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Cuba takes U.S. dollar out of circulation as food exporters worry about impact
CubaNews / November 2004

By Larry Luxner

During the first week of November — as visiting U.S. food executives wrapped up $150 million in new contracts with Alimport and Bush supporters celebrated their president’s re-election victory over Sen. John Kerry — ordinary Cubans resigned themselves to the latest edict from Fidel Castro: an end to the circulation of the U.S. dollar as legal tender.

Resolution No. 80/2004, approved Oct. 23, bans stores, restaurants and other commercial establishments from accepting dollars for the first time in a decade.

“Beginning on Nov. 8, the convertible peso will begin to circulate in substitution of the dollar throughout the national territory,” Castro decreed in a message read aloud by his chief aide.

The Cuban leader is recovering from a fall several weeks ago in Santa Clara that resulted in a shattered left kneecap, a broken right arm — and renewed speculation in Miami over what will happen when Castro dies.

Under the Maximum Leader’s new policy, the greenback won't be banned altogether, as it was before 1993, when Cubans could go to jail simply for possessing dollars.

But Cubans and tourists alike will now have to pay a 10% surcharge to change dollars into convertible pesos of equal value, meaning that those collecting overseas remittances will only get 90 cents for each dollar when they change the money into pesos convertibles. However, there will be no such fee to change other currencies such as euros, Canadian dollars, British pounds and Swiss francs.

Adam Ereli, deputy spokesman at the State Department, said the move is “yet another indicator” that Castro is refusing to do what's best for his own people.

“It shows he’s cynically trying to preserve a bankrupt regime at his people’s expense,” Ereli said at an Oct. 26 press briefing. “We see it as a confiscatory measure that demonstrates that President Bush’s policy is working; it’s squeezing the regime and causing them to take extreme measures that underscore its own inherent weaknesses.” Clearly, the idea is to discourage use of the dollar as much as possible — and so far, the draconian measure appears to be working.

As we went to press, over 700,000 Cubans had already visited 1,623 establishments set up across Cuba to open up dollar-denominated bank accounts or exchange dollars for pesos convertibles, which are pegged at 1:1 to the dollar.

Cuba said the measure was necessary to protect the country from an increasing U.S. crackdown on foreign banks sending dollars to Cuba.

In May, the Federal Reserve fined Switzerland’s largest bank, UBS, $100 million for sending dollars to Cuba and a handful of other countries under U.S. sanctions.

Part of the reasons behind this new policy is undoubtedly psychological. Castro was never happy with having Cuba so dependent on the currency of his No. 1 enemy.

But after the loss of Soviet aid in the early 1990s, the possession of dollars was legalized in order to maximize hard currency from tourism and from family purchases at the so-called “dollar stores.” It was always seen a temporary measure, until a more comprehensive monetary reform could be put in place.

In fact, the dollar has become so prevalent throughout Cuba that most tourists never even see the national currency, the peso, which currently trades at 26 to the dollar.

And Cubans with access to hard currency did much of their shopping at so-called “dollar stores,” which now will have to be called something else.

Jaime Suchlicki, director of the University of Miami’s Institute for Cuban and Cuban-American Studies, said Castro’s announcement is aimed at having better control of the dollars entering the island, as well as the black market that trades in dollars.

“This is all about recentralization of the economy. Castro is tightening things up again and returning to the original idea of the revolution,” Suchlicki told the Miami Herald.

Added Eddy Levy, a founding member of the Miami-based Cuban-American Commission for Family Rights: “I trust that the Cuban government is doing what they think is best for their economy, which is what any responsible government does. Let’s hope it is only a transitionary measure until the economy gets better on the island.”

Nevertheless, Francisco Soberón, president of the Central Bank of Cuba, stressed his commitment to keeping the convertible peso’s value on par with the dollar.

“It would be extremely unwise for us to change the one-to-one exchange rate after the Cuban people have shown such confidence in the Cuban government,” he said, responding to fears that once the dollar stops circulating, the convertible peso will be devalued.

Soberón said he’s surprised at the large am-ount of dollars Cubans have already changed in order to avoid the 10% exchange fee.

“It’s been above our expectations,” he told reporters in Havana. “A lot of people are opening accounts in important amounts of money. We didn’t know how much people were saving under their mattresses.”

Tourists, meanwhile, are being advised not to arrive in Cuba with U.S. dollars — but instead bring euros, Canadian dollars, British pounds or Swiss francs.

The euro is already being accepted at specific locations in six tourism complexes across Cuba: Varadero, Jardines del Rey (Ciego de Avila province); Santa Lucia (Camagüey); Covarrubias (Las Tunas); Guardalavaca (Holguín) and Cayo Largo del Sur. Officials are now thinking about making the euro legal tender throughout all of Cuba, says Tourism Minister Manuel Morrero.

“Extending the use of the euro outside those tourism areas could make Cuba a more attractive destination for Europeans, who would no longer have to change the EU’s common currency into U.S. dollars for use on the island,” notes Forbes magazine. “Increasing acceptance of the euro would also help Cuba start building a new hard currency base as it removes the U.S. currency from general circulation.”

To cope with the expected demand for convertible pesos, the Central Bank plans to introduce new banknotes in $5 and $10 denominations. The $5 bill will depict the monument to Antonio Maceo, while the $10 note will honor Máximo Gómez.

The previous issue of pesos convertibles, dating from 1994, will continue in circulation and remain legal tender, said the bank.

Marrero acknowledged that those likely to be hardest hit by the government’s new policy are Cuban-Americans living in the United States, along with the relatives who receive money from them.

How all this will affect U.S. food exporters remains to be seen.

David Radlo, president and CEO of Radlo Foods in Watertown, Mass., said it won’t make things easier for U.S. executives trying to market their goods to Alimport.

“Obviously, it is an inconvenience for U.S. companies traveling to Cuba, as we will need to use another standard of currency other than U.S. dollars,” noted Radlo, whose company sells fresh eggs to Alimport, Cuba’s official food purchasing agency. “But we’ll adapt to the changes and continue to serve our customer in a positive manner, as we sincerely appreciate the Cuban business.”

Lee Harrington, president of the Los Angeles County Economic Development Corp., which is trying to help California-based food companies secure trade deals with Alimport, is rather pessimistic, telling us “this will have a negative effect on trade relations. I also believe this will have a negative effect on tourism growth in Cuba.”

Despite concerns by those like Harrington who worry that the dollar ban will hurt Cuba’s tourism industry, others point out that most tourists visitng Cuba are euro-wielding Europeans and Canadians, who bring Cana-dian, not U.S., dollars, with them.

One such optimist is Kirby Jones, head of Alamar Associates in Washington — a longtime advocate of normalized trade relations between the U.S. and Cuba.

“The change applies to the domestic market, not international trade,” he told us. “I have talked to my own clients, as well as other business executives, and there have been no comments which indicate that this measure will impact at all this trade. It may impact the cost of a mojito, but not the business.”

Another optimist is Joe Heidelmaier, vice-president of City Seafoods in Los Angeles.

“We are still in negotiations for upcoming seafood contracts with Alimport. Since their payment is made on a guaranteed payment basis and paid in any currency convertible to U.S. dollars, I see no break in regular trade with Cuba.”

Cubans going abroad, however, will need dollars, since the peso convertible is only valid for domestic use in the hard-currency retail chains. That supports the theory that a black market in dollars will soon emerge.

Central Bank President Soberón downplayed such predictions, telling reporters that “a black market exists when you prohibit something” — which is why this time around, the government has not banned Cubans from holding or changing dollars.

But if problems do pop up later, he quipped, “we can always pass another resolution.”

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