The Unusual U.S.-Paraguay Diplomatic Crisis

Dear all,

We welcome you to the Greater Caribbean Monitor (GCaM). In this issue, you will find:

•U.S. Sanctions on Paraguay: The Challenge of Washington’s Anti-Corruption Strategy in Latin America

•With Recent Port Deal, El Salvador Grows Closer to Turkey

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•U.S. Sanctions on Paraguay: The Challenge of Washington’s Anti-Corruption Strategy in Latin America
741 words | 4 minutes reading time

It’s News. After the Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced new sanctions against former Paraguayan President Horacio Cartes, Paraguayan authorities ordered U.S. Ambassador Marc Ostfield to leave the country, effectively declaring him a persona non grata and elevating tensions between Washington and the South American nation. 

• Cartes, whose presidency spanned from 2013 to 2018, remains a key figure within the Colorado Party, which currently holds a majority in both chambers of Congress. The party also secured a significant victory in the 2023 elections under the leadership of now-President Santiago Peña and has dominated national politics for the better part of eight decades.

• OFAC sanctioned Cartes under the Global Magnitsky Act in early 2023. Since 2022, the U.S. State Department has deemed the former president a “significantly corrupt” actor.

• Now, more than a year later, OFAC doubled down on the issue, sanctioning Paraguayan tobacco company Tabacalera del Este (Tabesa), which stands accused of illegally funneling millions of dollars to Cartes, who divested from his holdings in light of U.S. sanctions.
  
  

Panorama. Sanctions, as defined by William Reinsch, a former Commerce Department official and senior adviser at the Center for Strategic and International Studies, are “the only thing between diplomacy and war” in the U.S. foreign policy arsenal. By using them, Washington can exert immense influence in some countries’ domestic affairs at relatively little cost.

• From 2020 to 2024, U.S.-issued sanctions have grown 57%, with Global Magnitsky-type sanctions becoming more usual worldwide. The recently passed Foreign Extortion Prevention Act makes corrupt actors criminally liable before U.S. courts.
  

• Indeed, the White House insists that it deems corruption a “core national security interest of the United States.”

• Both trends are particularly evident in Latin America and the Caribbean. Since the early 2000s, the region has faced the greatest number of U.S. sanctions against its political and business leaders. 
  
  

What’s Next? While Ambassador Ostfield has not left Asunción yet, the Biden administration has already picked his successor, career diplomat Gabriel Escobar. However, with Senate confirmation for Escobar still pending, this tense moment in U.S.-Paraguay relations is far from over.

• Although frictions between Washington and Latin American governments are not uncommon, it was exceptional for Paraguay, a U.S.-aligned state with a right-leaning government, to react in such a brash manner. 
  
  

Between the Lines. For several years, U.S. officials and foreign policy experts have expressed growing concern over the overuse of sanctions. This is often counterproductive and may lead to unintended consequences, further exacerbating economic and political instability in Latin America. Guatemala provides a clear example of penalties being applied irresponsibly.

• In November 2022, the U.S. Department of the Treasury sanctioned two Guatemalan nickel mining companies, a critical mineral for U.S. interests. In January 2024, OFAC lifted the sanctions, which had been imposed “by mistake.” Despite this, the sanctions effectively paralyzed the once-promising Guatemalan mining industry, which is now subject to a de facto moratorium amid government hostility to the sector.

• Similarly, in 2023 and 2024, the United States imposed sanctions on congressional allies and some members of former President Alejandro Giammattei’s administration. Although the Guatemalan public largely recognizes these individuals as stupendously corrupt, some argue that the sanctions may inadvertently reinforce their schemes by limiting their negotiation options as their grip on political power weakens.

• This mirrors the situation seen with Maduro’s regime in Venezuela. It has often been said that the regime is hesitant to give up power, since its leaders would likely face prosecution. By the same token, U.S. officials are unwilling to apply further sanctions, fearing that worsening conditions in Venezuela could encourage illegal immigration.
  
  

Why It Matters.  Washington faces the critical challenge of aligning its anti-corruption efforts with the preservation of strong diplomatic ties to its Latin American allies. This is especially urgent in Central America, where China’s influence is rapidly growing through free trade agreements and the preferential financing of major infrastructure projects. 

• Guatemala and Paraguay are two of the 12 countries that retain diplomatic links to Taiwan. Their stance positions them as crucial allies in countering Beijing’s growing influence in the Western Hemisphere, which poses a notable threat to U.S. national security interests. 

• Should this trend persist, Washington’s allies in Latin America are likely to feel increasingly neglected, with their patience wearing thin. U.S. support, which has centered on imposing sanctions, sometimes with minimal regard for collateral effects, is fueling growing indifference towards Washington.

• In Latin American political circles, it is also widely believed, unfairly or not, that China has proved a more efficient partner in solving the region’s critical infrastructure and investment needs. Any U.S. efforts at rapprochement must emphasize such projects.
  
  

•With Recent Port Deal, El Salvador Grows Closer to Turkey
555 words | 3 minutes reading time

There’s no need for the United States or China, or so Salvadoran President Nayib Bukele seems to think. On August 11, Bukele announced his government was partnering with Turkish firm Yilpor for the improvement and expansion of the ports of Acajutla and La Unión with a $1.6 billion investment. This is the biggest private sector investment the country has ever seen.

• Yilport isn’t new to the region and already operates in Guatemala, Ecuador and Peru. Its investment in El Salvador is certainly the firm’s largest. 

• Legally, it will operate the ports through a public-private partnership with the Autonomous Port Executive Commission (CEPA). The initial agreement is expected to hold for at least 50 years.

• Bukele has shown a certain fondness for Turkey since visiting in January 2022. El Salvador sent rescue personnel to Turkey after a series of earthquakes in February 2023.
  
  

It’s the Economy. Bukele enjoyed remarkable success during his first term in office, with homicides falling from 6,656 homicides in 2015 to 214 in 2023. Finer points, such as the government’s claim that El Salvador is the safest country in the hemisphere, may be debated, but the fall in crime is undeniable. 

• Bukele’s next challenge is El Salvador’s struggling economy. El Salvador is also the most indebted nation in Central America, with a debt-to-GDP ratio of 84.4%. Debt will rise to 87.82% of GDP by 2029, and the country’s private pension funds do not stand on solid ground.

• The country’s situation is aggravated by  mediocre growth of 2.7% and declining foreign direct investment, which has been the lowest in Central America for eight years in a row. 
  
  

IMF. For the Salvadoran government, a $1.3 billion IMF loan is key to the country’s economic revitalization. El Salvador’s bonds were significantly boosted by the news, but the deal’s details remain to be ironed out; it is, in any case, likely to require the state to enact significant cost-cutting measures. 

• Talks between the Salvadoran government and the IMF have been rather difficult. IMF officials could periodically be heard praising some of Bukele’s reforms, but they lamented El Salvador’s adoption of bitcoin as legal lender and called for the decision to be reversed. 

• Bukele proved unrelenting on this point and gambled on a deal. Earlier this year, El Salvador issued variable interest rate bonds, which would result in higher payments to investors if an IMF deal is not achieved.
  
  

Between the Lines. Although Yilport is one of the largest international container terminal operators in the world, opposition figures have criticized the deal for skipping the usual government procurement process. This is typical for Bukele’s government, which looks askance at bureaucracy and prefers more discreet channels, much to political opponents’ chagrin.

What to Expect. Bukele has enjoyed remarkable success in reducing crime. He correctly ascertained that his future popularity depends on meaningful economic growth. Not much has been achieved in this regard, except for relatively impressive growth in the country’s tourism industry. The country remains a laggard even by regional standards.

• An IMF loan would provide a much-needed influx of funds, but it would not stave off the need for reforms. These could also risk Bukele’s popularity, since they would likely require significant austerity measures. 

• The government’s deal with Yilport is certainly encouraging. Questions abound, as they always do with El Salvador’s government, but the Northern Triangle is lacking in technologically advanced, competitive ports, leaving a niche for El Salvador to fill.