The Cuban state is desperately short of foreign exchange. Its decrepit state-run economy doesn't produce much that can be sold abroad and the government has to import goods to supplement the economy's limited ability to supply domestic needs. Everyone in the world -- save Americans -- can legally invest in Cuba, but few want to take the chance. To change the investment climate, Fidel would have to understand why it is so bleak, in other words acknowledge that he himself is the problem.

The Cuban state exports only one item successfully: Cubans. It is the Cuban diaspora's export value that Castro now intends to put in his own pocket by capturing more directly the dollars Cuban expatriates send to their relatives back home.

Castro of course blames the U.S. embargo for his foreign-exchange shortage. He is particularly peeved that the New York Federal Reserve has shut down a deal he had going with UBS, a Zurich-based Swiss bank. That arrangement, according to the Senate Banking Committee's call for hearings, was uncovered last year when a joint Fed-Swiss Banking Commission investigation found that a Zurich UBS repository had engaged in illegal U.S. bank note transactions with Cuba amounting to about $3.9 billion. UBS had illegally sold dollars to three other blacklisted countries, but the Cuban case was of special interest because it involved huge shipments of dollars to UBS from Cuba to be credited to a Cuban account. In short, it not only violated the U.S. embargo but looked a lot like money laundering.

UBS paid a $100 million fine for this violation of U.S. embargo law and it's not likely that Fidel will be using those Swiss bankers again any time soon. But the source of the U.S. bank notes remains unclear. Cuban-born economist Ernesto Betancourt, an expert on the Cuban economy, points out that "Cuba cannot justify 600 or 700 million dollars annually in cash through tourism income. The tourists, Canadians, Europeans and Latin Americans buy their travel packages with credit cards at travel agencies. Therefore, some 90% of the tourism income is not cash." Nor are remittances from abroad sufficient to explain the large volume of cash, Mr. Betancourt argues convincingly.

Whether Fidel was engaged in facilitating illegitimate business transactions by laundering money remains an open question. If so, it's unlikely that New York Fed surveillance can plug every hole in the world financial system and shut down his operation. But it is possible that the squeeze on UBS and other institutions since Sept. 11, 2001, has raised Cuba's transaction costs in what might formerly have been a highly lucrative business.

Castro has already cracked down on the nascent small-business community and on political dissent. This has helped squelch competition but it hasn't helped his pocketbook. That's where de-dollarization comes in. As any International Monetary Fund economist will advise, when a state is broke it can always get money from the population by manipulating foreign exchange. Latin central banks specialized in expropriation through devaluation during the latter half of the 20th century.

The new regulations do not so far make holding dollars illegal. Cubans may still withdraw dollars from bank accounts but they may not deposit them. Most importantly, the change means that dollars will no longer be accepted at stores selling imports. Instead Cubans who want to spend their remittances from the U.S. will have to exchange them at par for "convertible pesos."

Clearly, the one-to-one exchange by the government is a fraudulent claim. Castro gets a 10% surcharge for all conversions. Add to this the average 15% price increase at import stores in May, and you have the equivalent of a 25% devaluation of the purchasing power of dollar remittances in the past six months. Regular pesos, which are used to buy domestically produced goods like farm products, trade on the black market at 26 pesos to the dollar, which gives some idea of how Cubans get short-changed.

By forcing Cubans to convert dollars if they want to use the income they receive from Miami, the Cuban state has officially recognized that its human exports are the country's key foreign-exchange generator. Undoubtedly Fidel noted how Venezuelan President Hugo Chávez exports oil, takes in all the dollars and regularly devalues the Bolivar to keep the palace rich. Fidel figured he could do the same. No wonder Cubans are joking that the slang term for the convertible peso, "chavito" or little penny, is actually named after Chávez.

Cubans have not managed to survive Castro's tyranny all these years without employing boundless creativity. It won't take long for a thriving black market, rife with corruption on the part of state employees, to develop in response to Castro's latest gambit.