NICARAGUA: COPING WITH US SANCTIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP04T00907R000100150001-6
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 24
• Document Creation Date: December 22, 2016
• Document Release Date: April 13, 2012
• Sequence Number: 1
• Publication Date: April 1, 1987
• Content Type: REPORT

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prr~ r7 s
Top Secret
ALA 87-10020C
Copy 17 4
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Directorate of
Intelligence
Top See, et
Nicaragua:
Coping With US Sanctions
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ff c Intelligence
Nicaragua:
Coping With US Sanctions
An Intelligence Assessment
This paper was prepared by
Office of African and Latin American Analysis, with
Office of Global Issues. It was
coordinated with the Directorate of Operations.
Comments and queries are welcome and may be
directed to the Chief, Middle America-Caribbean
Division, AL
Top Secret
ALA 87-10010('
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LDAI
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Nicaragua:
Coping With US Sanctions
Key Judgments Trade disruptions and the diversion of financial and managerial resources
Information available to circumvent US economic sanctions have put significant additional
as of 31 March 1987 pressure on the already staggering Nicaraguan economy. The embargo has
was used in this report.
directly cost Managua about $85 million in lower export earnings, more
expensive imports, and new middlemen fees since sanctions were initiated,
according to our analysis of industry and 25X1
trade statistics. 25X1
Nicaragua still has been unable to find new customers for much of its
previous sales to the United States, and higher transportation costs have re-
duced net foreign exchange earnings for those commodity ex orts that the
Sandinistas have been able to relocate. 25X1
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Indirect costs have also been significant, though harder to quantify.
Maneuvering around US sanctions requires exhaustive bureaucratic atten-
tion, limiting Managua's ability to respond to other issues. Meanwhile,
shortages of US-produced spare parts, machinery, and agrochemicals have
stunted production, adding to triple-digit inflation. 25X1
From the standpoint of remaining Sandinista vulnerabilities, a tightening
of US economic sanctions could further reduce Managua's access to US
goods, technology, and financing and increase, even at the margin, the cost
to Moscow of maintaining the regime. Prohibiting US persons and third-
country subsidiaries from supplying goods and services to the regime would
further raise the costs of front company operations. Ending private
economic aid or financial remittances from US persons would cut Mana-
gua's hard currency receipts from the West by as much as $20 million per
year. 25X1
Top Secret
ALA 87-10020C
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Contents
Key Judgments
Counterembargo Strategy
Increased Reliance on Foreign Financial Support 10
Implications for Sandinista Vulnerabilities 12
A. Methodological Notes on the Costs of US Sanctions
B. The Growing Covert Merchant Fleet
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Nicaragua:
Coping With US Sanctions
Even before US sanctions were announced on 1 May
1985, Nicaragua's economy was in a tailspin because
of the Sandinistas' economic and financial misman-
agement, their hostility to the private sector, and
dislocations caused by the growing civil war. The
direct and indirect costs of the US sanctions have
contributed to the continuing deterioration of the
economy
We calculate US sanctions directly cost Managua
some $85 million because of the loss of access to US
markets, higher freight costs for exports and imports,
and new middlemen fees to circumvent the embargo
through February 1987.' Sandinista claims that the
embargo cost $165 million in direct losses through last
year .are, in our opinion, exaggerated to deflect blame
from the regime for its general mismanagement of the
On the export side, we estimate that direct sanction-
related losses have cost the Sandinistas $52 million in
net foreign exchange losses since the embargo was
announced. Of this amount, $20 million was lost
during the last seven months of 1985, $28 million
during 1986, and the rest during the first two months
of 1987. The impact is concentrated in a number of
areas:
? We estimate that net hard currency earnings from
beef exports fell some $5 million in 1985 and $9
million more in 1986 because of the embargo.
Efforts to find alternate markets in Canada and
elsewhere have been mostly unsuccessful, according
to Embassy
Sanctions Background
The United States announced limited economic sanc-
tions against Nicaragua on 1 May 1985. Included in
the sanctions were the embargo of most direct trade
relations and the termination of Nicaraguan air and
maritime service to the United States. Unlike previ-
ous US sanctions against China, North Korea, Cuba,
Vietnam, and Cambodia, the sanctions did not call
for an asset freeze, travel limitations, or prohibitions
against doing business with Nicaragua either on a
personal contract basis or through third-country sub-
sidiaries. The sanctions became effective on 7 May
1985 and, to avoid disruptions in contracted produc-
tion and shipping schedules, allowed an extended
phase-in period that permitted some bilateral trade
during the rest of 1985
Current sanctions do not restrict imports or exports
of publications and gifts to or from Nicaragua, nor do
they limit the commercial export of medicines or
supplies intended strictly for medical purposes.
Moreover, the export to Nicaragua of nondonated
goods for humanitarian, educational, or religious
purposes can be authorized on a case-by-case basis.
Using these exceptions, Nicaragua legally and direct-
ly obtained $3 million worth of US products during
1986, according to official US trade data. Of this,
approximately half were in the form of charitable and
relief donations; one-fourth were medical supplies;
and most of the balance were news publications or
education-related items. US trade data show that
Nicaraguans shipped $900,000 worth of publications
and gifts to the United States in 1986.
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? We estimate that loss of the US sugar market cost
Managua about $7 million in 1985 and another $4
million in 1986. Since the Sandinistas lost the US
sugar quota, they have had to sell largely on the
glutted world market at less than one-third the
subsidized US price.
? We estimate that net foreign exchange earnings
from banana exports fell by some $3 million in 1985
and $8 million in 1986. While new sales to West
European customers took up some of the slack,
higher trans-
portation costs and product a eriora ion during the
longer shipping time have sharply cut profit
margins.
? Net foreign exchange losses from lower passenger
and cargo revenue and higher prices for mainte-
nance and spare parts cost Aeronica-the state
airline-about $2 million in 1985 and another $3
million in 1986, according to official Nicaraguan
estimates The
Sandinistas have been able to limit Aeronica losses
somewhat by selling Nicaraguan tours out of US
travel agencies and rescheduling some flights
through Mexico, Honduras, and Costa Rica.
? Despite some success in redirecting seafood and
tobacco exports, we estimate that sanctions cut their
net foreign exchange earning by $3 million in 1985
and $4 million in 1986.
On the import side, we estimate direct foreign ex-
change expenses from higher prices and new middle-
men fees to regain access to priority US-sanctioned
goods have cost the Sandinistas about $33 million,
including $14 million in 1985, $16 million in 1986,
and $3 million during the first two months of this
year. the Sandi-
nistas are only radua re --du-c-
on US goods.
while the Sandinistas have
tioned goods varies considerably,
While costs of regaining access to priority US-sanc-
found some new suppliers for much of the foodstuffs
and raw materials formerly provided by US sources,
they have not done nearly as well replacing imports of
US-built machinery, agrochemicals, and spare parts.
an average additional 25-percent
Table 1
Nicaragua: Direct Costs of Sanctions
Total export and import losses
34
44
7
Export losses
20
28
4
Beef
5
9
NA
Aeronica
2
3
NA
Tobacco
I
I
NA
Import losses
14
16
3
Machinery and chemicals
10
12
NA
Other
4
4
NA
a Embargo phased in beginning 7 May 1985; costs are estimated net
foreign exchange losses.
b Through February 1987.
markup to obtain these goods through third-country
US subsidiaries or by using front companies to pro-
cure the items in the United States. As a result:
? We estimate that because of embargo-circumven-
tion surcharges the Sandinistas paid an extra $10
million during the second half of 1985 to buy
priority US-manufactured spare parts, machinery,
and chemicals.
the Sandinistas were able to reduce their dependen-
cy on US goods somewhat in 1986, we estimate that
Managua still paid an extra $12 million to procure
those critical supplies.
? We estimate that Managua paid an extra $4 million
in both 1985 and 1986 to retain access to raw
materials and semifinished and consumer goods.
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ments were expected anytime soon.
While the Sandinistas have made some progress in
reducing their reliance on imported US goods and
services, we estimate that it will be years before they
can work their way completely free of dependency on
US supplies. at
least half of Nicaragua's existing capital stock (plants,
factories, machinery, and equipment) is still depen-
dent on US spare parts and equipment despite the
longstanding Sandinista policy of cutting economic
ties to the United States. By early 1985, six years into
the revolution, new suppliers in the Soviet Bloc, Spain,
and Italy had just begun to provide agricultural
machinery to the Sandinistas. Even so, just after the
embargo was announced, Sandinista planning officials
publicly reported that US companies were providing
46 percent of all tractors; 90 percent of their seeds;
the majority of the machinery used in milking plants,
slaughterhouses, and chemical production plants; and
all of their poultry incubation equipment, cotton
harvesters, and light fumigation aircraft. By late
February 1987, Ministry of Agriculture officials an-
nounced that, despite imports of Polish aircraft for
crop dusting, its fleet of fumigation airplanes was still
77 percent US-made, and that no further replace-
avoid the circumvention surcharge,
goods in either the West or the Soviet Bloc and thus
the embargo has required substantial bureaucratic
attention, which has further strained Managua's abili-
ty to address critical domestic economic issues and
development projects. Moreover, where the Sandinis-
tas have been able to find replacement imports for US
difficult to quantify.
We believe the economic impact of US sanctions goes
far beyond the direct costs of hard currency losses,
but the indirect costs to the economy are much more
the shortage of adequate replace-
ment parts for US-made plants and machinery contin-
ues to stunt production in a wide range of activities.
For example, the domestic commercial fishing fleet
has been virtually disabled, although Managua has
limited foreign exchange losses by leasing some of its
fishing grounds to Cuba and to private fishermen in
Costa Rica and Honduras. The Sandinistas have also
Even before the sanctions were announced, Nicara-
gua's economy was in a tailspin because of the
Sandinistas' economic and-financial mismanagement,
their hostility to the private sector, and dislocations
caused by the growing civil war.a Trade problems
resulting from the US economic sanctions have com-
pounded the decline. We estimate that real GDP fell
by 5 percent per year in 1985 and 1986, and that
overall economic activity is now one-third below
prerevolution levels. Export losses caused by inappro-
priate economic policies and exacerbated by the trade
embargo have driven Nicaragua's hard currency ex-
port earnings to less than half of 1984 levels and to
just a fraction of the prerevolution amount. Mean-
while, inflation is soaring, having jumped from 50
percent in 1984 to 330 percent in 1985 and 660
percent in 1986, according to official Nicaraguan
estimates.
The effect of the economic slide on the population is
increasingly severe. Real wages and personal income
are about one-half pre-1979 levels, according to IMF
and official Nicaraguan figures, and recent food
shortages are more serious than at any time since the
revolution, according to government spokesmen. In
these circumstances, a number of foreign correspon-
dents report that many Nicaraguans have cut their
diets to subsistence levels and that some are going
hungry. In February, Managua announced that ra-
tions of rice and cooking oil would be cut in half for
at least the next two months.
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had to eliminate jobs in banana field operations and in 25X1
government-owned meat-packing plants because of
lower foreign trade demand, according to Embassy
reporting. In the aggregate, we believe 25X1
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these factors have played a substantial role in damp-
ening economic activity, increasing consumer and
producer shortages, and accelerating triple-digit infla-
tion rates
While the embargo has hurt the Sandinistas, Nicara-
guan private-sector spokesmen report that the added
impact of sanctions has been relatively small on their
already restricted operations. According to US Em-
bassy reporting, most businessmen agree with a 1985
La Prensa article that stated that the private sector
had already been "embargoed for the past five years
by the Sandinistas" because the Sandinistas were
monopolizing foreign trade and tightly controlling all
domestic credit and foreign exchange allocations.
Before the embargo, private-sector leaders said that
they had access to US goods only through black-
market activities, usually involving direct contacts
with friends and relatives in the United States or
neighboring countries. Since the embargo, some busi-
nessmen report that improvements in the black mar-
ket have increased their access to US goods purchased
through third countries
Managua has publicly announced a two-phased coun-
terembargo strategy. In the short term the Sandinis-
tas call for trade diversification to replace lost US
markets. Over the longer haul the regime plans to
break remaining US economic linkages by streamlin-
ing industry and agriculture and accelerating the
replacement of all US-origin plants, factories, and
technologies. To date, in part because of the chaotic
economic situation, virtually all of the emphasis has
been placed on finding immediate trade solutions.
publicly Managua emphasizes legal efforts to
develop new international trade partners, including
US subsidiaries located in third countries,
Search for New Trade Partners
Managua's search for new Western outlets to replace
former US customers has been largely unsuccessful.
Since the embargo, total exports to Western nations
other than the United States have fallen one-fifth,
according to international trade statistics. After near-
ly two years, the regime has not been able to find
stable new markets for its beef, seafood, and tobacco.
For example, Canadians have been reluctant to ex-
pand purchases of beef because of poor quality,
according to Embassy reporting. Efforts to find new
markets for seafood have suffered because of virtually
prohibitive transportation costs,
Although Nicaragua has sold more
bananas to Western Europe, the volume of total
banana exports remains substantially depressed from
presanctions levels, according to Nicaraguan trade
statistics. Since the embargo, international trade sta-
tistics show that among non-Soviet or non-East Euro-
pean countries only Belgium, Switzerland, and the
Netherlands have increased their purchases from
Nicaragua by significant amounts. Even so, higher
Swiss and Dutch imports resulted from increased
coffee purchases, and thus had little effect on the
impact of the embargo because Managua had sold
only small amounts of coffee to the United States in
the period before the embargo. Of all Western mar-
kets, only increased banana sales to the Belgians
appear to have given the Sandinistas much relief from
the effects of the sanctions
land, Belgium, France, and the Netherlands.
While international trade statistics show that Nicara-
guan imports from the West have also fallen substan-
tially since the embargo was announced, Nicaraguan
purchases from some non-US Western suppliers have
helped ease the void caused by the embar o. Accord-
ing to the US Embassy, nd trade
statistics, the Sandinistas have been able to obtain a
small amount of spare parts for US vehicles and
equipment from suppliers in Spain and the United
Kingdom. Managua has also purchased some replace-
ment chemicals and consumer goods from Switzer-
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Table 2
Nicaragua: Destination of Exports
a Estimates based on IMF and UN trade tapes and Embassy
reporting.
Growing trade relations with the Soviet Bloc have
helped ease the impact of the embargo, but poor
quality also has limited Managua's exports to the
Bloc. Moreover, Communist suppliers manufacture
only a small fraction of sanctioned US products.
Nicaraguan exports to the Soviet Bloc actually fell
after the embargo was announced because Bloc coun-
tries did not follow up initial 1984 sample commodity
purchases with new orders. During the past year
Managua has worked hard to reverse this, and new
commodity sales to East Germany and the Soviet
Union have allowed Nicaraguan exports to the Bloc to
t e Soviet Bloc countries have shown
little immediate interest in expanding purchases of the
Nicaraguan beef, bananas, and seafood that have
been most affected by the embargo. On the import
side, the increase in Soviet Bloc shipments to Nicara-
gua has been mostly in the form of fuels, foods, and
raw materials, little of which has directly replaced
sanctioned US goods. Moreover, press
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sources indicate that Bloc suppliers are not able to
directly replace most sanctioned US machinery, agro-
chemicals, spare parts, and luxury consumer goods. 25X1
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Top Secret
Table 3
Nicaragua: Sources of Imports
Non-CEMA
552
472
385
United States
112
42
3
Mexico
69
30
10
Argentina
21
26
19
West Germany
18
16
20
Canada
18
14
19
United Kingdom
6
8
9
El Salvador
5
5
5
Belgium
3
1
7
CEMA
248
370
545
USSR
170
242
430
Cuba
34
44
30
extent, coffee markets
regain some access to US seafood and, to a lesser
In addition to direct search for new trade partners,
Managua has used third countries as platforms to
the Sandinistas have used third coun-
tries to clean, bag, and ship shrimp and lobster caught
in Nicaraguan waters to the United States. Others in
the Caribbean and Europe have repackaged Nicara-
guan coffee for resale at high prices in US specialty
shops. a portion of the
profits from such activities go back to the Sandinistas.
Dealing With US Subsidiaries and Consultants
The Sandinistas have regained access to a substantial
portion of sanctioned goods and services by buying
them from US subsidiaries in third countries and
from US foreign trade brokers and consultants, as
permitted by the 1985 sanctions.
the Sandinistas have been able to
meet much of their priority agrochemical needs by
using commercial trade credits or commodity swaps
from subsidiaries of US companies in Europe, Latin
America, and Japan.
In addition to the goods provided by US subsidiaries,
scores of US persons regularly provide a wide variety
of services to the Sandinistas. According to recent
press reporting, as many as 100 US citizens currently
work full-time in Nicaragua for the Sandinistas while
perhaps another 2,000 to 3,000 work part-time or as
volunteers on government projects. According to San-
dinista press and US Embassy reporting, US citizens
regularly travel to Nicaragua to provide consultations
on computer software and hardware systems and
technical support for agriculture and industry=
US firms frequently
provide financial, insurance, and shipping services for
the Sandinistas. Specifically, industry sources have
told the US Embassy that US ships have handled the
bulk of Nicaraguan banana exports to Europe.
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bass;y reports indicate that there has been no US
direct private investment since the Sandinistas took
power, and all but a few of the remaining US-owned
businesses are fully staffed b Nicara uan citizens.
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private sources for additional hard currency funding.
Increased Reliance on Foreign Financial Support
Managua is relying on increased foreign support to
finance purchases from new Western suppliers, US
subsidiaries in third countries, and front companies.
Immediately after the sanctions were announced,
teams of Sandinistas, including delegations headed by
President Daniel Ortega, and other top policymakers
traveled through the Soviet Bloc, Canada, Western
Europe, Latin America, and the radical Arab states
asking for financial support to offset the embargo.
The Sandinistas have also increasingly turned to
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The Soviet Bloc has been most reponsive. Within
weeks of the announcement of the May 1985 sanc-
tions, President Daniel Ortega had received a $100
million supplemental boost of financial support from
the Soviet Bloc.
Managua's approaches to potential Western donors
have not been as successful. During 1985 and 1986,
while total financial support from the Bloc was in-
creasing by more than $100 million each year, official
financial support from the West fell by an average
$70 million per year. Only Sweden and Norway have
raised their contributions, with increases totaling
about $5 million in 1985-86.
As official financial support from the West has
declined, the Sandinistas are making a determined
effort to attract more financial support from private,
including US, sources. During the past two years we
believe private donations from US citizens to Sandi-
nista organizations has reached at least $5 million
each year, according to our analysis of Sandinista
press reports and statements from spokesmen of US-
based Sandinista support groups. To encourage larger
private donations to the government, the Ministry of
Foreign Cooperation, at the urging of private donors,
has recently set up an office in Managua devoted
solely to cutting redtape and developing relations with
private donors.
The Sandinistas benefit from private remittances
through their control over foreign exchange. Within
weeks of the embargo Managua set up the govern-
ment-controlled Money Changing House in Managua
as the sole legal channel for persons outside the
country to remit cash to families and friends inside
Nicaragua. Since the Money Changing House was
Table 6
Nicaragua: Sources of Financial
Support
323
449
582
140
235
325
East Germany
73
108
149
Cuba
65
55
45
Bulgaria
23
32
21
Czechoslovakia
20
8
26
Other
2
lI
16
90
86
77
21
16
15
15
12
10
17
18
18
Latin America
120
80
40
Mexico
80
36
8
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opened in May 1985, Embassy reports indicate that it
has handled up to $1 million per month in remit- 25X1
tances. To encourage dollar remittances, Managua
authorized a number of agents in New York, New
Orleans, Houston, Chicago, and Los Angeles to facili-
tate the transactions according to press and Embassy
reporting. 25X1
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Implications for Sandinista Vulnerabilities
We believe that the current sanctions have hurt the
Sandinista economy, and probably increased Mana-
gua's vulnerability to internal dissent and armed
insurrection. From Managua's standpoint remaining
vulnerabilities exist. Given Sandinista efforts to find
loopholes and gaps in US sanctions, tighter US
economic sanctions would certainly restrict remaining
Sandinista access to US goods, technology, and fi-
nancing. Even if sanctions were tightened, Managua
would be likely to try to keep some limited access to
US products and expertise, not only by relying more
on front companies, but also by focusing efforts on
areas where US policy actions would in principle
result in increased financial costs to US citizens and
possibly some international legal challenges
We calculate that restricting economic aid or finan-
cial remittances from US persons to official and
private Nicaraguan recipients could cut Managua's
foreign exchange receipts by as much as $20 million
per year. Sandinista support groups in the United
States have publicly announced that they are stepping
up efforts to boost their funding of regime programs
to as much as $10 million this year. Managua's
control of financial remittances to family members
still living in Nicaragua is likely to provide the
Sandinistas at least another $10 million during 1987.
Focusing on another Sandinista vulnerability, the
restriction of US persons from doing business in
Nicaragua either by providing direct investments or
technical, financial, or related services could also hurt
Managua's efforts to minimize the impact of existing
sanctions. While the exact dollar value of such activi-
ties is difficult to calculate, it would affect areas
ranging from access to computer software to refining
of oil products. From the standpoint of in-country
operations, only a few of the 30 or so US businesses
remaining in Nicaragua employ US citizens. Accord-
ing to US business press, most of these companies
have not been able to remit more than token earnings
to owners and, in many cases, are staying in country
only to protect investments.
Sandinista hard currency earnings could be further
cut by restricting their access to third-country US
subsidiaries or tightening regulations on the import of
Nicaraguan products currently allowed to enter the
United States following minimal processing in third
countries. While either of these steps could result in
legal challenges, neither would result in substantial
financial costs to third countries, and both would hurt
Managua substantially more. Even so, some third
countries would be likely to fight the steps for political
reasons in support of Nicaraguan extraterritoriality
claims.
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Appendix A
Methodological Notes on the
Costs of US Sanctions
We estimated the direct costs of US sanctions by
comparing Nicaraguan export earnings and import
expenditures since the embargo with what we believe
they would have been in the absence of any sanctions.
In making our estimates, we assume that both exports
and imports would have fallen somewhat even without
the sanctions because of the Sandinistas' other eco-
nomic problems. On the earnings side we concentrat-
ed on the net foreign exchange impact of reduced
beef, sugar, banana, seafood, and tobacco sales and on
lower air passenger and cargo receipts-those areas
that accounted for the overwhelming share of Nicara-
guan earnings from economic relations with the Unit-
ed States before sanctions were announced. On the
import side, we analyzed the Sandinistas' direct costs
of finding alternative access to priority purchases of
US machinery, spare parts, agrochemicals, luxury
consumer goods, and other US supplies.
In our calculations, we used official US trade data for
US-Nicaraguan exchange through 1986. To analyze
Nicaraguan trade with the rest of the world, we used
United Nations Bilateral Trade tapes and IMF Direc-
tion of Trade tapes. To estimate the Sandinistas'
aggregate commodity exports during 1986, we relied
on official Nicaraguan trade data as reported by the
Ministry of Foreign Trade.
Calculating Export Losses
Our estimates indicate that, in aggregate, sanction-
related export losses have cost the Sandinistas $52
million, including $20 million during the last seven
months of 1985, $28 million in 1986, and another $4
million during the first two months of 1987. Losses
from lower beef, sugar, and banana sales caused the
bulk of the decline. In estimating the foreign ex-
change impact of the sanctions on export earnings, we
calculated the difference between what we believe net
earnings would have been under free trade and what
our analysis of international trade shows net foreign
exchange earnings actually were. In calculating po-
tential trade, we compared observed exports with
what could have been under preembargo export vol-
umes, unless we knew that export levels would have
fallen because of deteriorating output, such as was the
case for beef and sugar production. We estimated net
foreign exchange earnings by subtracting the Sandin-
istas' hard currency costs of producing and delivering
the export from the final sales price. While actual
hard currency costs vary substantially for each differ-
ent commodity export, each included transportation
and insurance fees and most also involve hard curren-
cy costs for agrochemicals (including pesticides, herbi-
cides, fertilizers, and chemicals needed in processing),
equipment and spare parts for maintenance, materials
for packaging and shipping, and brokering fees.
Efforts to find alternative markets for beef have been
largely unsuccessful, and we estimate that net foreign
exchange earnings fell by $5 million in 1985 and
another $9 million last year. While Nicaragua has
been able to maintain earlier beef sales to Canada, 25X1
other potential customers in Europe and the radical
Arab states have not followed up test shipments of
beef with major purchases, in part because those
countries lack the demand for frozen "hamburger"
beef that was sold in US markets. The decline of beef
sales has been particularly costly because the foreign-
exchange input into production and shipping costs are
relatively low, while hard-currency profit margins for
beef exports are high. While a small decline in world 25X1
beef prices would have reduced the export value of
constant beef sales somewhat in any case, we estimate
that, without the embargo, Nicaragua would have
provided enough incentives to the private sector to
limit the decline in beef sales to the United States to
about $22 million in both 1985 and 1986, with net
foreign exchange earnings equal to a little more than
half that amount. Instead, after the embargo, beef
sales plummeted. US and Nicaraguan trade statistics
show that Managua exported only $13 million worth
of beef in 1985 and $5 million in 1986, at the same
time, profit margins 25X1
fell somewhat because of higher transportation costs.
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Table A-1 Million US $ Table A-2
Nicaragua: Exports to the United States Nicaragua: Commodity Exports
1976-78 1982-83 1984 1985 1986
Average Average
Coffee
28
3
6
2
0
Cotton
0
0
0
0
0
Other
28
5
NEGL
1
1
Meat products were banned for much of 1984 because of sanitary
conditions.
b Sugar quota revoked in 1983.
Source: Figures from official US trade data.
As a result, we calculate that foreign exchange earn-
ings from beef fell from a potential $12 million in
both 1985 and 1986 to an actual $7 million during
1985 and just $3 million during 1986.
While the Sandinistas' have been slightly more suc-
cessful in finding new sugar customers, the loss of the
US sugar quota, in most cases so far, has meant that
the Sandinistas have had to sell on the world market
at less than the subsidized US price. We calculate
that net foreign exchange losses from lower sugar
earning were $7 million in 1985 and another $4
million during 1986. On the basis of Nicaraguan
production figures, we believe that in the absence of
sanctions Managua could have exported $18 million
worth of sugar in 1985 and $22 million in 1986, which
would have yielded them approximately $11 million in
1985 and $13 million last year in net foreign exchange
profits. During 1985, Managua actually sold $7 mil-
lion worth of sugar to Algeria, India, and Sri Lanka,
Last year, with new sales at more favorable
prices to Cuba and the Soviet Union, Nicaragua
1976-78
Average
1984
1985
1986
Seafood
30
12
12
10
Tobacco
7
5
4
3
Cotton
141
134
91
41
increased exports to $18 million and net foreign
Since the embargo, the Sandinistas have had only
partial success in finding new customers for banana
exports, and we estimate that net foreign exchange
earning from bananas fell by $3 million in 1985 and
$8 million in 1986. Progress has been slow in part
because most European countries continue to pur-
chase the majority of their bananas in the Eastern
Caribbean under concessions of the Lome Conven-
tion. Nicaragua has been able to sell a portion of its
bananas in Libya and Western Europe. Efforts to
place bananas in Soviet Bloc countries continue, but
have thus far been unsuccessful. Given steady world
prices and only a small reduction in Nicaraguan
banana production, we estimate that Managua could
have held banana sales to the United States at about
the 1984 level of $33 million in the absence of the
sanctions. the
net foreign exchange earnings would have been about
$11 million per year. As it was, Nicaragua came close
to its potential by selling $25 million in bananas to the
United States during 1985 because it was permitted
to sell bananas through October under long-term
225X1
25X1
25X1
25X1
25X1
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Table A-3
Nicaragua: Imports From the United States
1976-78
Average
1982-83
Average
1984 1
985
1986
Manufactures
158
95
89 29
1
Chemicals
42
33
34 8
NEGL
Foodstuffs
21
23
15
5
1
Other
6
2
4 4
1
a Figures from official US trade data.
$8 million during 1985,
contract commitments. As a result, we estimate that
net 'banana foreign exchange earning stayed high, at
Nicaragua, of course, was not able to sell bananas to
25X1 the United States, and exports to Libya and Western
Europe reached only $13 million.
costs and product deterioration during the longer
shipping time cut profit margins, and we estimate that
higher transportation
net foreign exchange earnings from banana exports
fell to about $3 million last year.
ed to the US Embassy
According to our analysis of official estimates provid-
US sanctions cost Aeronica-the state air-
During 1986,
immediate-
ly following the implementation of sanctions Aeronica
lost $500,000 per month in lower revenue from pas-
senger and cargo services. At the same time airline
officials told press sources in late 1985 that spare
25X1 parts and maintenance needed to keep operating even
with a reduced number of flights was costin an
additional $50,000 per month.
Aeronica's hard cur-
rency costs before the sanctions were equal to about
one-third of revenue generated, we estimate that net
foreign exchange losses from lost flights to the United
States cost Nicaragua about $380,000 a month in 25X1
lower flight profits and higher costs during the rest of 25X1
1985. Within one year of the embargo, the Sandinis-
tas had been able to cut Aeronica revenue losses in
half by selling Nicaraguan tours out of US travel
agencies and rescheduling some flights through Mexi-
co, Costa Rica, and Honduras, according to Embassy
sources, and we estimate that sanctions
cost Aeronica about $215.000 a month during 1986.
25X1
25X1
Nicaraguan figures show that seafood exports have
fallen only moderately since the embargo, but still 25X1
enough to cost the Sandinistas $2 million in 1985 and 25X1
another $3 million in 1986, according to our esti-
mates. Sanction value-added rules have allowed the
Nicaraguan to reestablish partial access to US mar-
kets by first delivering the seafood to partners in
Costa Rica and Honduras, who then wash, package,
and resell it in the more profitable US market,
In addition, Nicaragua has leased fishing
rights to Cuban trawlers. Managua's success in open-
ing new markets in Europe and the Soviet Bloc,
25X1
25X1
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Top Secret
Table A-4
Nicaragua: Calculating Export Losses
Probable export sales
without sanctions
Beef Sugar Bananas Aeronica Seafood Tobacco
1985 1986 1985 1986 1985 1986 1985 1986 1985 1986 1985 1986
22 22 18 22 33 33 6 6 13 13 4 4
Probable net foreign exchange 12 12
earnings without sanctions
Estimated net foreign exchange 7 3
earnings after sanctions
Net foreign exchange losses 5 9
because of sanctions
however, have been severely limited by transportation
costs and the difficulty of breaking into new markets
that in many cases are protected for national fishing
fleets. On balance we estimate that direct and indirect
fish exports to the United States totaled about $9
million in 1985 and $6 million in 1986, down from an
average $13 million during 1982-84. Nicaraguan
export statistics indicate fish sales to other countries
reached $3 million in 1985 and $4 million in 1986.
trade statistics indicate that lower tobacco sales to the
United States cost Nicaragua about $1 million per
year in 1985 and 1986. Tobacco sales to the United
States fell from an average $4 million a year during
1982-84 to $2 million during 1985 and to nothing last
year. At the same time, Nicaraguan statistics indicate
that overall tobacco sales have fallen from $5 million
in 1984 to $4 million in 1985 and to only about $3
million last year. Some of the slack may have been
taken up by increased purchases from the Bulgarians,
who are involved in efforts to revitalize the Nicara-
guan cigar industry, according to press reports.=
Import Costs
On the import side, we estimate that higher prices and
new middlemen fees to regain access to priority US-
sanctioned goods have cost Managua about $33 mil-
lion since the embargo was announced, including $14
million in 1985, $16 million in 1986, and another $3
million so far this year. In calculating these costs we
first estimated the volume of US goods that we 25X1
were announced. Finally we multiplied that amount
believe the Sandinistas were able to obtain through
US subsidiaries or front companies after the sanctions
by 25 percent, the average premium
the Sandinistas pay to obtain
such priority US goods. To determine the volume of
25X1
25X1
US goods, Managua bought, we considered the San- 25X1
dinistas' import plans for 1985 and 1986, how much
they were able to buy in 1985 before the embargo,
and what access we believe they actually had to US
goods after the embargo. Because the Sandinistas'
economic plans indicate that they hoped to reduce
domestic shortages during 1985 and 1986 by increas-
ing imports of spare parts, machinery, and chemicals
that could be purchased only in the United States, we
believe that Managua gave priority to obtaining these
goods. As a working estimate, we assumed that the
Sandinistas were able to purchase only 80 percent of
these priority imports during the last part of 1985 and
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Tablle A-5
Nicaragua: Import Costs
hat during 1986 they were able to
buy some $50 million worth of those goods at a cost of
Priority spares, machinery, 74 74
agrochemicals
Priority spares, machinery, 25 0
agrochemicals
Priority spares, machinery, 39 49
agrochemicals
Other US goods 15 16
Premium caused by sanctions
Priority spares, machinery, 10 12
agrochemicals
only two-thirds of planned priority imports during
1986. For nonpriority imports, we assume that Mana-
gua regained access to one-half of them during the
second half of 1985, and to just one-third of them
during 1987.
Using this methodology, we estimate Managua paid
an additional $10 million in 1985 and $12 million in
1986 to regain access to priority purchases of spare
parts, machinery, and agrochemicals. During 1982-84
purchase of these goods from suppliers in the United
States cost Managua an average $73 million each
year. Before the embargo was implemented in 1985,
the Sandinistas had already been able to procure $25
million worth of these goods accordin to US trade
figures.
we believe that, during the rest of 1985, the
Sandinistas were able to buy spare parts, machinery,
and agrochemicals worth about $40 million through
US subsidiaries and front companies for about $50
million. We believe, on the basis of our analysis of the
Sandinistas' economic plan for 1986
We estimate the Sandinistas paid another $3 million
each year to regain access to other US goods, includ-
ing luxury consumer goods, specialty fuels, and some
semifinished products. During 1982-84 Nicaragua
bought about $50 million per year in these goods.
Before the embargo was implemented in 1985, Mana-
gua had been able to procure $17 million worth of
these goods, according to US trade statistics. We
believe that, during the rest of 1985, Nicaragua
bought about $15 million more, for which they paid a
25-percent premium. We believe that during 1986,
consistent with economic planning, the Sandinistas
were able to restrict purchase of these goods to just
one-third of preembargo levels, paying about $20
million for $16 million worth of these oods.
25X1
25X1
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Appendix B
The Growing Covert
Merchant Fleet
The Sandinistas are relying on a growing fleet of Nicaragua's Official Merchant Fleet
covertly owned or indirectly controlled merchant ships The official maritime line, Naviera Nicaraguense
to help them circumvent trade sanctions,) (Nanica), operates five ships, but its freight hauling
While Managua continues to operate a small
official merchant steamship company under its own
flag, we have increasing evidence of a larger fleet
controlled by the Sandinistas through front companies
using mostly Panamanian registry.
Table B-1
The Sandinista Merchant Fleet
capacity has been sharply reduced in recent years.
One of Nanica's two oceangoing vessels, the Mon-
imbo, was wrecked in a storm last fall. The other, the
Carlos Fonseca Amador, reportedly is beyond repair
and for sale for scrap. The rest of the fleet consists of
25X1
25X1
25X1
small, old, coastal freighters, Ro/Ro's, or tankers that 25X1
Type
Flag
Capacity (DW7)e
Year Built
Crew/Nic
Aracely
Ro/Ro
NU
3,775
1965
11/11
Atlantic Freeze
Cargo
NU
1,215
1958
15/15
Carlos Fonseca Amador
Cargo
NU
10,526
1963
41/41
Nicarao
Ro/Ro
NU
1,175
1968
NA
Rama
Tanker
NU
1,612
NA
NA
Directly controlled merchant ships
Anita
Cargo
NA
NA
NA
NA
Installer II
Ro/Ro
PA
1,144
1970
11/11
Lowi
Cargo
PA
615
1966
NA
Services Tanker b
Tanker
PA
1,564
1975
10/10
Regina Valeria
Cargo
PA
1,415
1953
13/13
Western Navigator
Tanker
CY
NA
NA
14/ 12
The indirectly controlled merchant fleet
Agia Markella
Cargo
PA
17,337
1968
19/7
Caribbean Tanker
Tanker
PA
1,329
NA
9/9
Cargo
BF
5,363
1977
21/5
Cargo
PA
5,000
1985
15/8
Cargo
PA
4,842
1967
26/7
Ref cargo
PA
2,284
1965
18/12
Tanker
PA
697
1961
13/13
DWT = deadweight tons.
b Between 1983 and 1986, the Services Tanker was owned and
operated by Nanica as the Laureano Mairena under the Panamani-
an flag.
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steam mostly between Nicaraguan ports. Of these ? Financial credits and insurance are more readily
ships only the Aracely operates off Nicaraguan shores accessible to third-country ship operators than to
on regular trips to Cuba for military resupply. In lower rated Nicaraguan companies. Managua has
recent years Nanica ships have all been inserviceable had difficulty maintaining its ships to required
much of the time, and the Aracely is reportedly in marine standards.
particularly poor condition.
the Sandinistas are trying to acquire two new
Spanish-built ships, but we do not know if they plan to
register them with Nanica or with a front.
The Sandinistas' Covert Merchant Fleet
Managua directly controls at least six other small
merchant cargo ships through Panamanian compa-
25X1
25X1
25X1
25X1
25X1
nista cargo in the Caribbean. One operates solely
between Nicaragua east coast ports, and another has
been in a Colombian shipyard for repairs for over a
year.
We have identified at least seven other merchant
ships that are probably indirectly controlled by the
Sandinistas. Panama Canal ship transit records over
the last six months show that each has a full or partial
Nicaraguan crew. All of these vessels have called at
Nicaragua's major west coast port of Corinto. All
have undergone name changes within the last three
years
Benefits From Flying a Foreign Flag
We believe that the Sandinistas are shifting much of
their shipping to a covert fleet for a variety of reasons:
? In time of war or a US blockade, international
maritime law would protect ships registered with
nonbelligerent nations from interdiction or seizure,
allowing the Sandinistas' foreign-flagged ships con-
tinued access to international markets.
? While the May 1985 sanctions prohibit Nicaraguan
ships from entering US ports, Sandinista ships using
fronts and registered with nonembargoed nations
are given free access to US ports. This increases
their ability to bid for cross trade cargoes, which
earn the Sandinistas much-needed hard currency.
Top Secret 20
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Top Secret
Top Secret
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