GlobAl edition •

Global Marketing eiGhth edition of students outside the United States and Canada. If you purchased this book within the United States or Canada Warren J. Keegan • Mark C. Green •

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• ChaPter 5 • the POLitiCaL, LegaL, and reguLatOry envirOnMentS 181

CASE 5-1 CONTINUED (REFER TO PAGE 152) Mr. President—Free Riot!

lthough Pussy Riot is generally associated with the opposition are other problems as well. ’s entrenched bureaucracy is a amovement in Russia, the band members are quick to point out barrier to increased economic freedom. Further, the banking system that they view themselves as artists rather than political activists. Not remains fragile and is in need of reform. Yevgeny Yasin, a former surprisingly, their cause has attracted considerable attention. At a con- economy minister and an advocate of liberal reforms, noted recently, cert in , pop star appeared with the words “Pussy “The Russian economy is constrained by bureaucratic shackles. If the Riot” on her back. A documentary film about the trial, Pussy Riot: economy is to grow, these chains must be dropped. If we can over- A Punk Prayer, was screened at the 2013 South by Southwest Film, come this feudal system of using power, we will create a stimulus for Interactive, and Music Festival in Austin, Texas. strong and sustainable economic growth and improve the standards There is other evidence that the political environment in Russia is of living.” precarious. Anna Politkovskaya, a reporter for Russia’s Despite the political risk, a number of global companies are (“New Paper”), often filed stories critical of President . rolling the dice in an effort to capitalize on Russia’s improved eco- On October 7, 2006, Politkovskaya was gunned down by assailants nomic climate. For example, IKEA, the global furniture retailer, has as she returned from a shopping trip. Since 2000, more than a dozen opened dozens of new stores across Russia. However, after Russian journalists have been murdered in Russia. Observers note that Russia’s bureaucrats allegedly sought bribes, the company had to lease die- independent press suffered as the Kremlin tightened control in antici- sel generators to ensure a stable supply of electricity. In 2010 IKEA pation of the 2008 presidential election. announced that it was halting construction of a $1 billion mall and Revenues from the fuel and energy sectors translate into would focus on existing stores. France’s Auchan and German retail government spending that comprises a whopping 40 percent of gross chains Rewe and Metro are targeting the grocery market. By contrast, domestic product (GDP). A related problem is the fact that Russia’s Carrefour and UK-based Tesco do not yet have a market presence due energy industry is dominated by a handful of huge conglomerates. to the perceived risks. Walmart recently closed its Moscow office. The men who run these companies are known as oligarchs; at one As the global economic downturn deepened and lending stan- time, Yukos Oil’s , Sibneft’s Roman Abramovich, dards tightened around the globe, credit lines from Russia’s banks and their peers were among Russia’s ultra-rich elite. However, there dried up. Now, Russia’s dependence on a single commodity for the was widespread resentment among the Russian citizenry about the bulk of its export earnings has turned out to be a liability. Despite talk manner in which the oligarchs had gained control of their respec- of creating a Silicon Valley–type development in suburban Moscow, tive companies. In 2003, the Putin government sent a message to some observers have begun asking whether it is time to take the the oligarchs by arresting Khodorkovsky and several other oligarchs. “R” out of “BRICS.” Which emerging market should take its place? In 2010, after having spent 7 years in prison, Khodorkovsky was Indonesia is the top choice. The new acronym could be BIIC; an alter- sentenced to another 13.5 years of incarceration after a Moscow native would be BICI. As Richard Shaw, an investment advisor, notes, court found him guilty of money laundering and embezzlement. BICIS (“BEE-chees”) “is catchy—kind of like an Italian purse.” Many observers viewed the verdict as evidence of the Russian Meanwhile, Washington’s relationship with Moscow has been government’s desire to maintain an iron grip on the economy. There growing more strained. In December 2012, President

Exhibit 5-13 In 2012, Vladimir Putin was elected to a third term as president of Russia. Kremlin observers are concerned that liberal reforms begun under former president Dmitri Medvedev will be sidetracked as Putin consolidates his power and clamps down on protesters. 182 Part 2 • the gLObaL MarKeting envirOnMent signed the Russia and Moldova Jackson-Vanik Repeal and Sergei Discussion Questions Magnitsky Rule of Law Accountability Act. The first part of the law 5-8. Discuss why the Putin government decided to pursue legal normalizes trade relations with Russia and Moldova by repealing action against the members of Pussy Riot. Jackson-Vanik, a law dating to the mid-1970s. At that time, the Soviet 5-9. What impact will the Magnitsky law have on the political and Union was a non-market economy and restricted the right of its citi- legal environment in Russia? zens to emigrate abroad; Jackson-Vanik denied most-favored-nation 5-10. As the chief marketing officer of a global company, would trading status to any country that blocked emigration rights. However, you recommend establishing operations in Russia? the broke apart in 1991, Russia has transitioned to a 5-11. What response do you think the Russian government will market economy, and today its citizens are free to travel abroad and make to passage of the Magnitsky law? emigrate. Moreover, Russia joined the WTO in 2012. For these rea- sons, Jackson-Vanik is no longer relevant. Sources: Courtney Weaver, “Freedom Fighter,” Life & Arts (December The second part of the law is concerned with civil rights issues in 15/16, 2012), p. 23; Melena Ryzik, “Carefully Calibrated for Protest,” The New Russia at the present time. Sergei Magnitsky was a Russian lawyer who York Times (August 26, 2012), p. AR1; John Thornhill and Geoff Dyer, “Death of uncovered evidence that Russian government officials had stolen $230 a Lawyer,” Financial Times Life & Arts (July 28/29, 2012), pp. 2-3; Anatol Lieven, “How the Rule of Law May Come Eventually to Russia,” Financial Times (December million in tax payments made by the Heritage Capital Management 6, 2010), p. 11; Roben Farzad, “The BRIC Debate: Drop Russia, Add Indonesia?” investment firm. When Magnitsky went public with his allegations in BusinessWeek (November 18, 2010); Neil Buckley, “From Shock Therapy to Retail 2008, he was arrested. He died in jail under suspicious circumstances Therapy: Russia’s Middle Class Starts Spending,” Financial Times (October 31, 2006), in November 2009. The law calls for the U.S. government to iden- p. 13; David Lynch, “Russia Brings Revitalized Economy to the Table,” USA Today (July tify by name Russian officials believed to be complicit in Magnitsky’s 13, 2006), pp. 1B, 2B; Guy Chazan, “Kremlin : Russian Car Maker Comes Under Sway of Old Pal of Putin,” The Wall Street Journal (May 19, 2006), pp. A1, A7; death; those persons will not be allowed to enter the United States Greg Hitt and Gregory L. White, “Hurdles Grow as Russia, U.S. Near Trade Deal,” The and any assets held in the United States have been frozen. Wall Street Journal (April 12, 2006), p. A4. ChaPter 5 • the POLitiCaL, LegaL, and reguLatOry envirOnMentS 183

CASE 5-2 america’s Cuban Conundrum

hen Barack Obama was sworn in as the 44th president of the Cuba’s official currency. As a result, hundreds of millions of dollars WUnited States, he inherited a situation that had confounded his were injected into Cuba’s economy; Cuban exiles living in the United predecessors in the Oval Office for over half a century. The problem States were the source of much of the money. Cubans were able to was Cuba, the tiny island nation in the Caribbean that, until recently, spend the dollars in special stores that stocked imported foods and had been ruled by Fidel Castro. During his nearly 50 years in power, other hard-to-find products. In a country where doctors are among Fidel Castro remained unrepentant and clung to his socialist economic the highest-paid workers, with salaries equal to about $20 per month, policies. In denouncing “neo-liberal globalization.” Castro said, “The the cash infusions significantly improved a family’s standard of living. more contact we have with capitalism, the more repugnance I feel.” In 1994, mercados agropecuarios (“farmers’ markets”) were created His health failing, Castro handed over the levers of power to his as a mechanism to enable farmers to earn more money. brother Raul. And, as President Obama set out an ambitious agenda Cuba desperately needed investment and U.S. dollars, in part for sweeping changes, many observers wondered whether it was time to compensate for the end of subsidies following the demise of the for a new era of trade, support, and cooperation with Cuba. Soviet Union. Oil companies from Europe and Canada were among In the decades after Castro took power, America’s trade embargo the first to seek potential opportunities in Cuba. Many American exec- with the island nation was a matter of presidential policy. Then, in utives were concerned that lucrative opportunities would be lost as 1996, President Bill Clinton signed the Cuban Liberty and Democratic Spain, Mexico, Italy, Canada, and other countries moved aggressively Solidarity Act, also known as the Helms-Burton Act. Clinton’s action into Cuba. Anticipating a softening in the U.S. government’s stance, came after Cuban MiGs shot down two U.S. civilian airplanes, killing the four Cuban Americans who were on board. The act had two key provisions. First, it denied entry into the United States to corporate officers of companies from other countries doing business on U.S. property in Cuba that was confiscated by the Cuban government. Second, it allowed U.S. companies and citizens to sue foreign firms and investors doing business on U.S. property confiscated in Cuba. However, in July 1996 President Clinton ordered a 6-month morato- rium on lawsuits. Washington pledged to keep the embargo in place until Castro held free elections and released political prisoners. Cuba is a Communist outpost in the Caribbean where “socialism or death” is the national motto. After Castro came to power in 1959, his government took control of most private companies with- out providing compensation to the owners. American assets owned by both individuals and companies worth approximately $1.8 billion were among those expropriated; today, those assets are worth about $6 billion (see Table 1). President John F. Kennedy responded by imposing a trade embargo on the island nation. Five decades later, when Castro finally stepped down, no significant changes in policy were made. In 1990, Castro opened his nation’s economy to foreign invest- ment; by the mid-1990s, foreign commitments to invest in Cuba totaled more than half a billion dollars. In 1993, Castro decreed that the U.S. dollar was legal tender although the peso would still be

TABLE 1 american Companies Seeking restitution from Cuba Company amount of Claim (millions)

american $10.6 Coca-Cola $27.5 General Dynamics $10.4 ITT $47.6 lone Star Cement $24.9 Exhibit 5-14 Times are changing in Cuba. Under President Raúl Castro, decades of Soviet-style command-and-control economic policies are Standard oil $71.6 giving way to reform in agriculture and other sectors. Small-scale private Texaco $50.1 businesses, including restaurants and car washes, are starting to appear now that many types of entrepreneurial activities have been legalized. Source: U.S. Justice Department. Source: Maisna/Shutterstock. 184 Part 2 • the gLObaL MarKeting envirOnMent representatives from scores of U.S. companies visited Cuba regularly issuing such a statute exceeded the European Commission’s author- to meet with officials from state enterprises. ity; Denmark’s concerns were accommodated, and the legislation Throughout the 1990s, Cuba remained officially off-limits to all was adopted. Similarly, the Canadian government enacted legislation but a handful of U.S. companies. Some telecommunications and that would allow Canadian companies to retaliate against U.S. court financial services were allowed; AT&T, Sprint, and other companies orders regarding sanctions. Also, Canadian companies that complied have offered direct-dial service between the United States and Cuba with the U.S. sanctions could be fined $1 million for doing so. since 1994. Also, a limited number of charter flights were available In the fall of 1996, the WTO agreed to a request by the EU to each day between Miami and Havana. Sale of medicines was also per- convene a three-person trade panel that would determine whether mitted under the embargo. At a State Department briefing for busi- Helms-Burton violated international trade rules. The official U.S. posi- ness executives, Assistant Secretary of State for Inter-American Affairs tion was that Helms-Burton was a foreign policy measure designed to Alexander Watson told his audience, “The Europeans and the Asians promote the transition to democracy in Cuba. The United States also are knocking on the door in Latin America. The game is on and we hinted that, if necessary, it could legitimize Helms-Burton by invok- can compete effectively, but it will be a big mistake if we leave the ing the WTO’s national security exemption. That exemption, in turn, game to others.” Secretary Watson was asked whether his comments hinged on whether the United States faced “an emergency in inter- on free trade applied to Cuba. “No, no. That simply can’t be, not for national relations.” now,” Watson replied. “Cuba is a special case. This administration Meanwhile, efforts were underway to resolve the issue on a dip- will maintain the embargo until major democratic changes take place lomatic basis. Sir Leon Brittan, trade commissioner for the EU, visited in Cuba.” the United States in early November with an invitation for the United Within the United States, the government’s stance toward Cuba States and the EU to put aside misunderstandings and join forces in had both supporters and opponents. Senator Jesse Helms pushed promoting democracy and human rights in Cuba. He noted: for a tougher embargo and sponsored a bill in Congress that would penalize foreign countries and companies for doing business with By opposing Helms-Burton, Europe is challenging one country’s Cuba. The Cuban-American National Foundation actively engaged presumed right to impose its foreign policy on others by using in anti-Cuba and anti-Castro lobbying. Companies that openly spoke the threat of trade sanctions. This has nothing whatever to do out against the embargo included Carlson Companies, owner of the with human rights. We are merely attacking a precedent which Radisson Hotel chain; grain-processing giant Archer Daniels Midland the U.S. would oppose in many other circumstances, with the (ADM); and the Otis Elevator division of United Technologies. A full support of the EU. spokesperson for Carlson noted, “We see Cuba as an exciting new In January 1997, President Clinton extended the moratorium on opportunity—the forbidden fruit of the Caribbean.” A number of lawsuits against foreign investors in Cuba. In the months following executives, including Ron Perelman, whose corporate holdings include the Helms-Burton Act, a dozen companies ceased operating on Revlon and Consolidated Cigar Corporation, were optimistic that the confiscated U.S. property in Cuba. Stet, an Italian telecommuni- embargo would be lifted within a few years. cations company, agreed to pay ITT for confiscated assets, thereby Meanwhile, opinion was divided on the question of whether the exempting itself from possible sanctions. However, in some parts of embargo was costing U.S. companies once-in-a-lifetime opportuni- the world, reaction to the president’s action was lukewarm. The EU ties. Some observers argued that many European and Latin American issued a statement noting that the action “falls short of the European investments in Cuba were short-term, high-risk propositions that Commission’s hopes for a more comprehensive resolution of this would not create barriers to U.S. companies. The opponents of the difficult issue in trans-Atlantic relations.” The EU also reiterated its embargo, however, pointed to evidence that some investments were intention of pursuing the case at the WTO. Art Eggleton, Canada’s substantial. Three thousand new hotel rooms were added by Spain’s international trade minister, responded with a less guarded tone: “It Grupo Sol Melia and Germany’s LTI International Hotels. Both com- continues to be unacceptable behavior by the United States in foisting panies were taking advantage of the Cuban government’s goal to its foreign policy onto Canada, and other countries, and threatening increase tourism. Moreover, Italian and Mexican companies were Canadian business and anybody who wants to do business legally snapping up contracts to overhaul the country’s telecommunications with Cuba.” infrastructure. Wayne Andreas, chairman of ADM, summed up the In February 1997, the WTO appointed the panel that would views of many American executives when he said, “Our embargo has consider the dispute. However, Washington declared that it would been a total failure for 30 years. We ought to have all the Americans boycott the panel proceedings on the grounds that the panel’s mem- in Cuba doing all the business they can. It’s time for a change.” bers weren’t competent to review U.S. foreign policy interests. Stuart Eizenstat, undersecretary for international trade at the U.S. Commerce The Helms-burton Era Department, said, “The WTO was not created to decide foreign-policy The Helms-Burton Act brought change, but not the type advocated by and national-security issues.” One expert on international trade law ADM’s Andreas. The toughened U.S. stance signaled by Helms-Burton cautioned that the United States was jeopardizing the future of the greatly concerned key trading partners even though Washington WTO. Professor John Jackson of the University of Michigan School insisted that the act was consistent with international law. In par- of Law said, “If the U.S. takes these kinds of unilateral stonewalling ticular, supporters noted that the “effects doctrine” of international tactics, then it may find itself against other countries doing the same law permits a nation to take “reasonable” measures to protect its thing in the future.” interests when an act outside its boundaries produces a direct effect The parties averted a confrontation at the WTO when the EU sus- inside its boundaries. Unmoved by such rationalizations, the European pended its complaint in April, following President Clinton’s pledge to Commission responded in mid-1996 by proposing legislation barring seek congressional amendments to Helms-Burton. In particular, the European companies from complying with Helms-Burton. Although president agreed to seek a waiver of the provision denying U.S. visas such a “blocking statute” was permitted under Article 235 of the EU to employees of companies using expropriated property. A few days treaty, Denmark threatened to veto the action on the grounds that later, the EU and the United States announced plans to develop an ChaPter 5 • the POLitiCaL, LegaL, and reguLatOry envirOnMentS 185 agreement on property claims in Cuba with “common disciplines” of the press. “We could be wrong, we admit it. We’re human designed to deter and inhibit investment in confiscated property. beings. We’re willing to sit down to talk, as it should be done,” The U.S. stance was seen in a new perspective following Pope Castro said. John Paul II’s visit to Cuba in January 1998. Many observers were Raul’s initial response to Obama’s overture was indeed concilia- heartened by Cuban authorities’ decision to release nearly 300 politi- tory, and in August 2009 the United States and Cuba held extended cal prisoners in February. In the fall of 2000, President Clinton signed talks for the first time in at least 10 years. These talks included meet- a law that permitted Cuba to buy unlimited amounts of food and ings between U.S. and Cuban governmental official and between medicine from the United States. The slight liberalization of trade rep- U.S. officials and Cuban opposition figures. But the official position of resented a victory for the U.S. farm lobby even though all purchases the Cuban government, announced in September by Cuban Foreign had to be made in cash. Minister Bruno Rodriguez, was that the U.S. trade embargo should be In 2002, several pieces of legislation were introduced in the U.S. lifted unilaterally without preconditions. Meanwhile, Obama, despite Congress that would have effectively undercut the embargo. One his overtures, appears to be linking any lifting of the embargo to bill prohibited funding that would have been used to enforce sanc- Cuba’s making progress on human rights. tions on private sales of medicine and agricultural products. Another proposal would have had the effect of withholding budget money Discussion Questions earmarked for enforcing both the ban on U.S. travel to Cuba and 5-12. What was the key issue that prompted the EU to take the limits on monthly dollar remittances. Also in 2002, Castro began to Helms-Burton dispute to the WTO? clamp down on the growing democracy movement; about 70 writers 5-13. Who benefits the most from an embargo of this type? Who and activists were jailed. suffers? President George W. Bush responded by phasing out cultural 5-14. In light of the overtures U.S. President Barack Obama has travel exchanges between the United States and Cuba. In 2004, made to Raul Castro, what is the likelihood that the United President Bush imposed new restrictions on Cuban Americans. Visits States and Cuba will resume diplomatic and trade relations to immediate family members still living in Cuba were limited to one during the Obama administration? visit every 3 years. In addition, Cuban Americans wishing to send money to relatives could send no more than $1,200 per year. Sources: The authors are indebted to Hunter R. Clark, Professor of Law, Drake The early months of Obama’s administration saw a rollback of University Law School, for his contributions to this case. Additional sources: Alan various restrictions. In April 2009, for example, the president lifted Gomez, “U.S.-Cuba Relations: A Sea Change Today?” USA Today (January 14, 2013), pp. 1A, 2A; Damien Cave, “Cuba’s Free-Market Farm Experiment Yields a Meager restrictions on family travel and money transfers. Although reactions Crop,” (December 9, 2012), p. 5; John Paul Rathbone, “Cuba to the announcement were mixed, a significant increase in travel Reform Drive Brings Exiles to Homeland,” Financial Times (January 28/29, 2012), on commercial airlines will not be possible until a bilateral aviation p. 3; Laura Meckler, “Leaders’ Comments Auger Warmer U.S.-Cuba Ties,” The Wall agreement is negotiated between the two nations. Street Journal (April 18, 2009), p. A3; Alan Gomez, “Obama Could Change Relations At a Summit of the Americas meeting in Trinidad, President with Cuba,” USA Today (December 8, 2008), p. 4A; Jerry Perkins, “Making American Dollar Legal Tenderizes Tough Cuban Economy,” The Des Moines Register (April 6, Obama declared, “The United States seeks a new beginning with 2003), pp. 1D, 5D; Mary Anastasia O’Grady, “Threshing Out a Deal Between the Cuba. I know there is a longer journey that must be traveled in Farmers and Fidel,” The Wall Street Journal (September 20, 2002), p. A11; Pascal overcoming decades of mistrust, but there are critical steps we can Fletcher, “Cuba Sees Itself as Shining Example Amid Global Troubles,” Financial take.” Many observers were surprised by the conciliatory tone of Times (September 19–20, 1998), p. 3; Carl Gershman, “Thanks to the Pope, Civil Society Stirs in Cuba,” The Wall Street Journal (September 18, 1998), p. A11; Stuart Raul Castro’s response to the U.S. president’s overtures. Castro indi- E. Eizenstat, “A Multilateral Approach to Property Rights,” The Wall Street Journal cated a willingness to engage in dialogue about such seemingly (April 11, 1997), p. A18; Therese Raphael, “U.S. and Europe Clash Over Cuba,” The intractable issues as human rights, political prisoners, and freedom Wall Street Journal (March 31, 1997), p. A14.