A look into Remittances – an improbable way forward for Cuba

Back in the early nineties a report was submitted to Fidel Castro concerning the threat against national security the growing dependence on foreign remittances was becoming for Cuba´s economy. The main preoccupation stemming from a government sanctioned ban on approved US remittances by George Bush. In many respects this transpired under Bush who capped remittances to 1200 USD per year per family. Fidel began taking economic measures in 2004 to counteract the massive reduction in remittances on which his economy had grown so dependent by creating the now infamous gravamen (penalty) on USD remittances.



Now that Obama has removed these restrictions and, based upon Cuba´s growing dependence on them, Raul and his other party superiors are finding more ways to get families abroad, primarily in the US, to send more money to families in Cuba.



Here is a timeline of remittance related decisions and ways Cuba´s leaders have and will continue to tap into wealth far away to bolster Cuba´s stricken economy.



November 2004 – CUC currency exchange

This was the first smash and grab strategy introduced to pillage remittances. The plan was simple: Use a beleaguered currency that nobody used, the CUC, as a tool to extricate 18% (in the case of USD) and 8% (other currencies) straight off of the top of all inbound remittances. A clever plan at the time, it included obliging all inbound remittances to be exchanged for the CUC, incidentally a currency that no Cuban´s receive (now or then) in their pay packets as, they receive the Cuban peso pegged at over 25 Cuban pesos to 1 dollar, making their 300 Cuban peso salaries around 12 CUC. Anyway, back to the measure introduced, it was based upon turning all remittances entering Cuba into printed notes printed then by UK´s De la Rue at less than 1 cent per note allowing the Cuban government to directly receive every cent of all remittances directly into government coffers while Cuban´s were given the aforementioned notes. Not content with receiving all inbound remittances “directly” Cuba´s leader Fidel Castro sought to obtain a tax on all remittances payable in advance. The methods used to achieve this were two fold. First off, he calculated that over 70% of remittances came from the United States and thus were sent in US Dollars upon which he promptly imposed a 10% levy or direct tax called the “Gravamen”. This meant that not only all funds went straight to the government upon entering Cuban territory via its banks in exchange for the printed notes but, also those funds sent from the US were debited a 10% sanction retained directly by the government. The second method used targeted other nations sending remittances and was in addition to the 10% charge imposed upon the USD and was pegged at 8% essentially devaluing all other currencies by 8% against Cuba´s CUC. The final twist came by way of Cuba´s Cadeca´s or exchange houses, mandated specifically to capture actual foreign notes that slipped under the radar and into Cuba in the hands of tourists and Cuban Americans thus, being more problematic than money transferred straight to Government accounts in the case of remittances for CUC. These exchange bureaus were ordered to charge and extra 3.6% to exchange any currency meaning that for every USD exchanged directly in Cuba the government grabbed a staggering 21.6% (10+8+3.6%). Furthermore, for remittances sent to charge cards run by the state owned FINICIMEX (Ocean Card, Transcard, Delivery Card, etc) supplementary charges were added apparently to process these inbound funds which when added to the aforementioned charges totaled an unbelievable 30% of all remittances sent via this method all creamed off before the beneficiaries even received the funds.



January 2005 – CUC extraction stores

Known crudely by officials as “CUC Extraction stores”, starting in 2005, these new stores and shopping complexes sprouted up all over Cuba created exclusively to obtain the remainder of remittances received by Cuban families with a specific economic model based upon price fixing – now familiar names such as Carlos Tercero, TRD (run by the military), La Puntilla, Caracol, Cubalse, Dita, etc.



In nations where competition between stores and outlets brings prices down it is often difficult to conceive anything different. As you will soon learn, “shopping around” is not an option in Cuba though. Try to imagine for a second that every store in the US is owned by Wal Mart. Wal Mart could charge any price for any item in the knowledge that every item purchased, however small or large, could only be purchased from them. Thankfully this only exists in Cuba where every store is owned by the state under various commercial names as mentioned above thus, allowing all prices to be fixed in such a way that on a general basis 200% profit is placed on consumable items and 300% on electronics. Now, because only those receiving remittances use these stores each purchase made (and there are many) allows the government to extract most of the remaining monies through exorbitant profit thresholds (200 or 300%) imposed upon prices in these stores. Essentially there is nowhere else to go, no online price comparisons and above all, no competition.



February 2008 – Cell Phone ban lifted

For the first time, Cuban´s were offered the opportunity to buy previous generation cell phones from CCOM – Cubacel (Cuba´s cell phone operator) at a minimum price of 150 CUC or 10 months salary in Cuba with over 300% mark up over cost included into this new and popular luxury. We are talking about mid 90´s Phones from Europe, Canada and even the US sold in the only market that would accept them. The intention was to create immediate revenue from the said handsets then a regular “fix” of remittance requirements to pay for Calls. The financial logic substantiated by the government solely on remittances. This alone is said to have brought in over 60 million NEW dollars into Cuba´s coffers. A wise financial move but one that creates elitism in a nation where “those that have and those that don´t” has always been taboo…That is, until now



March 2008 – Electrical items

PC´s at over a 1000 USD (six years salary), DVD´s at 300 USD (two years salary) and Microwaves at 400 USD were “permitted” for sale. Promptly included on the next “must have” remittance request to uncles, children, fathers, or other family members living abroad, the sale of these previously forbidden items generated 10´s of millions of extra remittances for Cuba.



September 2008 – Termination fees for international calls suspended

Having phones in the hands of Cuban´s who tell their relatives abroad “don´t call me as I cannot pay the inbound minute charges” (40 cents per minute to receive calls) was not what Cuba´s government wanted. Instead they needed more calls from outside Cuba to arrive onto Cuban telephones. With the highest termination fees in the world this was another massive cash cow for Cuba if they could promote it successfully. Termination fees are the costs per minute one carrier charges another to receive calls on a competing network. In the US and Europe these per-minute fees can be less than one cent, in Cuba they are up to 40 cents per minute. To put this in another perspective, the Cuban governments brief was – Get cell phones into as many hands as possible, abolish call receiving charges to Cuban´s (those 40 cents per minute) for receiving calls and profit from termination fees foreign phone companies must pay Cuba to allow calls to be received (termination) on Cuban handsets. This money is the purest non diluted revenue available as it goes straight to the state owned Cubacel from abroad without any intermediaries. At 4 dollars for a 10 minute phone call going straight into government coffers, the government has every desire to let “Cubans Talk” so they promptly abolished roaming charges. Yet another example of a government created business model where remittances pay outbound calls and families calling from abroad pay the Cuban Government via their carriers to terminate the call.



March 2009 – Cuban´s allowed to stay at Hotels throughout Cuba

Seen by many as a relaxation by Raul Castro of draconian rules banning Cuban´s from Hotels in their own country, this decision to lift the ban came with much fanfare and, for some, a sign that Fidel´s brother had other ideas for the Cuban people by allowing them extended liberties etc. Nevertheless, those who understand the Cuban Governments main objective see this entirely differently. First off, selling “3 nights 150 USD all inclusive vacations” to a nation who´s average yearly salary is less than that would seem like a business idea destined for failure – BUT, not unless you count upon their relatives abroad to foot the bill. As we´ve explained above, this is yet another method of enticing Cuban´s to request more money from relatives abroad. These stays can be sold at an apparent “knock down price” under the guise of special deals for National Tourism (turismo nacional) because, based upon the previous calculations, any “extra” monies sent by way of remittances to cover this new sector are immediately subject to up to 30% loss for the sender/recipient. So for the 150 USD 3 nights stay the remittance required to pay this would be 195 USD.



What’s next for attracting extra remittances in 2009 – 2010?

As the whole basis of obtaining remittances is based upon keeping families in Cuba, there will be little in the way of concessions allowing Cuban´s to travel to other nations under any circumstances. Conversely, there is already an increase, on the government’s behalf, of the processing of legitimate requests for departure to other nations, providing these nations offer the required legal visa. These people considered as latent remittance providers over the shorter and longer term once established abroad. So, expect to see no permits approved to any person for tourist travel abroad for that reason, the loss of remittances being too great. In effect, if the grandmother or father of a Cuban American is allowed to leave Cuba the cash loss for the government can run into the 1000´s per head per year so, overlooking the humanitarian fundamentals in such cases, its is simply not economically sound for Cuba to allow its people to travel (move) abroad. Keeping Cubans in Cuba is therefore extremely important, as is coming up with newer methods to obtain yet more remittances. Our analysis of this leads us to think that higher ticket items will soon be “permitted” in Cuba as a way of extracting larger and larger sums from families abroad. These will probably be added over the next 6 to 12 months:



Cars and Motorcycles

However astounding it may be to tout cars and motorcycles priced from 1500 to 10,000 USD to people who earn just 150 USD per year, we anticipate seeing this introduced sooner rather than later. It is understood that talks have already been held with Cherry, the Chinese car maker, to provide such cars. With regard to motorcycles it is Jingcheng Motorcycles also from China. As selling all inclusive hotel stays and expensive cell phones has attracted more remittances, why not cars and motorcycles?




Cuban´s may be offered the ability to exchange properties with others or inhabit properties owned by the state which were taken from those people who have left to move abroad for varying fees, licenses and taxes. So as not to undermine the whole communist system houses will still be exchanged but the government will “broker” such exchanges for hard currency via “permuta” licenses. This is an attractive prospect because the government is acutely aware that Cuban´s abroad long for the ability to obtain better housing for their families and, as a very high ticket item, could envisage paying tens of thousands to do this. The desires also being to have a nice home for when they visit and possibly later to retire back in their homeland, with sights set on change in Cuba. There is also the pent up “first in” concept that the Cuban Government may use to attract serious money from family abroad in this type of – property exchange for a fee model.




Akin to purchasing an operating license, the government may open sectors, in which it is losing money, to private enterprise in exchange for thousands in licensing and set up fees, ultimately from abroad and, by way of remittances. As we write, Cuban officials are analyzing this scenario based upon similar principles as the age old CUC extraction stores. Cubans may be able to set up certain types of businesses if they can justify, via bank deposit, (obviously in Cuba) that they have a minimum amount of money from abroad. These licenses will allow businesses to operate under the legal premise that all supplies be purchased from the government. As with the CUC extraction stores the government will no doubt add the premium it previously made running the same business to the cost of supplies.




No we are not suggesting this be a new sector for licensing… What we are suggesting is that the government is acutely aware that almost all workers steal from their place of work to get by. These segments include businesses such as restaurants where a bag of chicken costing 20 dollars could mean extra money for the worker if the portions are reduced and, the remaining chicken resold or used to feed his or her family. This being widespread in most sectors (not just the chicken example) the government may raise the white flag and offer licenses to Cuban´s to run businesses such as the aforementioned example of a fried chicken outlet. The method would be simple – provide the license for a considerable fee, oblige the licensee to purchase all supplies from the state, then sell the chicken at twice its cost (still less than in CUC stores though) to the licensed individual, leaving him with the task of policing his business plus leaving the government with the same or more profit than was being attained previously. We thus anticipate licenses being offered at considerable cost (contemplating money from abroad) to run businesses the Cuban government has failed to control.



All of the above, if implemented, similar to the other “openings” concerning Hotel stays, PC´s, Cell Phones etc, will be heralded as “greater freedoms” for Cuban´s under Raul Castro.



Make your own decision as to whether you subscribe to this theory…

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