFFECTIVENESS OF ECONOMIC SANCTIONS IN THE CONTEXT OF
GLOBALIZATION AND TRANSNATIONAL LINKAGES: THE CASE OF CUBA

By

Paolo Spadoni

December 2005

Chair: Terry L. McCoy
Major Department: Political Science

This is a case study of the implementation and effectiveness of U.S. unilateral

economic sanctions against Cuba. Since the communist island is subject to one of the

most comprehensive U.S. embargoes in history, this study has great implications for the

research on the role and usefulness of sanctions as a tool of foreign policy. It also sheds

light upon a specific aspect that has been generally neglected by scholars of international

relations and by the literature on the Cuban embargo, the influence of transnational actors

in the globalizing post-Cold War world. In an increasingly interconnected global

economy, a coercer state's effective use of sanctions is undermined "from above" by

multinational capital and "from below" by migrant workers' remittances, mostly centered

on family ties.

This study challenges the idea on the utility of unilateral economic coercion and

enriches the debate on whether sanctions are effective by analyzing the impact on the

Cuban economy of activities carried out by transnational players, which sustain huge









flows of capital and finance across national borders. Foreign investors and U.S.-based

transnational actors, in particular, bear major responsibility for the failure of sanctions to

achieve ambitious foreign policy goals with respect to Cuba. Similar dynamics in other

cases of U.S. unilateral sanctions corroborate the argument that transnational activities by

multinational corporations and migrant entrepreneurs constitute one of the chief reasons

why economic sanctions rarely work in today's global marketplace.














CHAPTER 1
INTRODUCTION

For more than four decades, the United States has maintained a comprehensive

economic embargo on Cuba that severely restricts U.S.-based travel to the island and

makes most financial and commercial transactions with Cuba illegal for U.S. citizens.

During the Cold War, the Castro government weathered the economic impact of the

embargo in large part because of generous subsidies offered by the former Soviet Union,

mainly through cheap oil supplies in return for overpriced Cuban sugar. But when the

special relationship between Havana and Moscow ended abruptly in the early 1990s,

Cuba became much more vulnerable to U.S. economic pressures.

Since the early 1990s, Cuba has suffered debilitating blows that resulted from the

demise of the Soviet Union and the disappearance of the economic and financial system

in which the island was inserted, the Council for Mutual Economic Assistance (CMEA).

At end of the 1980s, some 81% of Cuba's external commercial relations were with

CMEA member countries. In 1989, Cuba exported 63% of its sugar, 73% of its nickel,

and 95% of its citrus to these countries. Similarly, imports from CMEA countries

represented around 85% of Cuba's total imports: 63% of food, 86% of raw material, 98%

of fuel and lubricants, 80% of machinery and equipment, and 57% of chemical products

(Alvarez Gonzalez and Fernandez Mayo 1992: 4-5). The termination of traditional trade

partnerships with the Soviet Bloc proved disastrous for the Cuban economy. Between

1989 and 1992, the total value of Cuba's exports fell by around 61.1%, while the same

figure for imports fell by around 72.5% (Mesa Lago 1994: 223).









Furthermore, Cuba lost the favorable and stable terms under which most of its trade

took place. In addition to "coordinated supply plans" and exports, it is reported that

Soviet subsidies and aid to Cuba averaged at $4.3 billion a year for the period 1986-1990

(Hernandez-Cata 2001: 4). It should be emphasized that Cubans do not consider Soviet

subsidies as financial aid but simply as credits and assistance to development. Whatever

the interpretation of the Cuba-USSR preferential relationship (whose cornerstone was

exports of Cuban sugar in exchange for relatively inexpensive Soviet oil and industrial

machinery), it is clear that because the island lost the external support that had sustained

its economy, it was forced to develop a new strategy for reinsertion into the global market

economy.

After 1989, the Cuban economy went into recession, with the real gross domestic

product (GDP) decreasing by more than 40% in the period 1990-1993. The beginning of

what the Cuban government has called "special period in time of peace" (established in

September 1990) stimulated a more pragmatic stance towards economic policy. Cuba

has gradually moved away from strict central planning to a more mixed economy and

opened the door to selected aspects of capitalism to foster a recovery, while at the same

time ensuring the survival of the social system and the major accomplishments of the

revolution (Haines 1997: 3).

Cuba's opening to foreign investment in the early 1990s was perhaps the most

significant change for a socialist country whose economy had previously been under

exclusive state control and ownership. The Cuban authorities resorted to foreign

investment as a way to assure the diversification and promotion of exports, acquisition of

raw materials, insertion into new markets, acquisition of technology and capital, and









introduction of modem practices of management (Perez Villanueva 1998: 98). Other

measures were adopted: the promotion of international tourism (1991); limited capitalist-

style reforms such as the legalization of the possession and circulation of U.S. dollars

(August 1993), featuring remittances from Cubans living abroad and state-owned dollar

stores and exchange houses open to the public; authorization of self-employment and the

breakup of the state monopoly on land to establish agricultural cooperatives (September

1993); restructuring of the state bureaucracy (April 1994); and the creation of free

farmers markets (September 1994).

Given the emergency situation of the Cuban economy, the end of Cuba's active

support of revolutionary forces in Africa and Latin America, and the end of its close ties

with the Soviet Union, one could have expected the beginning of friendlier relations

between Washington and Havana. However, just when Cuba was trying to reactivate its

economy in the wake of the events that had taken place in Eastern Europe, the Cuban

exile community in the United States successfully pressured the U.S. Congress to adopt a

new set of economic sanctions against the island. The United States tightened its long-

standing embargo by enacting first the Torricelli law in 1992 and subsequently the

Helms-Burton law in 1996, in an attempt to undermine the Cuban government with

additional economic sanctions. As Dominguez observes, "The Cold War had turned

colder in the Caribbean. Cuba was the only country governed by a communist party

whose domestic political regime the United States was still committed by law and policy

to replace, albeit by peaceful means" (Dominguez 1997: 49).

The U.S. Embargo Against Cuba in the Post-Cold War Era

At a time in which the Cuban government was struggling for survival and opening

the island to foreign investment, international tourism, and remittances to stimulate the









ailing economy, the United States reinforced its economic sanctions against Cuba. In

October 1992, U.S. President George Bush signed the Cuban Democracy Act (CDA),

also known as the Torricelli law. The bill prohibited foreign subsidiaries of U.S.

companies from dealing with Cuba, barred any ship that had docked in Cuban harbors

from entering U.S. ports for a period of six months, and called for a termination of aid to

any country that provided assistance to Cuba. In order to encourage democratic changes

on the island, the Torricelli law also permitted a calibrated reduction of certain sanctions

in response to positive developments in Cuba.

On March 12, 1996, U.S. President Bill Clinton signed the Cuban Liberty and

Democratic Solidarity Act, better known as the Helms-Burton law. Besides codifying the

existing restrictions that collectively formed the U.S. economic embargo against Cuba,

Helms-Burton aimed to halt the flow of foreign investment into Cuba by creating a riskier

and more uncertain business environment as well as to complicate Havana's access to

external financing. The rationale for this legislation was that this plan might ultimately

lead to the collapse of the Cuban government or at least seriously undermine the process

of slow but constant economic recovery witnessed by the communist island since its

lowest point in 1993. The attempt to undermine Cuba's opening to foreign investment is

linked to the possibility of lawsuits and the imposition of travel restrictions against

foreign companies or other entities that "traffic" in U.S. properties expropriated during

the early days of the Revolution. The right to sue foreign companies is also granted to

Cubans who became U.S. citizens after the expropriation occurred, in an attempt to

further increase the potential impact of the legislation.









In the last few years, economic sanctions against Cuba have been under fire in the

U.S. Congress. An increasing number of lawmakers have pushed for a rapprochement

with the Castro government and the lifting of restrictions on travel to and trade with the

island. In October 2000, the U.S. Congress passed a resolution that allows direct

commercial exports (on a cash basis) of food products to Cuba for the first time in almost

four decades. However, in June 2004, Washington intensified again economic pressure

on its communist neighbor by implementing more stringent rules on remittances, family

visits, and U.S.-based educational travel to Cuba. The White House also said it will

increase financial support of anti-Castro groups on the island.

There has been considerable debate about just how effective the U.S. economic

embargo against Cuba has been in achieving its main goals. On the one hand, several

scholars have concluded that U.S. unilateral economic sanctions with respect to Cuba do

not work. They argue that sanctions have failed to promote significant changes in the

Caribbean island or eventually hasten the demise of the Castro regime, while imposing

unjustifiable costs on American firms in terms of forfeited businesses with Cuba. They

also claim that a policy that respects the rights of Americans to trade with, invest in, and

travel to Cuba would more effectively serve U.S. interests in post-Soviet Cuba by

defending human rights, helping the Cuban people, and spreading the values of the

American society (Peters 2000: 5).

On the other hand, supporters of the U.S. policy toward Cuba justify the existing

economic sanctions by arguing that engagement with the island would be unlikely to

induce the Castro government to implement political liberalization. In their opinion, the

lifting of the embargo and the travel ban would guarantee the continuation of the current









totalitarian structures, lead to greater repression and governmental control, and delay a

transition to democracy (Suchlicki 2000: 2). While recognizing that the embargo by

itself would not produce liberalization, they say that economic sanctions are weakening

the Castro dictatorship and call for complementary measures aimed to intensify regime

destabilization. In fact, in their opinion, the major goal of the U.S. embargo at present is

not behavioral change of the Cuban leadership, but regime change (L6pez 2000: 347).

Limitations of Current Research on Economic Sanctions

The role and usefulness of economic sanctions as an instrument of foreign policy

have been debated for decades, especially since the League of Nations was launched with

grand hopes in 1919. Although military instruments are often thought to be the only

effective means for achieving ambitious foreign policy goals, since World War I

economic sanctions have come to be viewed as the liberal alternative to war. The

rationale behind sanctions is that they will produce economic deprivations, triggering

public anger and politically significant pressure. This in turn would lead to changes in

the behavior of the target government, or its removal from power (Jonge Oudraat 2000).

While the first major wave of research on economic sanctions, during the 1960s

and 1970s, reached a consensus that they were not as effective as military force, the

conventional wisdom began to change in the mid-1980s. As a sign of an increasing

optimism about the utility of economic pressure, a new wave of liberal scholarship began

to argue that international institutions might constrain state behavior and have a

significant impact on international outcomes (Martin 1992: 250-251). Neoliberals make

the case that increased interdependence in the modern world will cause states to act in a

more cooperative fashion, because it increases the costs of defection. In a world of

prisoner's dilemmas, states will go it alone unless they expect to be punished for









defecting (Keohane 1983: 97, Oye 1985: 14). In short, neoliberals assume that potent

sanctions provide an incentive for cooperation (Drezner 1999: 35). As noted by Axelrod

and Keohane, when sanctioning problems are severe, cooperation is in danger of

collapse. For cooperation to be a stable outcome, countries must believe that it is best to

avoid being the target of sanctions (Axelrod and Keohane 1986: 236).

The aforementioned optimism among liberals has not gone unchallenged. For

instance, Pape (1997: 106) holds that there is little valid social science research

supporting claims that economic coercion can achieve major foreign policy goals and that

multilateral cooperation can make sanctions an effective alternative to military force. He

claims that economic sanctions succeed in at most 5% of cases and challenges a previous

work carried out by Hufbauer, Schott, and Elliot (HSE) in which sanctions had been

demonstrated successful in about one-third of the cases analyzed (Hufbauer et al. 1990:

93). Pape (1997: 106-107) concludes that economic sanctions, despite the increasing

multilateral cooperation of the early 1990s among superpowers, are unlikely to gain

importance in the future mainly because the modern state is not fragile. According to

him, target states are able to mitigate the impact of sanctions by shifting the burden to

opponents and disenfranchised groups or through economic adjustments, while external

pressures tend to increase the nationalist legitimacy of their rulers. Using bargaining

theory and strategic interaction models, other scholars have demonstrated that sanctions

have little impact on dispute outcomes and argued that they can seldom be effective

policy instruments because the coercer and the target play against rational opponents

trying to promote their own goals (Wagner 1988: 481-483; Tsebelis 1990: 20; Morgan

and Schwebach 1997: 46).









It is worth emphasizing that the question of whether sanctions work may be

separated from the question of whether they should be used, since answering one does

not automatically provide an answer to the other. For instance, even if sanctions work

less than 5% of the time as claimed by Pape, they can still be a reliable alternative to the

use of force. Rational decision-making requires the comparative evaluation of policy

alternatives not only in terms of favorable policy outcomes but also in terms of costs and

benefits for both the coercer and the target as well as in terms of the difficulty of the

undertaking. In short, sanctions might be preferable to military force even when they are

less likely to achieve a given set of goals, provided that the cost differential is big enough

(Baldwin 1999/2000: 80-86). Nonetheless, there seems to be at least a general

acceptance among scholars that economic coercion is often unable to serve ambitious

foreign policy goals by provoking major positive changes in the target country.

Economic sanctions can be imposed either by one state acting alone or by all states

(or most of them) upon which the target government relies for external support.

Multilateral comprehensive sanctions are usually thought to have a greater potential

impact than unilateral ones, but they are rarely imposed due to the difficulty of reaching

consensus among countries on another state's behavior. On the other hand, unilateral

coercive economic measures have been used frequently, especially by the United States.

These foreign policy tools against target countries include the withdrawal of economic,

military, and technological assistance; the seizure of assets in U.S. jurisdictions;

restrictions on trade, investment, and travel; and pressures on international financial

institutions to deny loans, credits, or grants.









My research is interdisciplinary and draws on notions of international and domestic

(U.S.) law, international relations, transnationalism, history, and economics. It is a case

study of the implementation and effectiveness of U.S. unilateral economic sanctions

against Cuba. Since the communist island is subject to one of the most comprehensive

U.S. economic embargoes in history, this study has great implications for the research on

the role and usefulness of sanctions as instruments of foreign policy. It also sheds light

upon a specific aspect that has been generally neglected by scholars of international

relations and by the literature on the Cuban embargo, the influence of transnational actors

in the globalizing post-Cold War world.

While many scholars evaluate the utility of economic coercion by analyzing the

behavior of the target government, little attention has been given to transnational (non-

state) actors whose practices may affect economic interactions and the overall

effectiveness of sanctions in an increasingly interconnected global marketplace. This

study focuses on non-state players such as multinational corporations, migrant

entrepreneurs, international travelers, food exporters, and indirect investors. A twofold

question will be addressed: if transnational linkages sustain flows of capital and finance

across borders, mainly in the form of foreign investment and remittances, is it possible

that economic sanctions (especially unilateral ones) might not work as a result of

activities carried out by overseas investors and migrants? And even more important,

what is the role played by transnational actors located in the same country that has

devised sanctions as an effective tool to achieve far-reaching foreign policy objectives?

This is exactly the area where my project attempts to make its most important

contribution. Although one of the reasons for the tightening of the embargo during the









1990s was to stimulate democratic reforms in Cuba, the prime objective of U.S. policy

was to exert economic pressure on the Castro government (and eventually hasten its

demise) by reducing the flow of hard currency to the Caribbean island. I hypothesize

that, in spite of stiffened sanctions, the United States has not only been unable to stifle the

flow of foreign investment into Cuba, but has actually contributed in a significant way to

the recovery of the Cuban economy from the deep recession following the demise of the

former Soviet Union. Interestingly, formal and informal activities by the Cuban-

American community, the most vocal and influential group in the United States in favor

of the embargo, have been a major factor in mitigating the overall impact of U.S.

economic sanctions against Cuba.

Propositions and Contributions of the Research

Two main propositions are addressed in this study. The first one is that the Helms-

Burton law has made foreign investment in Cuba more problematic, but largely failed to

stem the flow of foreign capital delivered to the island and hinder the slow but steady

recovery of the Cuban economy. There is little doubt that the Castro government has

faced increasing difficulties to obtain external financing for its main economic activities

and probably lost some deals because of Helms-Burton's penalizing provisions against

foreign firms that invest in or use U.S. expropriated properties. However, it appears that

the overall process of foreign investment in Cuba has not been halted as many foreign

companies continue to run profitable businesses on the island and take advantage of the

absence of U.S. competitors.

The second proposition of this study is that, in spite of the tightening of the

embargo, the United States has played and keeps playing quite an important role in the

Cuban economy in several different ways. More specifically, large amounts of hard









currency have been channeled into the Cuban economy through U.S. visitors (especially

Cuban-Americans) and remittances sent by Cuban exiles to relatives on the island.

Smaller amounts were also channeled through U.S. telecommunications payments to

Cuba, American food exports (sold in government-owned dollar stores), and U.S.

investors who hold publicly traded shares of major foreign firms engaged in business

activities with the government of Fidel Castro. The fact that a significant share of hard

currency reaching Cuba is in violation of U.S. regulations also provides some evidence

for the inability of the U.S. government to obtain compliance from its own citizens.

Based on available information on U.S. citizens' activities with respect to Cuba,

this study attempts to demonstrate the following: 1) Even with travel restrictions in place,

legal and illegal visits to Cuba from the United States have increased constantly during

the 1990s, consolidating U.S. citizens as the second largest group among foreign travelers

to the island; 2) Cuba has become in recent years increasingly dependent on remittances

from abroad, mainly sent from the Cuban American community in South Florida, and net

hard currency revenues to the Cuban government from remittances are today greater than

its profit from tourist activities and sugar and nickel exports combined; 3) The United

States has played an important role in financing the development of Cuba's

telecommunications sector since a large portion of the island's hard currency revenues

from telecom services come from dollar charges applied to incoming calls (mostly Cuban

American calls) from U.S. territory; 4) In the past three years the United States ranked

first among Cuba's sources of imported food and a share of U.S. products ended up in the

island's state-owned dollar stores where the elevated markup on prices generates

significant amounts of foreign exchange revenues to the Castro government; 5) American









entities own equity interests of several foreign companies that have provided Cuba much-

needed capital, technology, management expertise, and new markets for its main exports.

Overall, there is sufficient evidence to argue that the U.S extraterritorial measures

against foreign companies investing in Cuba have had little success. Furthermore,

Washington's policy toward Havana ended up throwing a lifeline to the same government

it was supposed to undermine. The aforementioned activities are emblematic examples

of gaping holes in the United States' effort to economically isolate Cuba and provide a

solid explanation of why the Cuban embargo has failed to achieve its main goal. My

study, therefore, promises to make two significant contributions to the scholarship on

economic sanctions.

First, it challenges the idea on the utility of unilateral economic coercion as a tool

of foreign policy and enriches the debate on whether sanctions are effective by analyzing

the impact on the Cuban economy of activities carried out by transnational players.

While some scholars have focused on the effects of the Cuban embargo on U.S. entities

in terms of forfeited businesses with the Cuban government, very few have examined the

possibility that foreign investors and U.S.-based transnational actors bear major

responsibility for the failure of sanctions to achieve ambitious foreign policy goals with

respect to Cuba. In the post-Cold War context of economic globalization and

transnational linkages, these actors deserve more attention from the academic community

than they have received so far.

Second, this study provides concepts that can be used to examine not only the

Cuban embargo but also other sanctions situations. Indeed, activities carried out by

multinational corporations and other transnational actors (including individuals and









entities of the coercer state) might have had a positive impact on the economy of other

countries that, like Cuba, are subject to U.S. economic sanctions. In particular, foreign

direct investment, remittances sent from exiles, and secondary or indirect investment

operations may undermine the ability of sanctions to squeeze economically these target

countries. Mainly as a result of increasing migration flows, remittances have become the

second largest source, behind foreign direct investment (FDI), of external funding for

development countries (Solimano 2003: 5). In addition, money transfer and investment

operations are facilitated by the rapid growth of Internet and other electronic transactions.

In short, the flow of hard currency reaching Cuba from abroad, especially from the

United States, exhibits patterns that may suggest a potential path for further research on

the role and usefulness of economic sanctions.

Sources of Data

In addition to extensive documentary research in the United States, this study is

based upon field research conducted in Cuba between 2000 and 2004. Data were

generated from the following sources:

* In-depth interviews with key staff-members at the Cuban Ministry of Foreign
Investment and Economic Collaboration in Havana (MINVEC), the Center for the
Promotion of Investment (CPI), and the Cuban trade and investment consulting
firm Consultores Asociados S.A. (CONAS). These interviews provided valuable
information about the impact of the Helms-Burton law on specific foreign
companies operating in Cuba and the status of foreign investment in the island's
most important economic sectors.

* In-depth interviews with economists at major centers of investigations located in
Havana (Centro de Estudios de La Economia Cubana, Centro de Investigaciones
de la Economia Internacional, Centro de Estudios Sobre Estados Unidos, Instituto
Nacional de Investigaciones Economicas). I interviewed experts on the issues of
remittances, tourism, external sector, and foreign trade. The main goal was to
evaluate the role of the United States in the Cuban economy by obtaining detailed
information on the following topics: 1) The number of U.S. nationals that visit
Cuba every year and how they circumvent travel restrictions; 2) How remittances
from the United States are sent to Cuba and how they are estimated; 3) How net









hard currency revenues to the government from remittances are calculated; 4) How
the Cuban government obtains financing for commercial transactions with the
United States and the share of U.S. food sales that are sold in dollar stores.

* In-depth interviews with Cuban correspondents for foreign press agencies and
newspapers such as Reuters, Associated Press, Financial Times, Dallas Morning
News, Sun-Sentinel, and Chicago Tribune. Foreign journalists were a precious
source of information on both political and economic issues and provided
suggestions about how to obtain relevant data and contact specific people.

* Archival research at Cuba's public libraries on local newspapers articles (Granma,
JuventudRebelde, Trabajadores, Prensa Latina), governmental documents and
declarations (speeches and press conferences), and publications related to Cuba's
business environment and economic developments (Anuario Estadistico de Cuba,
Opciones, Economics Press Service, Enfoques, Negocios en Cuba, and annual
reports of the Cuban Central Bank).

* Archival research in the United States on newspapers articles (New York Times,
Miami Herald, Los Angeles Times, Washington Post, and Dallas Morning News),
publications of organizations that monitor the Cuban business environment
(Economic Commission for Latin America and the Caribbean, Economist
Intelligence Unit, and U.S.-Cuba Trade and Economic Council), and financial
reports of selected foreign companies that operate in the Cuban market. These
sources provided relevant information on the island's economic structure and
macroeconomic indicators, developments of specific sectors such as tourism,
nickel, sugar, and telecommunications, the Helms-Burton law and foreign
investment trends, international trade and financing activities, and U.S. secondary
or indirect investments in Cuba.

Organization of This Study

As previously observed, many scholars of international relations assess the

effectiveness of sanctions by focusing on the economic adjustments introduced by the

target country to cope with external pressure, neglecting the importance of growing

transnational flows of capital and finance in the context of globalization. Chapter 2,

therefore, explores the prevailing discourses on transnational linkages at both global and

local levels in order to structure the proposed case study and identify theoretical

assumptions relevant to its working hypotheses. Transnational business practices by non-

state actors such as multinational corporations and migrant entrepreneurs will receive









special attention since foreign investment and remittances have played a major role in

keeping afloat the Cuban economy in the post-Cold War era. Chapter 3 reviews the

history of U.S. economic sanctions with respect to Cuba that were first enacted in the

early 1960s and then intensified during the 1990s with the Torricelli law and the Helms-

Burton law. A major contention is that the strengthening of the embargo was linked to

self-interested groups in the Cuban American community seeking to serve their parochial

interests and able to influence U.S. decision-makers. Regarding Helms-Burton, this

section focuses on those articles aimed to create disincentives for foreign companies in

Cuba along with some discussion of their controversial aspects. Chapter 4 analyzes the

evolution of foreign direct investment in Cuba and describes the several different ways in

which the Helms-Burton law affects foreign companies that intend to invest in the island

and those already operating in the Cuban market. It also evaluates the impact of the

legislation on the Cuban economy and the flow of foreign investment, as well as its

effectiveness in forcing overseas firms to pull out of Cuba.

Chapter 5 tracks the flow of hard currency reaching Cuba from the United States in

order to provide evidence of the importance for the Cuban economy of activities carried

out by U.S. citizens (mainly Cuban Americans) and firms. More specifically, it analyzes

the presence of U.S. visitors on the island, the flow of remittances from Cuban exiles, and

payments to the Cuban government by American companies for telecommunications

services. It also examines recent developments in U.S. food sales to Cuba and U.S.

investments in foreign companies that operate in the Cuban market. Chapter 6 attempts

to identify other cases of U.S. unilateral sanctions that may exhibit patterns similar to

those seen in the Cuban case. Without performing detailed empirical analyses, this






16


section uses available information on remittances and foreign investment to support the

argument that economic activities carried out by transnational actors might play a crucial

role in the overall effectiveness of sanctions. The concluding section summarizes the

main findings of the study, offers suggestions for a more effective U.S. policy toward the

government of Fidel Castro, and identifies potential paths for further research on the role

and usefulness of economic sanctions.














CHAPTER 2
TRANSNATIONAL LINKAGES AT GLOBAL AND LOCAL LEVELS

Transnational linkages are broadly defined as movements of information, money,

objects and people across borders that are not controlled by organs of governments

(Vertovec 2003: 642). The concept of "transnationalism" in the study of international

relations came into prominent use in the early 1970s in the context of the growth of

international organizations and particularly relations between non-governmental bodies.

A number of scholars, mostly with a liberal background, began to question the prevailing

state-centric view of international relations by analyzing the impact on interstate politics

of transnational activities carried out by multinational businesses, revolutionary

movements, non-government organizations (NGOs), trade unions, scientific networks

and the Catholic Church (Keohane and Nye 1971).

More recently, the growing interconnectedness of the world as a consequence of

globalization and technological change has stimulated a proliferation of literature

concerning various types of transnational practices by private individuals and groups,

including students, tourists, migrants, NGOs, and corporations. Trasnationalism overlaps

globalization but typically has a more limited scope. Whereas global processes refer to

economic, political, and social activities that are largely de-linked from specific national

territories, transnational processes tend to be anchored in and transcend one or more

nation-states (Levitt 2001: 14). For instance, migration (which is embedded in

globalization) is considered a transnational phenomenon since it refers to individuals who

move across the borders of one or more nation states. Similarly, transnational









corporations (TNCs) operate across national boundaries but are centered in one home

nation (Kearney 1995: 547).

The growing number of non-state participants in international activities and the

expansion of capital, cultures, and people across borders have provoked discourses on the

crisis of the nation state and the complex transnational linkages that bind societies

together in today's interdependent and shrinking world. As Guarnizo and Smith (1998:

3) observe, the nation state is seen as weakened "from above" by multinational capital,

global media, and supra-national political institutions, and "from below" by informal

economic channels, ethnic nationalism, and grassroots activism. However, while there is

little doubt that transnational activities escape control and domination by the state, an

analysis of power relations and economic interactions in the context of sanctions must

take into account an additional element. The movement of capital sustained through

transnational linkages could actually strengthen the target country by providing it with

crucial financial resources to weather the impact of economic sanctions. Transnational

hard currency flows (mainly foreign investment and remittances) are even more

important in the case of communist Cuba, where the government controls a large share of

the economy and thus greatly benefits from all capital inflows.

Transnationalism "From Above" and "From Below"

In order to describe the variations in the intensities, frequencies, and the scope of

cross-border linkages, international relations scholars have introduced several different

typologies of transnationalism as referred to continuous or occasional practices (Itzigsohn

et al. 1999), the level of state and economy or the intimate level of family and household

(Gardner 2002), global networks or kinship and diasporic ties (Faist 2000). Nevertheless,

the substantial differentiation between transnationalism "from above" and "from below,"









based on who initiates and sustains linkages, seems to be the most common approach to

the study of transnational processes. In this two-levels approach, activities initiated by

TNCs and international organizations with a "global governance" agenda belong to

transnationalism from above. Most local linkages between immigrants and their home-

country counterparts, instead, are considered as transnationalism from below. It must be

noted that such a distinction focuses on who initiates and determines the direction of any

cross-border action in order to capture the dynamics of economic and power relations in

the transnational arena. The "above" and the "below" of transnational action should not

be equated exclusively with global and local structures or agents, since these categories

are contextual and relational (Guamizo and Smith 1998: 7 and 29).

Transnational businesses and organizations born of political and economic

integration (the United Nations, International Monetary Fund, World Bank, and

international NGOs) now vie with states for global influence and attempt to build a global

neoliberal contextual space to regulate transnational flows of capital, trade, people, and

culture. TNCs with largely jettisoned national origins, in particular, are seen as major

players in the global economy. By establishing universal systems of supply, production,

marketing, investment, information transfer, and management, they create the paths along

which much of the world's transnational activities flow (Vertovec and Cohen 1999: xxii).

Since they are controlled by powerful elites who seek dominance in the world, TNCs are

able to use their resources, range, and specialized flexibility to spread capital, imagery

and information on an almost global scale. Moreover, as Sklair (2002) suggests, a

transnational capitalist class has arisen alongside the TNCs. Comprised of TNC

executives, globalizing state bureaucrats, politicians and professionals, and consumerist









elites in merchandising and the media, this new class pursues interests that are global,

rather than exclusively local or national, and therefore control most of the world

economy. In short, the homogenizing and elitist forces of transnationalism from above

undermine the economic, political, and cultural networks of more local units, including

nations, ethnic groups, and grassroots communities (Mahler 1998: 67).

Transnational corporations with enormous financial resources and capabilities have

created considerable difficulties for the other international actors, primarily the nation-

states and the labor unions. Although the behavior of a particular corporation (what we

might call its "code of conduct") will depend on the way its management decides to use

the available resources, several scholars have documented how TNCs interfere in the

domestic political affairs of sovereign nations (Kline 2003), tend to be labor abusive in

their overseas investment destinations (Wang 2005), and frequently fail to uphold and

promote environmental standards in developing countries (Cohan 2001). In order to raise

public awareness of these harmful activities, the 2000 United Nations Global Compact

called upon TNCs to assume greater responsibilities toward those living in the countries

in which they operate, and to abide by standards in the areas of human rights, labor, and

the environment (Nien-he 2004: 643).

In the context of economic sanctions, however, the coercer state is mostly

interested in finding ways and means for controlling the positive effects of TNCs on the

target country's economy rather than ameliorating their damaging practices. For

instance, one of the main goals of Washington's policy toward Havana is to stifle the

flow of foreign direct investment (FDI) into Cuba and hinder the growth of the island's

main economic sectors. Investment operations carried out by TNCs play a crucial role in









the development of receiving economies as they contribute capital for the acquisition of

modern technologies, increase theoretical and business knowledge for the integration into

global marketing, distribution, and production networks, and stimulate greater

international competitiveness of national firms (Perez Villanueva 2005: 162). In other

words, FDI is an important catalyst for economic growth in developing economies,

although such a positive impact may vary across countries depending on the level of

human capital, domestic investment, infrastructure, macroeconomic stability, and trade

policies.

A key contention of this study is that the attempts by states to control the activities

of transnational corporations are doomed to failure for three main reasons. First, these

firms have been growing very rapidly and exert a great deal of power in the globalized

world economy. Through mergers and acquisitions, the leading TNCs are richer and

more powerful than most of the nation-states that seek to regulate them. In 2000, the

combined sales of the world's top 200 corporations were far greater than a quarter of the

world's economic activity. Of the 100 largest economies in the world, 51 were TNCs

and only 49 were countries (Anderson and Cavanagh 2000). Second, TNCs are

headquartered in one country but they operate across borders in a number of political

jurisdictions. This inevitably creates enormous legal and political difficulties for the

parties since the firm is only partially within the control of an individual state and must

deal with different and often conflicting national requirements. For example, when the

U.S. Congress passed the Helms-Burton law in 1996 and threatened sanctions against

foreign firms investing in Cuba, the European Union vowed to fight the legislation at the

World Trade Organization, while Mexico and Canada passed antidote laws that prevent









their citizens from complying with U.S. regulations. Third, because of its hierarchical

and highly integrated nature, a TNC has the capacity to shift its resources among

jurisdictions in accordance with a central plan, which can easily escape national control

(Bock 1979: 41). Modern corporations raise funds in international capital markets to help

finance their expansion plans anywhere in the world, including in embargoed countries.

In the light of the significant presence of U.S. investors in several major TNCs that

engage in business activities with the government of Fidel Castro, one is left wondering if

it makes any sense for the United States to keep using economic sanctions as a tool to

achieve ambitious foreign policy goals.

While activities by TNCs complicate the efforts of governments to control their

own economies and the global flow of capital, we must avoid confusing intentionality

with consequences, as when actors are designated "resistant" or "oppositional" because

their practices produce results that are at odds with the intention of states. Foreign firms

that invest in communist Cuba might help the Castro government to withstand the

economic pressure of the U.S. embargo, but their goals toward Havana are not

necessarily different from those of the U.S. government. Many TNCs that are taking

advantage of existing business opportunities in Cuba also realize that the introduction of

political changes and profound economic reforms on the island would be extremely

beneficial to them. The same distinction is valid for Cuban immigrants in the United

States and the money they send to relatives who have remained in Cuba. Although the

Cuban government is able to capture the vast majority of remittances through sales in

state-run hard currency stores, the primary goal of Cuban Americans is to support family

members, not Fidel Castro.









In contrast to transnationalism from above, in which transnational corporations play

a crucial role, transnationalism from below is largely the terrain of grassroots

collectivities (local households, kin networks, elite fractions, and other emergent local

formations) that are marginal to the centers of power and rely almost entirely on social

capital. The latter usually refers to the ability to secure resources by virtue of group

membership and networks (Bourdieu 1986: 249). Thus social capital is a resource

available through transnational linkages, making possible the achievement of certain ends

that would not be attainable in its absence. In particular, migrants' transnational practices

are believed to reconfigure the existing power hierarchies by sustaining material

resources that finance "good-will projects" in their country of origin and challenge

multiple levels of structural control: local, regional, national, and global (Mahler 1998:

68). In addition to the big players in the global economy, migrant entrepreneurs who

comprise the bulk of transnational communities are making an ever-greater impact by

transferring huge amounts of money across borders in the form of remittances. The

resulting capital flows help reduce poverty and may contribute to the economic growth of

recipient countries.

Since the early 1990s, the rapid growth of international migration has ushered in a

new era of transnational studies, mostly interested in the lived realities of migrants and

their cross-border communities and activities. Instead of focusing on traditional concerns

about their adaptation to receiving societies, this emerging perspective concentrates on

the continuing relations between migrants and their places of origin and how this back-

and-forth traffic builds complex social fields that straddle national borders (Basch et al.

1994: 6). In particular, the rebirth of the notion of diaspora has stemmed from academics









using it to describe practically any population that has originated in a land other than

which it currently resides, and whose social, economic, and political linkages cross the

borders of nation-states (Vertovec and Cohen 1999: xvi). In response to the process of

globalization, migrants are thought to create transnational communities that are "neither

here nor there" but in both places simultaneously. As they sustain economic activities

that are grounded on the differentials of advantage established by state boundaries, these

communities operate, to a large degree, in a way very similar to that of large transnational

corporations. The crucial difference is that these enterprises emerge at the grassroots

level and their activities are often informal (Portes 1997: 4).

It is worth emphasizing that migrants construct and maintain social networks that

are rooted in place, even as the networks transcend place. The social groups, identities,

beliefs, rituals, practices, and power relationships in both sending and receiving

communities (as well as locations in transit) are critical to our understanding of the

process and effects of transnationalism from below. Several scholars have challenged the

image of transnational migrants as de-territorialized, free-floating people that are socially,

politically, economically, and culturally unbound. While extending beyond two or more

national territories, transnational practices are constituted within historically and

geographically specific points of origin and migration established by transmigrants. In

addition, transnational linkages between migrants and certain local and national contexts

abroad are built within the confines of specific social, economic, and political relations,

which are bound together by perceived shared interests and values. For instance,

Guarnizo and Smith (1998: 13) argue that the context in which migrants' transnational

actions take place is not just local but also "translocal" (i.e. local to local), and that









relations between people across national territories would be unthinkable without a basic

sense of shared meanings and social bounds. Similarly, Levitt (2001: 6-7) observes that

individual actors cannot be viewed in isolation from the transnational social fields in

which they are embedded. According to her, the economic initiatives, political activities,

and sociocultural enterprises migrants engage in are powerfully shaped by the kinds of

organized social groups within which they are carried out.

There is now a substantial and growing body of literature on the initiatives of

migrants to establish durable transnational linkages with their societies of origin.

Analyses of migrants' connections with people and institutions in their homelands have

focused on family obligations and marriage patterns, remittances, political engagement,

religious practices, regular visits, media consumption and so on. In order to assess the

effectiveness of economic sanctions against a target government, this study gives special

attention to remittance practices and their significance for the economy of the recipient

country. The practice by migrants sending money "home" to family and friends left

behind is hardly new. But the volume of these money transfers has now become so

important that in many cases they determine the development prospects of villages,

towns, and entire countries. Whereas from an individual perspective remittances have

purely personal consequences, in the aggregate they translate into a flow of capital that

can constitute a crucial source of foreign exchange for receiving countries, into

investments that sustain the home construction industry in these countries, and into new

cultural practices that radically modify the value systems and everyday lives of entire

regions (Portes 2003). Remittances that migrants send to their homelands have indeed

become the prime topic of research in the field of migration and the most often-cited,









tangible evidence and measuring stick for the ties connecting migrants with their societies

of origin (Guarnizo 2003).

It has been argued that the extent, intensity, velocity, and impact of transnational

activities are enhanced by the advent of new space-and time-compressing technologies,

which greatly facilitate rapid communication across national borders and long distances

(Portes et al. 1999; Held et al. 1999; Kivisto 2001). Regardless of the migrants'

motivations to sustain economic connections with their countries of origin, technological

improvements are believed to explain a good part, if not all, of contemporary migrant

transnationalism. Improved modes of transportation and new electronic money transfer

services have boosted the frequency of family reunions across national boundaries and

provided cost-efficient ways to send remittances to relatives abroad, thus shortening the

distance between sending and receiving countries. However, these connections cannot be

fully understood without analyzing the growing family and kinship ties (mostly as a

result of recent trends in international migration) that constitute a powerful agency for the

cross-border transmission of capital, values, customs, and culture. Crucially, it is within

the linkages established through family relations that most migrants engage in

transnational activities (Goulbourne 2002: 160-161).

My findings suggest that the vast majority of remittances reaching Cuba from the

United States arrive on the island in the luggage of friends or entrusted agents rather than

through electronic transactions. Although such practices are surely aimed to circumvent

the cap on money transfers to Cuba established by U.S. embargo laws and regulations,

they also reveal the migrants' commitment to support family members abroad, or what

Portes (1998: 8) called "bounded solidarity," no matter how difficult it might be to









accomplish this goal. Thus, to a large extent, it is social capital mainly built through

family ties that sustains the transnational flow of remittances regardless of improved

technology, not the other way around. As Eckstein (2005: 338) observes, the rapid

growth of remittances to Cuba during the last decade hinges more on the strengthening of

cross-border bonding and trust than on technological breakthroughs in wire transfer

services.

Finally, whereas migration and family-based economic transactions undermine the

autonomy of states, the latter have found ways to influence the volume and density of

such activities and reap substantial benefits from them. As remittances constitute a

significant source of foreign exchange earnings, some developing countries encourage

international migration, hoping that money transfers from abroad will raise the welfare of

their non-migrant residents and stimulate economic growth (Chandawarkar 1980). In

embargo situations, the potential contribution of remittances at both the macro and

microlevels provides great incentives for sanctioned states to stimulate these financial

flows, and thus minimize the negative impact of economic sanctions on their economy.

For instance, family remittances to Cuba have increased dramatically since Fidel Castro,

amid a deep economic recession, legalized U.S. dollar holdings in September 1993 and

allowed about 35,000 Cubans to flee the island the following year, most of them

resettling in the United States.

What came to be known as the "Balsero Crisis" of 1994, ended with the United

States agreeing to accept 20,000 legal migrants a year from Cuba and pledging to speed

up the admission of another 4,000 to 6,000 who were already on a visa waiting list.

Nevertheless, in a clear attempt to stem family contacts and the flow of remittances to the









communist island, Washington's immediate response to these events was to impose a ban

on money transfers to Cuba and terminate the general license for travel to the island by

Cuban Americans (Morley and McGillion 2002: 75-78). Today, remittances from this

last wave of Cuban migrants, and those who left Cuba in 1980 during the "Mariel

Crisis,"1 generate in net terms more hard currency revenues to the Castro government

than any other economic activity. In short, the encouragement of out-migration (coupled

with domestic economic adjustments) by sanctioned states may be seen not only as an

escape valve to release internal pressure on their governments, but also as an effective

way to boost foreign exchange earnings at particularly critical times.

In summary, this section has presented an analysis of cross-border linkages from

both above and below, contrasting the transnationalism from above of corporations to the

transnationalism from below of international migrants. Such a distinction has been

criticized by several scholars because it fails to recognize that certain agents may act

simultaneously from above and from below depending on the nature of their actions

(Schein 1998), downplays the role of states in co-opting and advancing transnational

practices (Itzigsohn 2000), and privileges organized activities over more diffuse forms of

mass action with no collective purpose (Mahler 1998: 72). Even so, the aforementioned

typologies allow us to develop a research strategy that situates specific actors in regard to

power hierarchies and examines different categories of transnational linkages along with

the political, social, and economic factors that condition their creation and reproduction.

Since global processes and micro-dynamics of migration are hypothesized to play a



1 In 1980, after thousands of Cubans rushed into the Peruvian embassy in Havana seeking asylum, the
Castro government opened the port of Mariel to allow all who wanted to leave the island to do so in an
orderly fashion. While the exodus proceeded rather chaotically, approximately 125,000 Cubans left, most
of them reaching the United States.









crucial role in the context of sanctions, the rest of this chapter provides further details on

the activities of TNCs, international migration and the spatial expansion of social

networks (family ties) that sustain monetary remittances across borders, and the

economic impact of migrants' money transfers to their countries of origin.

Transnational Corporations and the Movement of Capital

Transnational corporations are defined as "all enterprises which control assets

(factories, mines, sales offices and the like) in two or more countries" (UNCTAD 1995:

xix-xx). There are currently at least three major categories of corporations that operate

internationally: 1) Relatively small TNCs with commercial activities only in a few

countries; 2) Medium-size enterprises that function in regional markets such as the

Americas, Europe, or Asia; 3) Large TNCs, also known as global corporations, that

operate on a worldwide basis and concentrate the greatest economic and political power.

As a result of technological advances and increasingly liberal policy frameworks, these

actors have come to dominate the international economic system and, in some cases, they

are more powerful than most states acting alone.

Today, TNCs are capturing global markets with foreign direct investment and

creating global webs of production, commerce, culture and finance virtually unopposed.

These actors are able to exert a significant influence over the domestic and foreign

policies of governments worldwide and the destinies of individual economies in the

developing world, order the agenda of the World Trade Organization, and set wage-levels

that can cause the first world to bend to their demands (Macleod and Lewis 2004: 77). In

addition, as they move across national boundaries and forge linkages between countries,

TNCs encourage the intertwining of national economies, thus limiting the scope of

government action and its controlling power (Suter 2004: 44). This particular aspect is









very important in the context of economic sanctions since laws and regulations of the

coercer state are specifically designed to halt business operations by TNCs in target

countries and the resulting flow of capital. Transnational corporations' home bases are

geographically concentrated in the industrialized countries of the North (mainly the

United States, the European Union and Japan), but their practices are assuming an ever

more stateless quality. As stated by Karliner (1997: 6), "this combination of stateless

corporations and corporate states allows a large TNC to hide behind the protection of

a national flag when convenient, and to eschew it when it's not."

It should be noted that, among the major world powers, the United States is not

only the country that has made more frequent use of economic coercion against other

nations, but also the country with probably the lowest level of interdependence and

cooperation between its government and corporations. Back in the late 1970s, Esterline

(1979: 32) observed that the United States, unlike the other four major supernational

actors of that time such as Japan, the European Community, China, and the Soviet Union,

did not have a symbiotic relationship between government and private enterprises. In

fact, the fundamental nature of U.S. policy on international investment was neither to

promote nor discourage inward or outward investment through government intervention.

While Esterline demonstrated that U.S.-based TNCs suffered disadvantages both abroad

and at home because they operated in the absence of an American political-economic

policy, his findings also suggested that the U.S. government's control over the activities

of its own corporations was virtually nonexistent, or at least very limited.

The current situation seems to confirm that American-based transnational

enterprises continue to enjoy a high degree of autonomy in carrying out their operations.









Despite numerous attempts to limit corporations' power and increase their accountability

to the state, these TNCs maintain a strong grip on the domestic and foreign policies of

their home country and, at the same time, use the accelerating process of globalization to

gain independence from their government.2 Admittedly, all the major economic powers

face great difficulties in regulating their corporations' business practices as a result of the

increasingly global nature of the international financial system and growing corporate

mobility (Karliner 1997: 9-11). Nevertheless, such an attempt is particularly problematic

for a country like the United States, which is the most open political system and the one

most committed to the promotion of trade liberalization, privatization of state enterprises,

deregulation, foreign investment, and legal security for property rights. Thus, the U.S.

commitment to neoliberal economic policies seriously complicates its strategy to isolate

target countries economically and undermine their governments through the imposition of

sanctions.

Curiously, while direct investments in Cuba are prohibited for U.S. firms under the

embargo, the United States allows individuals and entities subject to U.S. law to hold

publicly traded shares of foreign-based TNCs that are engaged in business dealings with

the government of Fidel Castro. In March 1994, because of efforts by the U.S.-Cuba

Trade and Economic Council or USCTEC (a New York-based organization that monitors

business activities between Washington and Havana), the U.S. Department of the

Treasury issued an opinion according to which an American entity can make a secondary,

non-controlling investment in a third country company that has commercial activities in


2 The political power and lack of accountability of U.S. corporations are mostly derived from their
economic power. In 2000, a total of 59 of the global top 200 TNCs were U.S.-based enterprises, including
AT&T, Boeing, Lockheed-Martin, BellSouth, Kmart, Chase Manhattan, GTE, Mobil, and Texaco
(Anderson and Cavanagh 2000).









Cuba as long as the majority of the revenues of this company are not produced from

operations within the island (USCTEC 1998). The obvious difficulty for the U.S.

government in limiting such practices is that the Cuban operations of most TNCs that

invest in the island's market represent only a small fraction of their global activities.

Given the enormous economic interests at stake (non-controlling investments in leading

TNCs may be worth billions of dollars), it would be extremely problematic for U.S.

policymakers to prevent American entities from holding shares of these corporations just

because of their ventures in Cuba. However, the ironic result for the United States is that

these TNCs undermine the main purpose of the Cuban embargo by providing the Castro

government with much-needed capital, technology, management expertise, and new

markets for its main exports. Washington's global economic interests and its policy goals

toward specific target countries are clearly at odds in the context of economic sanctions.

Even more important, in a global economy driven by competition and the search

for the best short-term return on investment, it is very difficult, if not impossible for the

United States to dictate through the imposition of unilateral sanctions where foreign-

based TNCs can or cannot invest worldwide. States have little chance of controlling the

huge sums of capital that move electronically every minute from computer to computer,

bank to bank, and country to country. In addition, transnational firms headquartered in

foreign countries are able to devise effective strategies to circumvent U.S. restrictions.

For instance, in order to avoid potential penalties under the Helms-Burton law, several

foreign investors have developed roundabout methods to operate in Cuba, using offshore

companies registered in fiscal paradises in the Caribbean and Central America to keep

anonymity, reduce personal liability, and obtain easier access to capital funding. Other









corporations, instead, have simply decided to create legally distinct entities that are

associated exclusively with their Cuban assets or reorganize their activities on the island

in such a way as to escape the reach of the U.S. legislation (Spadoni 2001: 29-32).

Unilateral sanctions, especially when imposed by an economic power like the United

States, may dissuade some TNCs from investing in a target country, but they are unlikely

to stem the overall foreign investment process in that particular country. The reality is

that relatively low levels of overseas investments, or just a few major business deals, may

still provide sufficient resources for target states to resist changes and guarantee the

survival of their governments.

In 2001, more than half of the world's population in 78 countries, for the most part

developing ones, was subject to some forms of U.S. unilateral coercive economic

measures. Economic sanctions by the United States may include the prohibition on all

dealings with a foreign country, trade restrictions, the withholding of financial assistance,

a ban on participation in U.S. government procurement, and opposition by U.S.

representatives in international financial institutions to loans or financial assistance to a

particular country (Carter 2002). According to the United Nations' General Assembly,

the use of unilateral economic coercion "adversely affects the economy and development

efforts of developing countries and has a general negative impact on international

economic cooperation and on worldwide efforts to move towards a non-discriminatory

and open multilateral trading system" (United Nations 1998). Even so, FDI flows into

developing countries have increased significantly during the last decade. While

American companies account for a substantial share of these capital flows, foreign-based

corporations might have helped diluting the impact of U.S. coercive measures on several









target nations, especially those where U.S. direct investments are prohibited. Currently,

the United States maintains comprehensive economic sanctions against Cuba, Iran,

Sudan, and Burma (Myanmar). Sanctions against North Korea and the Federal Republic

of Yugoslavia (Serbia and Montenegro) were significantly relaxed in late 2000, and those

against Iraq and Libya were practically lifted in 2004.

Since the early 1990s, the continued liberalization of FDI regimes and trade has

been a major factor for the substantial growth of TNC activities in developing nations.

Worldwide, the number of countries that each year introduced regulatory changes aimed

to create incentives for foreign investment and strengthen market functioning rose from

just 35 in 1991 to 82 in 2003 (UNCTAD 2004: 8). As a result, net FDI flows to

developing states jumped from about $40 billion in 1990 to $238.4 billion in 2000 and,

after a sharp decline following the September 11, 2001 terrorist attack on the United

States, peaked again at $255 billion in 2004. Whereas in 1990 foreign investment

directed to developing countries accounted for little more than 20% of total capital flows

worldwide, last year their share of global FDI was almost 42%. In 2004, Asia (mainly

China) and Latin America were the leading recipients of foreign investment among

developing regions. Africa also experienced a substantial increase in FDI, although its

share of the total remained relatively low (ECLAC 2005: 31). Interestingly, the United

Nations Conference on Trade and Development (UNCTAD) reports that, between 1990

and 2002, the FDI performances of sanctioned nations such as Sudan and Myanmar were

among the best in the least developed countries. Foreign direct investment has continued

to flow into these two countries after the United States imposed sanctions against them in

1997 (FDI to Sudan, in particular, has been growing considerably in recent years), and









today exceeds total official development assistance (ODA)3 from foreign governments

(UNCTAD 2004: 5-6). Although FDI could have been higher without restrictions on

U.S. investors, foreign-based TNCs have filled the gap by providing Sudan and Myanmar

with crucial sources of financing and development tools.

A similar situation has occurred in Cuba, where FDI keeps pouring in despite

serious hurdles created by the U.S. Helms-Burton law of 1996. It has been claimed by

some scholars that foreign investment plays a negligible, or at least very limited role in

the Cuban economy. Criticism mainly focuses on the cumulative amount of FDI

delivered to the island, which is significantly lower than in many other developing

countries (Werlau 2001: 290). However, the significance of foreign capital in Cuba

cannot be measured from a simple quantitative comparison with other nations. Cuban

authorities make no secret they resorted to foreign investment in the early 1990s out of

necessity, and essentially against their will. By their own admission, the government

policy is not intended to create a market economy and develop a real and substantial

private sector, but aimed at establishing a state economy that regulates foreign capital so

that the benefits of investment go to the entire society. In addition, Cuba's business

environment and its economic system present characteristics that are very different from

those of most developing nations. Therefore, quantitative comparisons with other

countries based on delivered FDI have a limited value (Spadoni 2002: 173). Foreign

corporations' investment activities in Cuba have had a positive impact on the island's




3 Official Development Assistance (ODA) consists of loans or grants administered with the objective of
promoting sustainable social and economic development and welfare of the recipient country. ODA
resources must be contracted with governments of foreign nations with whom the recipient has diplomatic,
trade relations or bilateral agreements or which are members of the United Nations, their agencies, or
multilateral lending institutions.









most important economic sectors and stimulated the competitiveness of Cuban products

both domestically and internationally.

Overall, it is generally believed that foreign direct investment by TNCs play a key

role in improving the economic performance of recipient countries. Transnational

corporations are seen as development agents able to provide assistance to developing

countries through an arsenal of economic, technical, and other managerial resources.

Many analysts have demonstrated that the deployment of these assets accelerates

recipient countries' growth by augmenting domestic savings and investment, helping

transfer of new technologies, increasing production, exports, and foreign exchange

earnings, and fostering spillovers from TNCs to domestic firms through imitation,

competition, and training (Findlay 1978; Grossman and Helpman 1991; Barro and Sala-i-

Martin 1995; Campos and Kinoshita 2002; Ram and Zhang 2002; Baliamoune-Lutz

2004). These findings and the monumental transformation of the global economy under

way have great implications for the research on economic sanctions. While the United

States continues to use unilateral economic coercive measures as a way to curtail the

resources (and change the behavior) of target governments, especially in developing

countries, FDI flowing through transnational corporations has become the single most

important source of foreign capital for these countries (Ramamurti 2004: 277). As they

dominate the realm of global capital flows, promote economic growth and reduce poverty

worldwide, and tend to escape control from nation states, TNCs could bear a major

responsibility for the failure of economic sanctions to accomplish far-reaching foreign

policy objectives.









Migration, Family Linkages, and Remittance Decisions

In the last decade, the dramatic growth of international migration and monetary

remittances has stimulated extensive multidisciplinary inquiry on migrants' long-distance

economic relations with their homelands. Between 1990 and 2000, the number of

migrants in the more developed regions (mainly Europe, Asia, and North America)

increased by 23 million persons, or 28%. In 2000, around 175 million persons resided

outside the country of their birth, and almost one of every 10 persons living in the more

developed regions was a migrant from developing countries (United Nations 2002: 2).

Whereas early scholars of migration believed that most migrants severed ties with their

countries of origin as they assimilated into the country that received them, recent works

have suggested that a large number of these individuals remain oriented toward the

communities they come from (Levitt 1998). Remittances, the funds that transnational

migrants send "home" to family members, have become a major source of foreign

exchange earnings for many developing nations, and a key addition to their gross

domestic product. They are often one of the main reasons why individuals decide to

leave their home country to search for job opportunities abroad as well as an important

consequence of the overall migration process.

It has been argued that migrants' relationships with their places of origin are forged

and sustained by complex and enduring transnational social networks. Rather than a

movement of individual players, international migration is considered as a process

leading to the formation of groups and communities that bring social units into contact

across national boundaries. In his historical overview of immigration in the United

States, Tilly (1990: 84) emphasized that, to a large degree, the effective units of

migration are not individuals but sets of people linked by acquaintance, kinship, and









work experience. According to this perspective, migrating means enlarging one's living

space and making a more or less permanent commitment to maintain multiple relations

(familial, economic, social, organizational, religious, and political) that span borders.

Migrants carry out activities, from visitation to sending remittances, to making telephone

calls, that are transnational in nature and connect them to two or more societies

simultaneously (Glick Schiller et al. 1992: 1-2). In order to describe this constant contact

between communities of origin and destination, recent studies have used terms such as

"transnational migration circuits" (Rouse 1992), "transnational social fields" (Basch et al.

1994), "transnational communities" (Portes 1996), and "binational societies" (Guarnizo

1994).

As stated before, social capital mostly developed through family linkages is a

powerful agency for the transmission of monetary remittances. The flow of these money

transfers is not a random byproduct of migration by an individual, but an integral part of

the family's strategy behind migration. While the behavior of individual migrants should

not be neglected, group decision-making and objectives in the context of the family play

a crucial role in determining migration patterns and remittance flows. Using the tenets of

portfolio investment theory, Stark (1991) demonstrated that the decisions to migrate and

remit earnings to relatives left behind are often ordered by family needs for stable income

levels, specialization (migration by some laborers, non-migration by others), and the need

to jointly insure the family's well-being. In some cases, families might even decide to

allocate their labor assets over geographically dispersed and structurally different markets

in order to reduce the risk of losing income in individual markets and allow family

members to smooth its consumption. The general idea is that the main stimulus for









migration is the prospect of receiving remittances rather than the wage differential

between two places. Once the migrants have successfully established themselves in other

locations, they play the role of financial intermediaries and substitute for missing or

imperfect markets (Gubert 2002: 268).

Although Stark focused on internal migration trends and practices in a number of

developing countries, namely Botswana, India, and the Philippines, most of his findings

are valid for international migrants in developed regions as well. In the 1980s and early

1990s, for instance, several scholars who analyzed return migration from England,

Canada, and the United States to a group of English-speaking islands (West Indies) in the

Caribbean found that many migrants had maintained very closed relationships with

families at home during their years abroad. In those years, they visited relatives on a

regular basis, continued as actors in key family decisions, and purchased properties and

built houses in their countries of origin (Rubenstein 1982; Thomas-Hope 1985; Gmelch

1992). More recently, Crawford (2003: 107-108) showed how African Caribbean women

migrating to Canada have utilized their extensive family and kinship connections to

buffer the effects of social and economic instability in their home countries in the last

three decades. According to her, these actors' commitment to maintain their families

from abroad is not simply a consequence of globalization but a continuation of African

Caribbean family interactions across seemingly distant borders. Thus, what we might

call "transnational families" are critical decision-making entities that shape international

migration patterns and stimulate the flow of remittances across national boundaries.

Individuals commit themselves to act together and develop strategies on how to share

common income and improve their economic conditions. Seen in this light, coordinated









efforts and arrangements by all or most members of a family allow the overall group to

enjoy more resources than it could obtain in the absence of cooperation.

Remittances are the exemplary forms of migrant transnationalism (Vertovec 2002:

4). They are usually associated with migrant workers' transfers of a proportion of their

income to their families in the country of origin. The importance of remittances as a

private mechanism on income redistribution has given rise to a burgeoning literature on

motives for and purposes of these money transfers. For some scholars, altruism could

play a crucial role in the decision to remit. In the early 1970s, Becker (1974: 1079-1080)

argued that migrants send remittances to their rural families because they care sufficiently

about the well-being of their relatives. The altruistic behavior is the result of the family's

utility function, which is the same as that of one of its members. Resources are

transferred voluntarily because all members have the same motivation to maximize

family opportunities regardless of how selfish they are. The person making the transfers

would not change the consumption of any member even with dictatorial power because

his/her utility partly depends on the family's welfare. Put it differently, "sufficient love

by one member leads all other members by an invisible hand to act as if they too loved

everyone." In his study of remittance patterns in El Salvador and Nicaragua, the two

countries with the largest and most permanent out-migrations from Central America in

the 1980s, Funkhouser (1995: 138) also developed a function model that includes both

the migrant's own utility and that of the household in the source country, weighted by a

factor of relevant importance. The altruistic motivation is demonstrated by the fact that

the migrant receives nothing but the satisfaction of the household's increase in

consumption.









Pure altruism, however, cannot fully explain why migrants remit a portion of their

income to relatives abroad. To a certain extent, remittances may also be triggered by

selfish interests such as the aspiration to an inheritance or the desire to channel one's

investments through the trustworthy family both as purchasing agent and for subsequent

maintenance. Based on a household survey conducted in Western Kenya's rural areas,

Hoddinott (1994) claimed that remittances are influenced not only by the migrant's

wages but also by the reward, or bequests of land, offered by the parents. As parents age,

they may require both financial assistance and help with agricultural work and domestic

tasks. Parental land holding, therefore, becomes an effective bargaining tool to induce

children residing abroad to make available a portion of their earnings, especially when

they have plans to return to their homelands. In addition, Ahlburg and Brown (1998:

136-138) argued that migrants may remit capital with the self-interested aim to

accumulate physical assets (homes, farms, small businesses, financial deposits) and

become good entrepreneurs in their home countries, or to encourage family, social and

economic ties that keep alive the possibility of one day returning home, even if they are

not planning to move in the near future. Using data from a survey of Tongan and

Samoan migrants in Sidney, Australia, they concluded that migrants' remittances are

driven, at least in part, by the accumulation of physical and social capital and not, as is

often thought, only by altruism and the need for family consumption support.

Finally, the flow of remittances could be the result of implicit contracts and/or

loans among family members. Lucas and Stark (1985: 913-914) used an eclectic model

labeled "tempered altruism" or "enlightened self-interest" to show how the migrant and

the family have an implicit understanding to share mutual benefits and reduce risks by









allocating certain members as migrants and using remittances as a mechanism for

redistributing gains. In this case, private transfers are the result of a mix of altruism and

self-interest as they are part of, or one clause in, an inter-temporal, mutually beneficial

contract arrangement between migrants and their families. In other words, there is a co-

insurance contract based on altruistic social norms (family loyalty and mutual care) and

self-seeking motives (inheritances and investments), which makes the cost of enforcing

much lower than if dealing with non-family members. According to Poirine (1997: 589-

590), instead, most remittances consist of the repayment of an informal and implicit loan

resulting from the household paying for education and the cost to emigrate. While noting

that surveyed migrants seldom admit openly to acting in such a calculating manner, he

presented a "three waves theory" to explain the remittance flow over time. In the first

stage, migrants send remittances home to repay an education-related loan taken out

during their youth. In the second stage, they transfer money to finance the education of

other family members until they are ready to emigrate. Then, in the third stage, the next

generation of migrants pays back the former lenders who may have relocated home, or

both groups help older family members build a house and set up businesses. This theory,

which is particularly relevant to international migration from poor to rich countries, is

based on the idea that the family savings or loan component is more important than the

family co-insurance or altruistic components in remittances.

In the case of Cuba, the significant out-migration during the last two decades and

the strengthening of transnational family linkages have stimulated increasing flows of

remittances mostly from the United States (where the vast majority of migrants resettled),

especially after Fidel Castro legalized the possession and circulation of the U.S. dollar in









the Cuban economy in 1993. There is little doubt that altruism is a critical component in

the Cuban migrants' decisions to remit money to relatives left behind. Until the early

1990s, transnational connections between Cuban exiles in the United States and their

families on the island remained at minimal levels, mainly as a result of institutional

barriers imposed by the U.S. and Cuban governments and informal social pressures on

Cubans in both countries to avoid cross-border bonding. However, when the deep

economic recession of the early 1990s threatened the survival of the Cuban economy and

many islanders tried to reach out to the Cuban diaspora, financial assistance from

overseas relatives in the form of remittances witnessed a dramatic surge (Eckstein 2005:

320-321). This could be seen as altruistic because migrants began to transfer substantial

amounts of capital to their families abroad when they needed it most. Remittances to

Cuba may also be prompted by moral and financial obligations toward the family or by

self-seeking motives such as the migrant's desire to raise his social status or prestige

within the homeland context. Attempts to accumulate physical capital through

purchasing agents or secure bequests in the country of origin play virtually no role as

determinants for remittances to communist Cuba. A very low number of Cuban residents

are permitted to hold private productive assets on the island and inheritance is extremely

limited under Cuban law.

It must be noted that both the U.S. and Cuban governments contributed to the

deepening of family linkages and to bonding of potential economic worth between

islanders and exiles during the 1990s. The Castro government shifted its stance toward

the diaspora and courted remittances by introducing reforms in its monetary policies,

increasing the channels for converting or spending U.S. dollars, and allowing more exiles









to visit relatives in Cuba. After 1998, the Clinton administration also encouraged

transnational connections by streamlining procedures for U.S.-based travel to Cuba,

facilitating family reunions with the resumption of direct flights between the two

countries, and easing limitations on money transfers to the island (Barberia 2002: 30).

Clinton's policy changes, in particular, assume great importance for future U.S. attempts

to stem the flow of remittances to Cuba through the creation of new cross-border barriers.

Once formed, migrants' connections with relatives abroad often become self-sustaining,

reflecting the establishment of formal and informal networks of information, economic

assistance, and obligations (Boyd 1989: 641). As Cuban exiles in the United States have

widely demonstrated their ability to circumvent U.S. sanctions, it is likely that large

amounts of remittances will continue to flow to Cuba despite the Bush administration's

recent tightening of restrictions on Cuban American family visits and money transfers to

the island.

In short, migrants decide to remit money to their countries of origin for a variety of

reasons. Commitment to home rests upon complex emotional and social foundations and

manifests itself in the migrant's willingness to financially support those left behind, share

the costs and benefits of migration, pay back a loan to relatives, invest in assets in the

home area and ensure their careful maintenance, and maintain social relationships that

facilitate an eventual return at some time in the future. Nevertheless, a common element

of most remittance decisions, whether they are triggered by self-interested or altruistic

motives, is that they occur in the context of family linkages that often span national

borders. The family is at the heart of contractual arrangements, bequests, loans, and

social norms like guilt, solidarity obligations, and loyalty. These resources constitute a









social capital that reinforces international migrants' connections to relatives in the source

country and sustains the flow of transnational monetary remittances.

Economic Impact of Remittances

The flow of remittances, which are typically in cash rather than goods, has

increased dramatically worldwide during the last two decades. Official statistics tend to

focus on capital flows from developed to developing regions, neglecting domestic as well

as intra-regional money transfers. In addition, accurate quantitative assessments are

complicated by the fact that a very large, unknown amount of money (unrecorded

remittances could be larger than recorded ones) is usually transferred through informal

mechanisms and to countries that do not provide statistics on these transnational

practices. Even so, it is reported that global remittances to developing countries rose

from $15 billion in 1980 to an estimated $93 billion in 2003, and were close to $100

billion in 2004 (Carling 2005: 9). They are currently the second-largest financial flow to

developing countries after foreign direct investment, more than double the size of official

development assistance. In terms of specific regions, Latin America was the largest

recipient of remittances in 2003 (around 30% of the total), followed by South Asia, East

Asia and Pacific, Middle East and North Africa, Europe and Central Asia, and Sub-

Saharan Africa.4 Figures for the African region are extremely underrated due to the lack

of comprehensive data for most of its countries. The United States is by far the leading

source of remittances to developing nations, accounting for about one third of total

money transfers in 2002 (World Bank 2004).




4 Further details on remittance flows to developing countries and their regional distribution are available at:
http://siteresources.worldbank.org/GDFINT2004/Home/20175281/gdf appendix%/20A.pdf (last visited
November 2005).









Today, remittances constitute the fastest growing and most stable capital flow to

developing countries, especially as compared to foreign investment. FDI flows are

volatile components of external financing and tend to be affected by global

macroeconomic cycles, raising incomes during booms and depressing them during

downturns. Remittances, instead, are less influenced by these cycles and may actually

increase during periods of crises, given that migrants send money home to their relatives

in bad times to augment their income and thereby reduce the impact of the shock on

welfare (Sander 2003: 6). For instance, whereas FDI flows to developing countries

decreased by approximately 35% between 2001 and 2003, mostly as a result of the

September 11, 2001, terrorist attacks on the United States, remittances rose by about 20%

during the same period (World Bank 2004). The fact that migrants' money transfers tend

to be counter-cyclical seems to suggest that very often they serve as a critical source of

both income and consumption smoothing strategies, especially for families in poor

countries living close to subsistence levels. Remittances are less susceptible to economic

downturns than FDI even when their main purpose is to accumulate physical assets

abroad. As Ratha (2003: 161) states, "overseas residents are more likely to continue to

invest in their home country despite economic adversity than are foreign investors, an

effect that is similar to the home-bias in investment."

The positive economic impact of remittances on individual households and local

communities is widely acknowledged. For the most part, migrants transfer funds to

relatives abroad with no strings attached and deliver capital resources on a massive scale

directly into the pockets of those who need them most, increasing prosperity and

satisfying the basic necessities of people living in economically peripheralized areas









throughout the developing world (Ballard 2003: 14). These resources are primarily used

to cover household expenses for food, medicines, clothing, children's education, and

other consumer goods. Therefore, it can safely be argued that remittances make crucial

contributions to welfare enhancing and poverty reduction (Siddiqui and Kemal 2002: 14).

In a recent study on international migration trends and remittances for a group of 74 low

and middle-income nations from each major region of the developing world, Adams and

Page (2003: 21-22) found that international remittances (defined as the share of money

transfers from abroad in a country GDP) have a strong, statistical impact on reducing

poverty. On average, a 10% growth of the share of transferred funds in a country GDP

will lead to a 1.6% reduction of the share of people living on less than $1 dollar per

person per day, and to about a 2% decline in the depth of poverty in that particular

country. Noting that official statistics greatly underestimate the actual level of

international remittances (and their potential impact) because they report only funds

transmitted through official banking channels, the authors conclude that migrants' money

transfers to their original communities appear to raise average income and lower both the

incidence and severity of poverty.

Although the bulk of remittances are usually spent on consumer goods, a smaller

but substantial part of them go into savings and investment. Once satisfied the recipient

households' immediate consumption needs, remittances increase the opportunity for

additional savings that can be invested in home construction and repair and in more

productive sphere, including agriculture. In two separate survey studies of Egyptian and

Pakistani rural households, Adams offered evidence for the marginal propensity of

families to invest money transfers from abroad in residences, land, and other rural assets









(Adams 1991: 715; Adams 1998: 170). In a similar vein, Alderman (1996: 362)

demonstrated that a significant portion of international remittances to rural Pakistan tend

to be saved and used for purchases of lands and buildings, adding that resources for non-

durable goods (food and clothing) are mostly obtained though local remittances.

Transferred funds may also be invested in financial assets, such as a bank savings

deposit, which can be held either by the migrant in the host country or by his family

members at home. In a comprehensive survey on the use of remittances in South Pacific

countries in the early 1990s, Brown (1994) found that in more than 60% of households

that received remittances some financial savings had been made out of family income, as

compared to only 40% of households that did not collect money from relatives abroad.

Hence, migrants' transnational money transfers allow recipient families to channel

increasing amounts of capital into productive investment in their domestic economies or

into the build-up of financial assets to provide for long-term income security.

Remittances augment the income of recipient families and may help lifting them

out of poverty, but their overall impact on receiving economies remains a highly debated

topic. Several scholars have expressed negative views on the effects of these capital

flows at the macro level and their role in spurring economic development. A common

argument is that remittances contribute minimally or do not contribute at all to economic

growth because they are largely spent on consumption, with little left over for productive

use (Weist 1984; Rubenstein 1992). Even when a substantial portion of transferred funds

are saved and devoted to investment, they are mostly used to purchase land or build new

houses for family members rather than to set up businesses and improve agricultural

technology and productivity (Ballard 2003: 2). Moreover, the benefits of remittances are









selective and tend to increase inequalities between households, adding to macroeconomic

instability in poor countries. And they also have a propensity to be unequally distributed

among nations in developing regions. In fact, to a large degree, money transfers from

abroad "tend to go to the better-off households within the better-off communities in the

better-off countries of the developing world since these households, communities, and

countries tend to be the source of migrants" (Nyberg-Sorensen et al. 2002: 53)

Finally, it has been argued that regular flows of remittances lead to the

development of a dependency syndrome, creating "moral hazard" problems between

remitters and recipients that produce negative effects on economic growth. Given that

remittances are often part of an insurance arrangement in a situation of imperfect

monitoring, recipients have incentives to limit their job searches and reduce work efforts

(thus earning less income) in order to be eligible for financial assistance (Gubert 2002:

285).5 This suggests that migrants' money transfers provide short-term relief but could

be detrimental for long-term development, as recipients would act in ways that tend to

decrease expected output. Using a panel of aggregate data for 113 developing countries

over a 29 years period (1970-1998), a recent study commissioned by the International

Monetary Fund (IMF) found that remittances are negatively correlated with economic

growth. The authors of the study claimed that such an outcome is mostly the result of

moral hazard mechanisms and asymmetric information, which exert strong influences on

the behavior of the recipients and inhibit productive investment. According to them,

remittances do not act as a source of capital for economic development since they are

frequently ill-spent in a context of growing dependency. Remitted funds may be used to

5 The remitter may establish occasional contacts with the recipient through telephone calls, visits home,
electronic mail, and letters, but he/she cannot directly observe the daily activities of remittance
beneficiaries and how they utilize the transferred funds.









raise the family's consumption and stock of wealth, but not necessarily the overall

economy's stock of wealth (Chami et al. 2003: 5-9).

Notwithstanding the potential negative consequences of remittances at the

aggregate level, recent scholars in the field have become increasingly optimistic about

their effects on receiving economies. This optimism was partly triggered by a re-

evaluation of the nexus between consumption and investment, based on the idea that

expenditures on health and education represent an investment in human capital (Carling

2004). However, remittances augment the foreign exchange reserves of receiving

countries and produce macroeconomic benefits whether they are used for investment or

simply for consumption, offsetting in both cases some of the losses that a developing

nation may experience as a result of highly skilled workers migrating abroad (Ratha

2003: 164). Productive investments benefit the overall economy by contributing to

output growth and creating new jobs. But remittances may generate positive multiplier

effects even if they are totally consumed, provided that at least some of the funds are

spent on domestic goods and services. Using input-output tables to assess the diffused

impact of migrants' money transfers on the Greek economy, Glytsos (1993: 154) showed

that the spending of remittances on final consumer goods stimulates the development of

domestic industries, leading ultimately to more production, higher employment, and

increased capital formation and economic growth. He also contended that remittance

leakages do not impose any serious burden on the balance of trade despite their strong

import-generating effect. Research studies on Bangladesh, Pakistan, and Mexico have

reported similar findings on the positive spillover effects of remittances operating









primarily through family consumption (Stahl and Habib 1989; Nishat and Bilgrami 1991;

Durand et al. 1996).

The issue of whether migrants' remittances to their countries of origin contribute to

economic development remains a question that elicits many contradictory answers.

While these capital flows certainly benefit recipient families, their impact on economic

growth depends on a variety of factors, including the type of migrant workers who left

home (the adverse growth effect of high-skilled out-migration is bound to be large), the

receiving country's regional economic position and its relationship to a more

economically salient country, and how remitted funds are used by their beneficiaries

(Solimano 2003: 16; Orozco 2003: 5). Nevertheless, even if remittances simply enhance

the welfare of recipient households, with little or no impact on the overall economy, they

would still play a crucial role in the context of economic sanctions. In order to intensify

pressure on the economy of a target country and induce its government to comply with

the requests of the sanctioning state (or eventually remove this government from power),

the mechanism of economic sanctions requires the generation of massive shortages and

popular discontent in the target territory that inevitably affect the lives of the civilian

population. Because they increase the consumption of recipient families and help

alleviating poverty, thus easing civilian pain, remittances to a sanctioned country may

reduce the likelihood that its citizens will rally against their government. In other words,

remittances could undercut the transmission mechanism of sanctions by which

widespread social suffering is translated into demands for political and economic changes

or into a call for the removal of authorities.









The flow of remittances and their benefits to large segments of the civilian

population in terms of consumption are particularly important in the case of communist

Cuba, where the social welfare state is supposed to satisfy popular needs such as the

supply of food and other consumer goods, services, work, and increased standards of

education and health care. When the Castro government's supply of rationed goods to its

citizens shrunk considerably in the early 1990s amid a deep economic recession,

purchases of food products, clothing, medicines, and other items in state-owned dollar

stores became the only relief from scarcity for many Cubans. Although Washington tried

to capitalize on this precarious situation by strengthening the embargo against the island,

the dramatic surge of remittances from the United States brought valuable hard currency

into the hands of a large number of Cubans, and from there into the coffers of the Castro

government. In practice, without remittances there would exist no hard currency stores

for Cubans, since money transfers from abroad represent the main source of foreign

exchange for the Cuban population. While remittances have not solved all the problems

of the island's economy and created inequalities that defy the revolution's egalitarian

precepts,6 they would seem to have minimized the impact of U.S. sanctions and

undermined their main goals by improving the standard of living of many Cuban citizens,

making them less prone to question their government and the inefficiencies of Cuba's

socialist system.

Conclusion

Business practices by transnational corporations and migrant entrepreneurs sustain

hard currency flows across national borders that greatly complicate the attempts of

6 Brundenius (May 2002) estimated that the Gini coefficient in Cuba increased from 0.22 to 0.41 between
1986 and 1999 as a result of unequal access to hard currency sources, with remittances representing one of
the factors that contributed to the new inequality.









nation-states to promote changes in a target country through the imposition of economic

sanctions. Because of their structure, size, and supra-national decision-making powers,

TNCs are major players in the global economy and tend to escape control from national

governments. Stimulated by the free play of market forces, especially maximum profits

and earnings, TNCs capture global markets with foreign direct investment and may

adversely affect the purpose of sanctions by delivering capital and other resources to

embargoed nations. At a more local level, transnational linkages mainly built through

family ties sustain the flow of remittances from migrants to their homelands. These

capital flows are centered on the family whether they are triggered by altruistic reasons

such as the care of migrants for those left behind, or by self-interested motivations such

as the migrants' desire to accumulate physical investments in their countries of origin.

The positive effects of remittances on recipient families' consumption patterns, in

particular, might play a crucial role in the context of economic sanctions by preventing

social suffering from translating into a pressure for political and economic changes.

Having presented the theoretical concepts of the transnational literature that are

relevant to the working hypotheses of this study, the next chapter shifts to a review of the

key events regarding U.S. sanctions with respect to Cuba. It also offers an analysis of the

Helms-Burton law of 1996 and the potential implications for foreign companies that are

engaged in investment activities within the communist island.














CHAPTER 3
THE U.S. EMBARGO AND THE HELMS-BURTON LAW

The Origins of the U.S. Embargo Against Cuba

On January 7, 1959, the United States recognized the new Cuban government led

by Fidel Castro, but relations quickly deteriorated. The U.S. policy toward Cuba was

initially a reaction to Cuba's confiscation of American properties without compensation,

its alliance with the Soviet Union, and its declared intention to spread the revolution to

other Latin American countries (Fisk 2001: 93). While economic sanctions were

established to punish Cuba for the expropriations, raise the cost of Cuban adventurism in

Latin America, and raise the cost to the Soviet Union of maintaining its new relationship

with the Castro regime, the United State's ultimate goal was the economic and political

isolation of Cuba (Peters 2000: 5). In the early 1960s, the embargo was not simply a

unilateral measure on the part of the United States, but a more general Latin American

attempt to contain the Communist threat. By 1964, all members of the Organization of

American States (OAS) with the exception of Mexico had broken diplomatic and trade

relations with Cuba.

Between 1959 and the first half of 1960, the Castro government expropriated

70,000 acres of property owned by U.S. sugar companies, including 35,000 acres of

pasture and forests owned by the United Fruit Company in the Eastern portion of the

island. It also took over U.S. oil refineries, after they refused to refine oil Cuba had

acquired from the Soviet Union, and U.S. properties in key sectors such as telephone and

electricity (Jatar-Hausmann 1999: 15). In response, the United States cancelled Cuba's









portion of the annual U.S. sugar import quota in July 1960 and announced a complete ban

on U.S. exports to Cuba (except for non-subsidized foodstuffs and medical supplies) later

in October. On January 3, 1961, the Eisenhower administration officially broke

diplomatic relations with the Castro government.

On September 4, 1961, just a few months after the famous speech of Fidel Castro in

which he defined for the first time the 1959 revolution as socialist and declared himself a

"Marxist-Leninist," the United States promulgated the Foreign Assistance Act (FAA).

The FAA granted the U.S. President specific authority to impose economic sanctions

against Cuba and deny all U.S. foreign assistance to the Caribbean island. On February

7, 1962, the FAA was expanded and the Kennedy administration announced a total

embargo of U.S. trade with Cuba. It should be noted that, since the prohibition of all

U.S. exports to Cuba in October 1960, the embargo had become extraterritorial with

regulations barring re-export to Cuba of any commodities or technical data that originated

in the United States.

The legal foundations of the U.S. economic embargo with respect to Cuba are laid

down in the Cuban Assets Control Regulations (CACR) promulgated in 1963 pursuant to

the Trading with the Enemy Act (TWEA) of 1917. The TWEA, signed in the context of

U.S. entry into World War I, allowed the President to prohibit, limit or regulate financial

and commercial transactions with hostile countries in time of war. It was amended in

1933 to grant the President authority to exercise the powers of the act during periods of

national emergency. The main reasons behind this amendment were to deny hard

currency resources to sanctioned countries and their nationals as well as to preserve the

assets of such countries and their nationals for possible vesting and use in the future









settlement of American claims against them. The CACR of 1963 froze all Cuban assets

in the United States and prohibited all unlicensed financial, commercial, and travel

transactions by Americans with Cuba or its citizens. The Office of Foreign Assets

Control (OFAC), established by the U.S. Department of State in 1962, was responsible

for issuing, interpreting, and applying economic sanctions regulations. With the CACR,

the U.S. government aimed to isolate Cuba, protecting Cubans from having their assets in

the United States confiscated by Cuban authorities, preserving Cuban assets for future

disposition, and denying Cuba access to dollar earnings and financial facilities (Travieso-

Diaz 1993).

On May 5, 1966, the U.S. Congress expanded the embargo by passing the Food for

Peace Act. The act outlawed food shipments to any country that sold or shipped strategic

or non-strategic goods to Cuba, except for specific circumstances in which the President

could allow shipments of medical supplies and non-strategic goods. The Food for Peace

Act was signed by President Johnson in November 1966, although he expressed some

concern for certain provisions of the act that precluded food aid to countries that traded

with Cuba and North Vietnam.

Well into the 1970s, the United States conditioned the reestablishment of normal

relations with Cuba on the end of Castro's effort to spread the revolution in Latin

America as well as on the end of its military ties with the Soviet Union. Fears of a

military threat from Cuban and Soviet expansion in the region were confirmed in the

Cuban Missile Crisis1 and deepened later in the 1970s when the Cuban military became



1 In late October 1962, the Khrushchev-Castro attempt to deploy nuclear missiles on Cuban soil brought the
world to the brink of a nuclear war. The Cuban Missile Crisis ended with the Soviet Union agreeing to
remove its missiles from Cuba in exchange for the U.S. commitment not to invade Cuba and to remove
U.S. missiles from Turkey and Italy (Nuti 1994).









involved in Angola and Ethiopia (Piczak 1999: 4). However, there was no formal

condition regarding Cuba's internal system or arrangements or demands that Cuba

become a democracy and adopt a market economy.

The 1970s: Efforts Toward Normalization

In the mid-1970s, a more favorable international climate and some changes in the

political scenario of the Western hemisphere promoted the active resumption of

economic ties between several Latin American countries and Cuba and undermined the

overall support of the OAS for the U.S. embargo. Castro's decision to reach out to

establish diplomatic relations with the same Latin American governments he had

previously vowed to overthrow was a consequence of his failed attempt to export

"armed" struggle in the region and growing pressures from the Soviet Union to adopt

tactics less likely to provoke a confrontation between Moscow and Washington. On July

29, 1975, the OAS dropped multilateral sanctions against Cuba in recognition of Castro's

less aggressive policies in the hemisphere. Interestingly, the United States voted with the

majority as an indication of its willingness to at least explore possible grounds for more

formal negotiations with Cuba leading to normalization (Smith 1998).2

Contacts with Cuba had begun in the last months of the Nixon administration. In

July 1974, a secret message was transmitted by the U.S. Secretary of State Henry

Kissinger to Fidel Castro to determine if there was interest for changing the relations

between the United States and Cuba. In 1975, Kissinger, now serving under President

Gerald Ford, indicated that he was prepared "to move in a new direction," and some

expansion in commerce with Cuba was granted to subsidiaries of U.S. firms with


2 In February 1973, the United States and Cuba signed an anti-hijacking agreement in which the two
countries pledged to return or prosecute hijackers.









amendments to the CACR (Schwab 1999: 15). Overseas subsidiaries of more than a

hundred large firms based in the United States could now apply for a specific license to

trade with Cuba from third countries. This kind of commerce increased constantly during

the 1980s and reached its highest level in 1991 (before the enactment of the Torricelli

Law) to more than $770 million (Aguilar Trujillo 1998: 3). However, talks between

Washington and Havana for a relaxation of tensions were drastically suspended in the

autumn of 1975 when Cuba deployed troops in the civil war then raging in Angola.3 On

December 20, 1975, Ford announced in a public speech that the Cuban involvement in

Angola would preclude any possibility of restoring full diplomatic relations with Cuba in

the near future.

Talks resumed during the first year of the Carter administration. In March 1977,

the U.S. government dropped the ban on U.S. travel to Cuba by U.S. citizens, who were

since then allowed to spend $100 in travel-related expenditures on Cuban goods during

their visits to the island. In September of the same year, the two countries opened interest

sections in each other's capitals, physically located at the sites of their former respective

embassies (Gonzalez 1995: 210). The United States arranged for the Swiss Embassy in

Havana to assume its diplomatic and consular representation in Cuba while the

Czechoslovakian Embassy in Washington provided the same service for Cuba. These

offices dealt primarily with trade and consular issues and represented important channels

of communication between the two countries. Although scholars disagree on the

feasibility of positive U.S. overtures to the government of Fidel Castro in the late 1970s,




3 Cuban and Soviet troops backed the Popular Movement for the Liberation of Angola (MPLA) in its effort
to take power after Portugal granted Angola its independence.









it is widely believed that Carter has been the only U.S. President to make a concerted

effort to normalize relations with the communist island.4

According to Wayne Smith, who became the second head of the U.S. Interest

Section in 1979, the establishment of interest sections, which were embassies in all but

name, inaugurated a more flexible and pragmatic U.S. approach toward Cuba and a more

flexible position of the Cuban government on the issue of compensation for expropriated

U.S. properties. However, while recognizing its obligation under international law to

compensate the original owners, the Castro government claimed damages resulting from

the Bay of Pigs invasion5 and the U.S. economic embargo. Given that Havana would

have been unable to pay back Americans unless the embargo was lifted, the United States

and Cuba agreed informally to simultaneously negotiate both the issue of compensation

and the removal of sanctions (Smith 1998).

Scarcely three months after the opening of interest sections, the Carter

administration dropped its conciliatory stance, and normalization efforts came to a halt as

the Cuban government begun sending military troops to Africa again. Fidel Castro's

involvement with the Soviet Union in the conflict between Somalia and Ethiopia put an

abrupt end to negotiations that were still at a very preliminary stage and led the Carter

administration to add two more conditions for progress toward normalization: the

removal of Cuban troops from Africa (echoing President Ford's 1975 public speech) and

Havana's greater respect for human rights (Smith 1998). The Carter administration could

not accept the Cuban incursion in Africa because it was perceived as a strategic gain for

4 Schwab (1999: 17) argues that Carter's attempt at achieving a modus vivendi with Cuba demonstrated that
accommodation was entirely feasible and that the problem was the traditional U.S. foreign policy.
5 On April 17, 1961, a group of 1,200 Cuban exiles backed by the U.S. Central Intelligence Agency (CIA)
invaded Cuba on the South-West shore of the island (Bay of Pigs). The internal support anticipated by the
CIA failed to materialize and the Cuban forces defeated the exiles after 72 hours of fighting.









both Cuba and the Soviet Union, and thus a setback for the United States in the East-

West struggle (Gonzalez 1995: 210). In this context, a broad definition of the U.S.

national security linking U.S. credibility to developments throughout the world returned

to be pervasive in Washington. The process of rapprochement was frozen and then

reversed in the 1980s with the election of Ronald Reagan and the new wave of

revolutionary socialism backed by Soviet and Cuban troops in Central America, the

Caribbean, and Africa (Zimbalist 1995: 26). The long-standing U.S. policy of hostility

and isolation against Cuba and its Cold War intent on punishing and destabilizing the

Castro government were resumed.

The 1980s: Renewal and Intensification of Economic Sanctions

Ronald Reagan reinstated the traditional hard-line toward Cuba. He intended to

pursue the containment strategy with respect to Cuba much more vigorously than many

of his predecessors as well as to revive the goal of rolling back Communism. Besides

putting forward the same conditions for normalization imposed by former President

Carter, the Reagan administration clearly aimed at undermining the tide of Soviet-Cuban

advancements throughout the Third World, and especially in the Western Hemisphere

(Erisman 1995: 132).

Throughout the 1980s, Cuba expanded its military presence abroad, supported

logistically by the Soviet Union. Deployments reached 50,000 troops in Angola, 24,000

in Ethiopia, 1,500 in Nicaragua, and hundreds more elsewhere. Cuba also served in a

non-combat advisory role in Mozambique and Congo. However, the focal point of U.S.

attention and its main source of concern was Central America. The region, peripheral for

Moscow earlier in the Cold War, had become a crucial area for Soviet and Cuban foreign

policies in the Third World after the 1979 Sandinista victory in Nicaragua and the 1980









outbreak of civil war in El Salvador. In this regard, Washington realized that if it could

not prevail in Central America, it could not expect to prevail elsewhere. The cases of

Nicaragua and El Salvador highlight the U.S. strategy of containment and protection of

political and economic interests. During the 1980s, Washington spent hundreds of

millions of dollars to back Contra opposition forces and overthrow the Sandinista

government, whose socialist convictions and close ties with Cuba and the Soviet Union

unnerved U.S. officials. Moreover, the State Department embarked in its longest and

costliest war ($6 billion in twelve years) since Vietnam by providing material assistance

to the Salvadoran military against revolutionary insurgents (Farabundo Marti National

Liberation Front) backed economically and militarily by Cuba and the Soviet Union

(Seligson 1993: 261-262).

The regional security of the Eastern Caribbean also served as the target of the

reassertion of U.S. hegemony within the context of the Cold War and the ideological

challenge of Cuba. In 1983, U.S. troops invaded the Caribbean island of Grenada to

overthrow its Marxist-leaning Revolutionary Military Council, considered too radical and

too closely aligned with Fidel Castro. For Reagan, the Soviet-Cuban militarization of

Grenada could only be seen as Soviet power projected into the region. Between 1980 and

1986, annual U.S. military aid to Grenada jumped from $200,000 to $20 million. The

U.S. role in the region, fueled by the fear of nationalism and Cuban communism, was

abetted by the extremely pro-U.S. governments in Jamaica, Dominica, Antigua, Barbuda,

and St. Lucia (Schwab 1999: 22-24).

In line with a tougher position toward Cuba, the economic sanctions were renewed

and intensified during the 1980s. On April 19, 1982, the Reagan administration









reestablished the travel ban prohibiting U.S. citizens (with the exception of officials,

relatives visiting family, and professional activities) from spending money in Cuba,

despite the fact that U.S. courts had upheld the constitutional right to travel. That same

year, it warned U.S. subsidiaries in Third countries not to exceed the limits allowed by

the Treasury Department. Finally, on August 22, 1986, the U.S Treasury Department

announced new restrictive measures with respect to Cuba. These measures prohibited

U.S. businesses from dealing with a list of foreign firms operating in the United States,

Panama, and Jamaica, which were considered as "Cuban fronts intended to break the U.S.

embargo" (Leyva de Varona 1994: 9). They also included lower limits on cash and gifts

that Cuban Americans could send to relatives on the island and tighter regulations on

companies that shipped food and care packages to Cuba from Cuban-Americans.

By the early 1990s, the U.S. strong response to Cuban and Soviet initiatives in

Latin America and Africa, its tougher stance on economic sanctions against the island,

and the collapse of the Soviet Union had provoked significant changes in the areas of

major concern for the United States. First of all, Cuba had begun to pull back militarily

from Africa and Latin America. The Castro government unilaterally removed its forces

from Ethiopia, met the timetable of the 1988 Angola-Namibia accords by completing the

withdrawal of its forces from Angola before July 1991, and ended military assistance to

Nicaragua following the Sandinistas' 1990 electoral defeat. Furthermore, the signing of

the peace agreements in El Salvador in early 1992 ended any hope that Central America

would join Cuba in its socialism and opposition to the United States. Following the

agreements, Fidel Castro stated at a conference in Havana: "Times have changed, we

have changed. Military aid outside our border is a thing of the past. The most important









task is to see that the Cuban revolution survives. Abroad we intend to live by accepted

norms of international behavior" (Seligson 1993: 263). Second, a report of the State

Department on human rights violations acknowledged that Cuba had shown signs of

improvement in this regard. A significant number of political prisoners were released

while Red Cross officials were allowed into the prisons to interview inmates (Smith

1998).

Third, after the fall of the Soviet Union in late 1989 and the end of its special

relationship with Havana, the massive amount of aid that had allowed Cuba to weather

the U.S. embargo began to dry up. In February 1991, the Council for Mutual Economic

Assistance (the Soviet bloc) was disbanded and by the following year most Russian

military personnel stationed on the island had been withdrawn, except for some

technicians at the Lourdes electronic system facility near Havana. Without Soviet aid

and without the external markets for its main products, the Cuban economy went into a

deep recession while the government was no longer able to finance revolutionary

movements across the globe. Socialism had collapsed almost anywhere in Eastern

Europe and the Cold War was over. Cuba ceased to represent a threat to the U.S. security

interests (unless for a migration crisis that could overwhelm Florida or the potential use

of the Cuban territory to advance the drug trade) whereas its military forces, starved for

resources, went into decline (Peters 2000: 3). Although it was possible that Castro still

wished to support Marxist revolutionaries in the Americas, such an action appeared

highly improbable.

In short, three of the four conditions put forward by the United States (the end of

Cuba's active support of revolutionary forces in Africa and Latin America, and the end of









its close ties with the Soviet Union) for resuming a constructive dialogue with Havana

toward normalization had been met. On the fourth issue, the case of human rights, the

Castro government had at least given a few timid, but encouraging signals. Therefore,

the circumstances seemed to allow a possible relaxation of U.S. economic sanctions with

respect to Cuba and the beginning of friendlier relations between the two countries. In

addition, one might expect that the normalization of U.S. international relations following

the collapse of the Soviet Union would favor new commercial exchanges with countries,

including Cuba, that were once polarized by the superpowers' confrontation (Roy 2000:

18). However, as we will see in the next section, things turned out quite different.

The 1990s: U.S. Approach Toward Cuba in the Post-Cold War Era

The collapse of the Soviet Union and its European proxies inaugurated a very

difficult period for Cuba and an unprecedented economic recession that seriously

threatened the survival of the Castro government. The Cuban authorities were forced to

loosen up their centrally planned economy, establish more developed relations with the

capitalist world, and introduce limited market reforms in areas including trade, foreign

investment, and tourism. Instead of triggering improved relations between Washington

and Havana, the situation of emergency of the Cuban economy led the United States to

further tighten the embargo against the island.

In the early 1990s, supporters of the embargo benefited from important political

changes in the United States with respect to Cuba. At that time, Cuba was low on the list

of the first Bush administration's priorities given the preoccupation with the fall of the

Soviet Union and the problems still unresolved in the Central American region. The

Clinton administration was also perceived not to have a Cuba policy or much less a secret

plan to normalize U.S. relations with the island. With the executive branch effectively









leaving a policy vacuum, hard-liners within the U.S. Congress stepped up efforts to

reinforce the U.S. embargo against Cuba (Fisk 2001: 94). In addition, the United States

tried to capitalize on Cuba's economic dilemma and frustrated economic adjustment. It is

important to note that, up to 1989, the embargo placed conditions on the 15% of Cuba's

international trade that fell outside the socialist market. After 1991, the embargo placed

conditions on more than 90% of that trade (Schwab 1999: 71-72). Under these

conditions, it appears obvious that Washington was given an unparalleled opportunity to

finally get the most of economic sanctions that had failed for thirty years to overthrow the

government of Fidel Castro in Cuba.

Despite the collapse of the Soviet Union and the end of its close relationship with

Havana, U.S. policymakers have continued to use the old Cold War palate while painting

their Cuban enemy during the 1990s. At the level of political discourse, Washington

denounced the lack of democracy in the island but also kept alive the "realist" approach

that had dominated the old strategy of containment of communism. Cuba continued to be

portrayed as a "backlash state" accused not only of spying for strategic military secrets

and maintaining links with Colombian guerrillas, but also of engaging in terrorist

activities and developing computer viruses and biological weapons (Landau and Smith

2001: 8-9). However, such a discourse conceals the fact that U.S. strategic beliefs,

instead of being learned from history, were simply the result of domestic politics.

Privately, a number of past and present administration officials conceded that Bush-

Clinton policy was anachronistic, even absurd, and on occasion publicly canvassed the

need for a more rational approach toward Cuba similar to the increasingly businesslike

manner the United States adopted toward most other governments with which it had









disagreements, including even North Korea. The major obstacle remained the absence of

political will in the White House to challenge entrenched interests of an increasingly

important Cuban American constituency in Florida and New Jersey and its champions in

Congress (Morley and McGillion 2002: 6). In other words, domestic political concerns

dictated the U.S. approach toward Cuba and established the limits of Washington's

interest in engaging the Castro government.

During the post-Cold War era, the Cuban-American community has consolidated

itself as one of the principal players in shaping the U.S. policy toward Cuba. Hoping for

a possible return to Cuba under a different government, before 1980 Cuban exiles had

been slow to apply for U.S. citizenship, which means the acquisition of the right to vote.

The election of Ronald Reagan in 1980 represented an important shift in the role of

Cuban exiles because it dramatically increased participation of Cuban-Americans in the

U.S. electoral system. By the mid-to-late 1980s, this surge in electoral participation

began to heavily influence the anti-Castro agenda of the U.S. government. Cuban-

American voting blocs in two key electoral states, Florida and, to a lesser extent, New

Jersey, fueled so-called "low politics" aimed to assure election. Both Republican and

Democratic candidates for Congress and the Presidency became aware that supporting a

hard-line against Cuba increased their chances to be elected. In addition, a powerful exile

group lobbying for new sanctions emerged by the late 1980s in Washington with the

increasing power of the Cuban American National Foundation (CANF). Several Cuban-

Americans were also elected to Congress. In short, Cuban exiles were no longer mere

agents or implementers of U.S. policy toward Cuba but directors of that same policy to

which their personal interests were linked (Perez 2000: 4).









The Torricelli Law

In 1991, under the Bush administration, the Treasury department denied licenses

for trade with Cuba to U.S. subsidiaries in third countries, or firms trading products

containing U.S. components. German, Swedish, Japanese, Argentinean, and French

firms were affected. In September of the same year, the Treasury Department announced

tighter restrictions on the amount of money U.S. citizens could remit to family members

in Cuba and on travel to Cuba. In September 1992, in the heat of the presidential

campaign, a Democrat-controlled Congress approved the Cuban Democracy Act or CDA

(better known as the Torricelli law). The Cuban American National Foundation,

frustrated as Congress was by presidential inattention toward Cuba, played a crucial role

in the passage of the bill. As noted by Richard Nuccio, special assistant of Bill Clinton,

CANF's enthusiasm for the legislation was based "on a perception that the Bush

administration was doing nothing on Cuba, or at least nothing good from their point of

view and now was the time to strike" (Morley and McGillion 2002: 42).

In February 1992, based on a draft proposal put to him by Mas Canosa (director of

CANF), Robert Torricelli (D-NJ) introduced the legislation into the House to further

tighten the trade embargo while simultaneously promoting greater interaction at a people-

to-people level between Americans and Cubans. Subsequently, Robert Graham (D-FL)

and Connie Mack (R-FL) submitted a virtually identical proposal into the Senate. The

Bush administration initially opposed the CDA by claiming that it would create problems

internationally for the United States while having little impact on the Cuban economy.

However, given the lack of support for the bill from Bush, the CANF's director Mas

Canosa went looking for a White House aspirant who would. He found one in the person

of Democratic presidential candidate Bill Clinton. In the spring of 1992 the two met in









Tampa, Florida. Clinton showed some willingness to endorse the bill and left the

meeting with the notion he could at least neutralize Cuba as an election issue for Cuban

Americans and thus concentrate their vote in November on the social and economic

policies that were the Democratic candidate's strong points. In April 1992, with his

presidential campaign grasping for money, Governor Clinton attended a CANF-

sponsored fund-raiser in Miami's Little Havana and announced to cheers: "I have read the

Torricelli bill and I like it." He also declared that the Bush administration had "missed a

big opportunity to put the hammer down on Fidel Castro and Cuba." Clinton was

rewarded with $125,000 and received an additional $150,000 at another CANF-

sponsored event the same day in Coral Gables (Franklin 1993). Therefore, he left Miami

with his campaign coffers $275,000 richer for the endorsement and with Bush suddenly

outflanked in a key electoral state.

Locked in a bidding war over which candidate could be tougher on Cuba, Bush

almost immediately changed his mind and announced his support for the CDA. In an

election year, domestic political perceptions were all that counted when it came to Cuba

policy (Morley and McGillion 2002: 50). Confronting a Democratic opponent committed

to make inroads into the historically Republican Cuban American vote in Florida, and

despite his initial objections, George Bush signed the law a few weeks before the

November 1992 presidential elections. In short, Congress had seized the initiative on

how the United States should deal with Fidel Castro, and both presidential candidates had

signed onto CANF's agenda of forcing a regime change on the island. The influence

exerted by domestic politics, especially the electoral context linked to the partisan

bidding for Cuban American votes in the pivotal state of Florida, was therefore the









"mobilizing incident" and the key for the passage of the Torricelli law (Dominguez 1997:

61). By signing the legislation, Bush sent a very sharp message about his order of

priorities: the national interest took a back seat to the interests of the hard-line exile

community in Miami and, of course, the President's own domestic political advantage.

Analyzing U.S.-Cuba relations during the past 30 years, Leogrande (1998: 68)

argues that temporary relaxation in tension followed by heightened hostility might be

explained as a result of a two level game. According to him, national leaders are actually

involved in two negotiations simultaneously: the international negotiation (level 1),

wherein the leader seeks to reach agreement with other international actors, and a

domestic negotiation (level 2), in which the national leader must persuade his domestic

constituency to accept or "ratify" the level 1 agreement. For leaders, the problem is that

rational moves in the level 1 game may prove impolitic at level 2, or vice versa. In the

1990s, as exemplified by the proposed reconstruction of the events that led to the passage

of the Torricelli law, the problem has been that the salient domestic constituency was so

hostile to Cuba, that it effectively vetoed any effort to relax U.S. hostility. This suggests

that, in this issue area, domestic politics ultimately determined U.S. foreign policy.

Stated in another way, the domestic political goals of U.S. policymakers have outweighed

their foreign policy goals.

The Torricelli law was conceived as an effective instrument for exerting economic

pressure on the Cuban economy while offering positive inducements to democratic

reforms in Cuba. It established a two-track policy to reach out to the Cuban people while

strengthening the embargo against the Castro government (Piczak 1999: 4-5). There is

no doubt that the U.S. legislation irremediably reversed the policy direction toward









normalization that had emerged in the 1970s. Here are the main provisions of the

Torricelli law of October 23, 1992.

* It prohibited foreign subsidiaries of U.S. corporations from engaging in any
transaction with Cuba.

* It prohibited any vessel from entering a U.S. port for a period of 180 days if that
vessel had handled freight to or from a Cuban port.

* It maintained strict limits on remittances to Cuba by individuals subject to U.S.
law.

* It permitted humanitarian donations including medicines, medical supplies,
instruments, and equipment, after onsite verification.

* It authorized the President to prohibit U.S. economic and military assistance,
military sales, or debt forgiveness or reduction of debt owed to the United States, to
any country that provides assistance to Cuba.

* It authorized telecommunications and mail services (the latter with certain
limitations) between the United States and Cuba. Payments to the Cuban
government for telephone services were also allowed.

The Torricelli law undoubtedly had an impact on the Cuban economy, in particular

the section that intended to halt the shortfall in food imports from the defunct CMVEA

being made up by imports from U.S. subsidiaries. While in 1992 the Cuban trade with

U.S. subsidiaries was about $760 million, in 1994 such trade dropped to less than $10

million. In addition, the growing process of merger and acquisition of firms taking place

on a global scale (in which the United States was certainly the most active player)

amplified the reach of the law (Aguilar Trujillo 1998: 9). Finally, the combined effects

of U.S. economic sanctions, the end of preferential trade agreements with the Soviet

Union, and unfavorable weather conditions pushed Cuban sugar production to a low of

4.2 million tons in 1993, while it had averaged 7.5 million tons a year between 1987 and









1991.6 The country was now able to earn hard currency sufficient to pay for little more

than its necessary food and fuel imports. Cuban imports, which had already plummeted

to 2 billion pesos in 1992 from more than 8 billion pesos in 1989, fell by another 24% in

1993. By that year, Cuba was deeply embedded in an economic crisis that seriously

threatened the survival of the Castro government (Cole 1998: 4).

Thanks to economic adjustments introduced between 1993 and 1994 and the

opening to foreign investment, the Cuban economy slowly began to recover around the

mid-1990s. While successful in aggravating the economic crisis of the Caribbean island,

the Torricelli law ultimately failed to hasten the demise of the Castro government. The

legislation also galvanized the international community against the U.S. sanctions with

respect to Cuba. Table 3-1 shows the United Nations vote on resolutions calling for an

end to the embargo against Cuba, which were presented between 1992 and 2004.

Table 3-1. UN Vote on Resolutions Against the U.S. Embargo on Cuba
Year In favor Against Abstentions
1992 59 3 71
1993 88 4 57
1994 101 2 48
1995 117 3 38
1996 137 3 25
1997 143 3 17
1998 157 2 12
1999 155 2 8
2000 167 3 4
2001 167 3 3
2002 173 3 4
2003 179 3 2
2004 179 4 1
Source: United Nations data


6 The full and combined force of the collapse of Soviet-bloc communism and of the U.S. economic
blockade came to be known in Cuba as the "double blockade," between a one-time friend and an
implacable foe: Moscow's betrayal and Washington's obsession.









Prior to the passage of the Torricelli law, Cuba had never been able to obtain a

resolution condemning the U.S. embargo on the floor of the United Nations General

Assembly. In November 1992, as a consequence of a widespread international concern

regarding the extraterritorial character of the U.S. legislation, the General Assembly

condemned the embargo by a vote of 59 to 3 (with 71 countries abstaining). Since then,

the vote has been more lopsided with every passing year. In 1995, a total of 117

countries expressed disapproval of the embargo. The United States was left with Israel

and Uzbekistan as its lonely partners in voting against the resolution.7 By 1998, the

governments condemning the embargo were 157 (with only 12 abstentions). Instead of

gaining international support for its policy toward Cuba, the United States became more

isolated. As stated by Roy (2000: 102-103), "Washington had lost a public relations

war." The number of countries opposing U.S. economic sanctions against Cuba reached

167 in 2000, and peaked at 179 in 2003 and 2004.

The Helms-Burton Law

Washington enacted an even harsher package of measures against Cuba in 1996.

The story of the Cuban Liberty and Democratic Solidarity Act (better known as the

Helms-Burton law)8 is very similar to that of the Torricelli law. Approval of the bill

coincided with the 1996 Republican presidential primary elections in Florida and

preceded the general presidential elections of November of that year. Moreover, the

conservative faction of the Cuban American community lobbied heavily for a much

tougher line against Cuba. As recalled by Nicholas Gutierrez, a prominent Cuban


7 It must be noted that both countries (like the United States) currently trade with Cuba; Israel is also a
major investor in the island's citrus sector.
8 The Cuban Liberty and Democratic Solidarity Act is widely referred to as the Helms-Burton law after its
sponsors, Senator Jesse Helms (R-North Carolina) and Representative Dan Burton (R-Indiana).









American figure, "nobody lobbied the bill as methodically and in as well-funded a

fashion as CANF (Kiger 1998: 52).

The only real difference was Jesse Helms' new role within the U.S. Congress

(Dominguez 1997: 62). The conservative Senator had been installed as chairman of the

Senate Foreign Relations Committee after the Republican electoral victory in the

Congressional elections of November 1994. Representative Dan Burton had also

replaced Robert Torricelli as chairman of the House Subcommittee on Western

Hemisphere Affairs. It was the same platform Torricelli had used to become one of

Capitol Hill's most influential voices on Cuba policy, and Burton moved to exploit it

(Kiger 1998: 45). The new legislation, originally presented by Helms to the U.S. Senate

in February 1995, was subsequently introduced by Burton into the House of

Representatives. The Republican-controlled Congress, increasingly critical of President

Clinton's commitment to the maintenance of the status quo in Cuba policy, pressed ahead

for continuing the policy of tightening sanctions on Cuba while simultaneously offering

positive inducements to democratic change. Nevertheless, this time the act sought to

build a two-track approach by expanding the target of possible sanctions to foreign

companies who knowingly "trafficked" in U.S. properties expropriated by the Castro

government without compensation in the early 1960s (Fisk 2001: 94-95).

The issue of the settlement of property claims had been largely neglected since

then, at least as a possible reason for new punitive measures against Cuba. The severe

economic decline of the Cuban economy in the early 1990s nurtured fears among U.S.

legislators that the Castro government would seek to cure its capital crunch by selling

properties expropriated from U.S. nationals. The increasing number of foreign









companies investing in Cuba since 1993 simply confirmed these fears and gave U.S.

legislators a further pretext for tightening the economic embargo. The issue of human

rights violations was raised as an important reason for their action, but the real goal of

Helms-Burton was clearly to bring about collapse of the Castro regime by keeping

international firms away from Cuba, thus denying the Cuban government needed capital

(Arreola 1998). Indeed the law, engineered by hard-liners in Congress and leading

figures of the Cuban American community (such as the prominent exile family Bacardi)9

had nothing to do with resolving the original U.S. claims. Not one of the 5,911 certified

U.S. claimants lobbied on behalf of the Helms-Burton legislation. They were all against

it. For them, it would have probably been better to engage in business activities in Cuba

and satisfy their property claims through revenues from joint ventures with the Cuban

government (Peters 2000: 12).

When the Helms-Burton legislation was first submitted in early 1995, President

Clinton and Secretary of State Warren Christopher opposed it. The President, in

particular, worried that the law limited his authority to conduct foreign affairs and feared

retaliatory measures by the U.S. major trade allies such as Canada, Mexico, and the

European Union, whose companies were trading with and investing in Cuba. Clinton

noted in April 1995: "I support the Cuban Democracy Act, which passed in 1992 and

which we have implemented faithfully. I think we should continue to operate under it. I

know of no reason why we need further action" (Morley and McGillion 2002: 85). Given

the opposition from the international community and the reticence of the State

Department, the future for Helms-Burton seemed gloomy in late 1995 and early 1996.


9 Many Cubans on the island refer to Helms-Burton as the "Bacardi law," due to the active involvement of
the Cuban American family in the passage of the legislation.









The legislation had also lost the center stage because of the federal budget battle between

Congress and President.

Since September 1995, the Clinton administration had quietly been trying to drum

up opposition to the legislation in the U.S. corporate sector, hoping to create a

counterbalance in the embargo debate to the conservative Cuban Americans (Kiger 1998:

54). But the tide turned drastically on February 24, 1996, when two small planes

operated by Cuban exiles (belonging to the group Brothers to the Rescue) were shot

down by Cuban forces over the Straits of Florida. This tragic event proved to be the key

to the passage of Helms-Burton, especially because of its proximity to important election

dates. Unable to obtain the enactment of the law until then, supporters in Congress and

within the Cuban American community were successful in capitalizing on the outrage

over the shoot-down. The latter transformed the dynamics of the whole debate: limiting

its domestic political fallout became the overriding concern. Clinton tried to negotiate a

milder version of the bill with its proponents in Congress and with prominent figures in

the Cuban American community, but he was ultimately compelled to accept the initial

version of the legislation. He even agreed to codify all existing embargo executive orders

and regulations into law with no presidential waiver loophole, thus ceding a great deal of

authority to Congress in dictating future shifts in Cuba policy (Morley and McGillion

2002: 107).

Early in March 1996, Congress rapidly approved Helms-Burton by overwhelming

majorities in both chambers. President Clinton was forced (as was Bush four years

earlier) to set aside the national interest in order to avoid a major electoral setback in the

presidential elections of November 1996. He ended up changing his initial position and









signing the law on March 12, 1996, just 17 days after the two planes were shot down

(Smith 1998). The passage of Helms-Burton simply demonstrates a proclivity in the

White House to distort foreign policy to conform with short-term domestic political

imperatives. Anti-Castro lawmakers, and especially an increasingly powerful Cuban

American lobby, had established the domestic game as the major factor shaping U.S.

policy toward Cuba. Being the only significant, organized group working on the Cuba

issue, Cuban Americans dominated the field and played a crucial role in the tightening of

the embargo. Although some polls showed that a majority of the American public in the

first half of the 1990s favored a policy of engagement with the Castro government, the

issue was not highly salient, and no domestic group stood to reap any significant gain

from a normalization of relations with Cuba. As Putnam (1988) points out, when the

political costs of an international agreement fall disproportionately on a domestic group

that is cohesive and politically mobilized, and the benefits from the agreement are

diffusely distributed, the mobilized group often has the power to block ratification (and

eventually push foreign policy on a more confrontational ground). That description

captures perfectly the political dynamics behind U.S. policy toward Cuba in the post-

Cold War era.

The final text of the Helms-Burton law is composed of thirty-three sections

grouped into four titles.10 The legislation aims to assert the property rights of U.S.

nationals affected by the extensive process of nationalization undertaken by Fidel Castro

10 The final text of the Helms-Burton law does not include two clauses of the original version that had
attracted considerable international attention. First, the U.S. Congress did not attach a provision, which
would have prohibited imports of sugar from third countries that import Cuban sugar. Instead, the Helms-
Burton law simply reaffirms the old U.S. regulation that forbids the import of sugar from Cuba through
third countries. Second, the U.S. Congress left out a clause that would have prohibited U.S. financial
institutions from financing companies of third countries that "traffic" in expropriated properties, even if this
financing was not used to support trafficking activities. Instead, Helms-Burton reiterates the existing
regulation, which forbids U.S. nationals to fund transactions related to Cuba (Krinsky 1996: 26).









after January 1959. It also presents itself as an effective measure for promoting political

change in Cuba and assisting the Cuban people in regaining democratic institutions

(Groombridge 2001: 2).

Title I codifies the restrictions in effect as of March 1, 1996, that collectively form

the U.S. economic embargo against Cuba. These restrictions include the Torricell Law of

1992, which calls upon foreign governments to restrict their trade and credit relations

with Cuba. This title aims to multilateralize and strengthen the U.S. embargo to the extent

possible. In fact, it prohibits Cuban participation in international financial organizations,

restricts travel by U.S. residents wishing to visit family members in Cuba, and threatens

sanctions against countries that provide anything that could be defined as "economic

assistance" to Cuba (even in the form of favorable terms of trade).

Title II, labeled by some U.S. and Cuban scholars "a second Platt Amendment,"

lays down a series of conditions demanded by Washington for re-engagement with some

future Cuban government. The central one is that neither Fidel nor Raul Castro be part of

that government. Basically, the law nullifies a "calibrated response" by eliminating the

United States' ability to respond positively to anything except the fall of the Castro

government (Leogrande 1997). This is the first time that the objective of getting rid of

Castro has been explicitly stated as American policy. Other conditions are: 1) a

democratically elected government; 2) release of all political prisoners; 3) progress in

moving toward a market economy; 4) progress in returning properties confiscated by the

Castro regime to U.S. citizens, including properties of those who were Cuban citizens at

the time of the expropriation; and 5) stop to jam Radio and TV Marti, even though they

are operating in violation of the International Broadcasting Convention.









While the first two titles of Helms-Burton may seem designed primarily for Cuban

consumption, both in the U.S. exile community and in Cuba, Title III and IV are the

aspects of the legislation aimed at Cuba's commercial partners. Title III allows U.S.

citizens whose property was expropriated without compensation by the Cuban

government, including those who were not citizens when the expropriation occurred, to

sue in U.S. courts those foreign companies or individuals who "traffic" in that property.

In order to make it more difficult for foreign companies to evade Helms-Burton's reach,

the authors of the law consciously left a margin of uncertainty in the interpretation of

"trafficking." This is broadly defined and includes selling, leasing, managing, and

purchasing expropriated properties. It also includes the use of trademarks or licenses

claimed by American firms. In short, any commercial activity in Cuba can in principle

be considered as "trafficking" and could be affected by the implementation of the Helms-

Burton legislation (Roy 2000: 64).

For the first two years after the enactment of the law, only claims that had been

certified by the U.S. Foreign Settlement Commission (FCSC) could provide the basis for

an action under Title III. Indeed, under the Cuba Claims Program completed in 1972, the

FCSC determined the validity and amounts of claims by U.S. nationals against Cuba and

certified them to the Secretary of State for use in a future negotiation of a claims

settlement agreement with a "friendly" government in Cuba (Confidential Report 1999:

21). There are already 5,911 certified claims listed by the Settlement Commission for a

total value of approximately $6 billion. Table 3-2 reports the largest 10 U.S. claims and

their approximate amounts.









Table 3-2. Ten Largest Certified U.S. Claims ($U.S. million)
Company Certified Claim
Cuban Electric Company $267 million
International Telephone and Telegraph Corp. $131 million
North American Sugar Industries Inc. $109 million
Moa Bay Mining Company $88 million
United Fruit Sugar Company $85 million
West Indies Sugar Company $84 million
American Sugar Company $81 million
Standard Oil Company $72 million
Bangor Punta Corporation $53 million
Texaco Inc. $50 million
Source: U.S.-Cuba Trade and Economic Council

After two years, uncertified claims could also serve as the basis for action. The

claim must exceed $50,000 in 1996 dollars, excluding interests, costs, and attorney fees.

Regarding the impact of this specific provision, there are contrasting interpretations.

Kiger (1998: 57-58), for instance, argues that it would exclude all but 75 of the certified

claimants and probably most claims by Cuban-Americans.l1 On the other hand, a

declaration by the former U.S. Secretary of State Warren Christopher suggested a

different scenario. Christopher affirmed that the implementation of Title III "would

exponentially increase the number and value of U.S. property claims against Cuba from

their current total of about $6 billion to as much as $100 billion" (Groombridge 2001: 4).

If this is true, properties that were worth a few thousand dollars in the 1960s might be

easily worth over $50,000 dollars today.12 Therefore, the Helms-Burton law would

actually expand the process of settlement of property claims.




1 Robert Muse, a Washington lawyer whose clients have included European firms with investments in
Cuba, said he expects 430,000 lawsuits if Title III of the Helms-Burton law is implemented. He believes
Cuban-Americans will bury U.S. courts in claims for lost homes, businesses, and farms (Cox 2001).
12 For instance, a Cuban family which owned a sugar plantation valued at $3,000 in 1962, is seeking
compensation of close to $10 million from a Spanish firm (Sol Melia) that has built a hotel on that
property.









Under Title III, a foreign company with investments in the United States might be

victim of retaliation by U.S. claimants (backed by a court order) on its properties in this

country, which can be obtained legally as compensation (McKenna and Kirk 1998: 6).

However, the mere condition of "trafficking" in expropriated properties is by no means

sufficient for the application of sanctions. In order to be subjected to the jurisdiction of

U.S. courts in case of a controversy based on this title, a foreign company must have

"systematic and continuous" business links with the United States whose amplitude

makes reasonable a process of reclamation. This provision is not applicable to foreign

companies that simply trade with and obtain financing from the United States.

Furthermore, Title III can be applied only in a U.S. court of the state where the foreign

company has business activities. More specifically, if a foreign enterprise has investment

activities in Miami, it is subject to the jurisdiction of Floridian courts and not to the

jurisdiction of courts in other U.S. states (Krinsky 1996: 29).

We can fairly assume that claims against foreign companies with no U.S. exposure

(mainly no assets in the United States) and requests of compensation for violation of Title

III are probably going to be ignored by foreign investors. Without operations in the

United States, a company is not obligated to defend an action. However, a further

question should be raised. Can the subsequent default judgment (in case the executives

of the firm do not appear before the U.S. court) be enforced in courts of other countries?

For example, in January 1997, Canada amended the 1985 Foreign Extraterritorial

Measure Act (FEMA) by establishing that any court judgment linked to the Helms-

Burton legislation would not be recognized in Canada.13 Yet, a few months earlier, a


13 The amendment to FEMA allows Canadians who are sued in the United States to recover any amounts
awarded if the other party has assets in Canada. Mexico passed a similar law in October 1996. The law









Canadian lawyer commented on this aspect: "With amendments to FEMA we could have

a stronger case, but I am not going to give Canadians a guarantee that their assets would

be protected" (Lacy 1996: 30).

Although Title III of Helms-Burton was due to come into effect on August 1, 1996,

it has not been implemented so far because former President Bill Clinton used his

discretionary power to waive it for period of six months (the last in January 2001). In

fact, a clause included in the final draft of the law permits the President to delay it for

national security reasons or to promote democracy in Cuba. Since July 2001, George W.

Bush has also suspended every six months the application of the controversial Title III.

Although the postponement can still be lifted in the future, Bush's actions raise the

likelihood that the full force of Helms-Burton may not take effect during his

administration.

Title IV of the Helms-Burton law allows the U.S. government to deny entry into

the United States to senior executives of foreign companies that are accused of trafficking

in properties subject to U.S. claims. This provision also applies to close relatives of the

executives such as their spouses and any dependent children. Unlike Title III, Title IV

cannot be suspended. Determination of "traffickers" and application of sanctions are

responsibilities of the U.S. Department of State.

Title IV seems deprived of a retroactive character since it focuses on trafficking

activities initiated after March 12, 1996. Section 401(B)(2)(A)(i)(III) suggests that the

exclusion from the United States would not be applicable if a company in possession of a

confiscated property avoids making any change to the way it was conducting business

establishes that Mexican companies can be fined if they comply with the extraterritorial provisions of
Helms-Burton and it provides for the non-recognition and non-enforcement of foreign judgments under
such extraterritorial legislation.









activities in Cuba prior to the enactment of the Helms-Burton law. Improvements and

investments in a confiscated property are permitted only if they are for routine

maintenance (Lacy 1996: 29).

However, how is it established that renovations, upgrades, or other constructions

have been undertaken just for routine maintenance? The extreme vagueness of the

provision makes it very difficult for foreign executives to avoid the reach of Title IV. If

you do business on a confiscated U.S. property, you might be easily identified as a

"trafficker." Just a few months after the passage of Helms-Burton, the U.S. Department

of State sanctioned the executives of two foreign companies (a third one was sanctioned

in 1997) trafficking in expropriated properties in Cuba. In addition, it has maintained

pressures on several other firms by sending them "warning" letters regarding potential

violations of the U.S. legislation and by threatening to deny them visa entry into the

United States. In such a short period, it seems at least improbable that those foreign firms

made enough changes to their activities in Cuba to justify the application of sanctions

under Title IV.

Finally, the Helms-Burton legislation locks U.S. policy in place indefinitely. While

most U.S. economic sanctions against the government of Fidel Castro were previously

based on executive orders, which could be modified or rescinded at the president's

discretion, now they are embedded in law. A future lifting of the embargo and the

beginning of normal relations with Cuba will be possible only after Helms-Burton has

been repealed (Smith 1998). In recent years, though, there have been several changes in

U.S. policy toward Cuba. Before the end of the 1990s, the Clinton administration eased

some restrictions on U.S.-based travel to the island. In October 2000, the U.S. Congress









allowed an exception to the embargo by authorizing food sales to Cuba. In March 2003,

the Bush administration relaxed limitations on family remittances by significantly

increasing the amount of money that U.S. authorized travelers could carry to Cuba.

Bush's policy was reserved in June 2004, just a few months before the U.S. presidential

elections, when remittance (and travel) restrictions were again tightened. Further details

on these changes will be provided in chapter 5. The next chapter analyzes the evolution

and the current situation of foreign investment in Cuba, the impact of Helms-Burton on

potential and existing investors in the island's market, and the most important cases of

foreign companies affected by the U.S. legislation.














CHAPTER 4
IMPACT OF THE HELMS-BURTON LAW ON FOREIGN INVESTMENT IN CUBA

Cuba's response to the deteriorating economic situation subsequent to the demise

of its former benefactor, the Soviet Union, was the implementation in September 1990 of

an economic austerity program called "special period in time of peace." The program

consisted of a series of measures intended to conserve energy and raw materials,

stimulate food production, expand markets for exports and imports, and accelerate the

development of international tourism. But the main novelty was the opening of the island

to foreign investment in the search for the markets, technology, and financing that

disappeared with the collapse of the socialist bloc. While it cannot be argued that foreign

investment plays a fundamental role in the Cuban economy, it appears that foreign capital

has helped Cuba to raise production of oil and electricity, find new markets for its main

exports, boost international tourism, and increase domestic supplies to the tourist industry

and the internal market in hard currency.

Following a cautious start during the worst years of the economic recession when a

handful of hotel and oil exploration joint ventures were formed, foreign investment in

Cuba gathered pace after 1993 as the economy began to show signs of a modest but

constant recovery. Since then, and despite the passage of the Helms-Burton law in 1996,

an increasing number of foreign companies have entered the Cuban market with

investments in nearly all sectors of the island's economy. However, after more than a

decade of uninterrupted growth, the number of joint ventures with overseas firms fell









significantly in the past two years, raising questions on just how wide the Castro

government's welcome to foreign investment really is.

Although it should be noted that the level of interest for the Cuban market on the

part of foreign investors has diminished, the recent decline of international economic

associations (Asociaciones Economicas con Capital Extranjero, or AECEs)1 is not due to

the impact of Helms-Burton but mainly to Cuba's increasing selectivity toward foreign

investment and its unwillingness to create a more attractive business environment.

President Fidel Castro and other senior officials have never concealed their intention to

keep foreign ownership and capital in the communist island at a minimum level. They

keep saying that foreign investment is a complementary measure aimed to help

strengthen and improve the country's state-run socialist system, not destroy it. While

acceptance of new investments is based on strict consideration of what they can bring to

Cuba in terms of capital, technology, and markets, the Castro government has made clear

that it wants to keep overall state control of the economy. Additionally, Cuba has done

very little to solve recurring problems mentioned by overseas partners, which include

excessive bureaucracy, project approval delays, payments problems, and restrictive labor

legislation. On the contrary, recent moves by the island's authorities to introduce foreign

exchange controls for state-run enterprises and other centralizing economic measures



1 The term international economic association (or simply economic association) refers to the following:
joint action by one or more national investors and one or more foreign investors for the production of
goods, the offering of services, or both, for profit, in its two forms, which consist of joint ventures and
international economic-associations contracts. Joint ventures imply the establishment of a legal status
distinct from that of any one of the parties; the proportions of capital stock which should be contributed by
the foreign investor and the national investor are agreed upon by both partners and defined as part of the
authorization. International economic associations contracts do not imply a legal entity separate from
those of the contracting parties; each contracting party makes separate contributions, which constitute a
cumulative amount which they own at all times, and even though they do not constitute capital stock, it is
in their interest to establish a common fund, as long as the portion of ownership belonging to each of the
parties is well defined.









have lowered confidence among existing and potential investors about their ability to deal

with bureaucratic hurdles and collect payments and arrears from the Cuban government.

Given this situation, it is hardly surprising that the number of active AECEs in Cuba

decreased for the first time in more than a decade.

Any attempt to carry out a comprehensive study of foreign investment in Cuba is

hindered by the lack of reliable and detailed information on the activities of foreign firms

and their contribution in terms of capital. Due to what Cubans call the "U.S. economic

blockade" against the island, public disclosure of data on the presence of foreign capital

in Cuba is practically limited to statistics on the evolution of international economic

associations by year, by sector, and by country. This method of reporting the level of

foreign investment in the country offers no idea of the value or strategic importance of

the deals involved. Nonetheless, this chapter utilizes the best available information to

date from a variety of sources (some of them confidential) in order to provide a quite

detailed analysis of foreign business activities in Cuba and the effects of Helms-Burton

on potential and existing investors, the flow of foreign capital, and the overall Cuban

economy.

Foreign Direct Investment in Cuba

With the demise of the Soviet Union in the early 1990s and the plunge of its

economy, Cuba's need to find alternative finances, technology, and markets grew more

urgent. As a result, the government moved actively to seek new long-shunned foreign

investment and the first handful of joint ventures were signed in the hotel industry and oil

exploration under Decree Law 50 of 1982. Regarding the latter, the limit of 49% for the

foreign share of joint ventures and the low level of investment protection for overseas

companies were certainly major dissuading factors for capital inflows. Cuban statutory









guarantees fell considerably short of providing the level of investment protection foreign

firms would demand. According to Article 24 of Decree Law 50, if Cuba unilaterally

terminated the activities of a joint venture, the Cuban National Bank simply guaranteed to

foreign investors the ability to repatriate the proceeds of their share after liquidation. In

addition, it was clear the intention of the Cuban government to maintain the most

important sectors of the economy in national hands (Confidential Report 1999: 10).

The opening to foreign investment and international tourism, matched by

increasing interest but also growing complaints from foreign companies, led the

government to draw up an updated and more attractive legislation in 1995. The 1995

Law 77, while repeating some of the basic aspects of Decree Law 50, set out specific

guarantees for foreign firms by establishing full protection and security against

expropriation and opened all sectors of the Cuban economy (except public health,

education, and armed forces) to foreign investment. It also abolished the limit of 49% of

foreign shares for joint ventures and authorized for the first time the possibility of 100%

wholly foreign owned investments. Finally, in an attempt to speed up and streamline the

approval process of new agreements, the law introduced an article requiring that approval

or denial of an investment must be given within 60 days of the presentation of the formal

request.

After 1993, Cuba has intensified the promotion of foreign investment. Through

visits to foreign countries, participation in international investment events, and meetings

with potential investors, Cuban officials became very active in publicizing the advantages

of business activities in the island (Perez-L6pez 1999). As a result, the number of

international associations grew steadily and expanded to different sectors of the Cuban










economy such as mining, construction, light and food industry, agriculture, and services.

An important change of policy toward foreign investment occurred in 1998 when the

Cuban authorities declared their preference for AECEs that involved higher amounts of

capital and loan financing. In fact, as a result of banking reforms and continued

economic recovery, Vice President Carlos Lage announced that year the intention of the

government to pursue a strategy of encouraging foreign investment in large development

projects while limiting interest for smaller projects, unless they included the introduction

of new technologies or new export markets. He added that Cuba's government-operated

banks were in a position to provide small amounts of capital (USCTEC 1998).


450
392 400 403
400 374
345 342
350 317 313

300 6
260
250 212

200 176

150 120

100

50


1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Figure 4-1. Active International Economic Associations (1993-2004)
Source: Cuban Ministry of Foreign Investment, March 2005.

As shown in Figure 4-1, there were 313 active international economic associations

in Cuba at the end of 2004, most of them joint ventures. The number of active AECEs,

which had been increasing at an annual average of around 32% between 1993 and 1997,

rose by just 5% per year between 1998 and 2002, and dropped by 15.1% in 2003 and by

8.5% in 2004. However, despite the lower number of associations, Cuban authorities









argue that foreign investment is in a process of consolidation. In February 2002, Minister

Marta Lomas stated: "While Cuba is often blamed for trying to detain foreign investment,

what is happening in reality is the opposite. The country has been concentrating on

businesses with results" (Economics Press Service 2002). Early in 2004, Lomas noted

that the main economic indicators of AECEs were positive in 2003 and that the declining

number of joint ventures with foreign partners was more suitable to Cuba's current needs

in terms of technology, financing, and market (Murguia Delgado 2004).

Indeed, several foreign investors are engaging in profitable operations and

expanding their interests in the Cuban market. It is true that some major foreign

companies have had problems in recent years, but none of them have pulled out of the

country. For instance, Spain's Sol Melia, the leader in Cuba's tourist sector, revealed that

the communist island had been one of the most affected destinations in the Caribbean in

2002 as a result of the downturn in tourism after 9/11. However, the company has an

expansion plan for its Cuba division that includes the incorporation of a new 240-room

hotel under management contract.2 In addition, Brazil's Petrobras, after ending oil

explorations in 2001 (the wildcat well drilled off Cuba's north central coast was a dry

hole), said the decision was temporary and that it was still interested in prospecting for oil

in deep-water areas in the Gulf of Mexico (OilOnline 2001). With only a few exceptions,

not even those companies that have been targeted or sanctioned by the Helms-Burton law

have divested themselves of their Cuban holdings. In short, 313 international economic

associations remain active in Cuba and some must be making money.




2 See Sol Melia. 2" '14 First Quarter Results."
hlup l\ \ \ .solmelia.com/sol/pdf/financials/English/1Q04.pdf (last visited November 2005).