Latin America Advisor

A Daily Publication of The Dialogue

How Interested Are Companies in Cuba?

Q: Cuba’s government on Nov. 3 asked international companies to invest more than $8 billion in the Caribbean island nation. The country’s foreign commerce minister expressed hopes that the 246 projects being pitched by the government, ranging from an auto plant to a hog farm, would help spur Cuba’s flagging economy. How interested are international companies in investing in Cuba? What benefits and drawbacks will companies encounter in investing there? What results have come from Cuba’s four-year-old economic reform process?

A: Matthew Aho, consultant in the corporate practice group of Akerman Senterfitt in New York: “The appeal to foreign companies to invest $8 billion over the next several years preceded the opening of the first Havana International Trade Fair since the passage of Cuba’s new foreign investment law in March. It was the latest move in a multiyear charm offensive designed to encourage investors to pump $2 billion annually into the island’s long-lagging economy. While the rhetorical message was positive: ‘Cuba is open for business,’ little has changed to improve Cuba’s general investment climate, and foreign companies there report few changes to their dealings with Cuban counterparts. In fact, many businesses say the same bottlenecks, delays and idiosyncrasies that have long frustrated investors have been exacerbated recently by growing wariness among major banks to handle legitimate Cuba-related transactions. International companies will always be interested in Cuba because it’s among the global marketplace’s final frontiers. Early partners in resource extraction and hospitality have profited handsomely from their investments. But others, in telecommunications, import/export and consumer goods have lost money or even gone to jail. While Cuba clearly has potential, most mainstream investors will steer clear until the Cubans define clearer rules of the road and improve their track record with new and existing partners. A loosening of U.S. sanctions would also bump the risk-reward balance in investors’ favor. The last four years have proven that limited economic change is indeed possible in Cuba. All signs indicate that the government will continue this process and accelerate where necessary. Let’s hope in time conditions reach a tipping point for investors—as well as U.S. policymakers—so that the Cuban people can benefit from the long-term sustainable economic growth they deserve.”

A: José R. Cárdenas, director of Visión Américas in Washington: “Eight billion dollars is a wildly exaggerated figure that Cuba has no chance of ever realizing. Perhaps Cuban authorities believe that somehow international political solidarity against U.S. policy can be monetized. But foreign investors are an unsentimental sort. They demand such things as transparency, legal guarantees and predictability, which the Cuban government is incapable of providing. Witness the widely publicized ordeals of Canadian businessman Cy Tokmakjian and Englishman Stephen Purvis, among others, who wound up in incarcerated in Cuba’s Kafkaesque legal system for unclear reasons. There may as well be a ring of flashing red lights surrounding the island warning foreign investors of the exorbitant risks to doing business in Cuba. Certainly, governments such as Brazil are investing there, but those are political decisions, not economic ones. Cuba’s highly touted domestic economic reforms are largely an official recognition of activity that was already occurring on the island’s black market —with an eye toward regulating and taxing it. Some believe that Cuba can replicate China’s combination of authoritarian political control with free-market activity, but that is hardly a worthy aspiration. The Chinese model is built on a foundation of sand, buoyed for now by the extraordinary size of its internal market. Any progressing economy needs the freedom to innovate, take risks and guarantee that one will reap the benefits of their efforts. Cuba, like China, cannot ultimately offer such conditions. As long as the primacy of the Communist Party remains the Cuban lodestar, the country will continue to head into an uncertain future.”

A: Scott J. Morgenstern, associate professor and director of the Center for Latin American Studies at the University of Pittsburgh: “As a target for investment, Cuba provides crucial drawbacks, but there are also some special attractions. There has been some investment in Cuba—notably tourism—but the government is now promising to open new areas. This is crucial to the government, since it is purging itself of hundreds of thousands of jobs. To do this, Cuba must also create new opportunities for private employment. Thus, while the reforms are making some investment possible, investors will not find wide-open markets and streamlined bureaucratic procedures. In many areas, there are severe limits concerning where people can invest and the types of businesses they can open. Currency convertibility will also be a critical issue for any business; currently there are two currencies, only one of which is convertible. Foreigners, formally, are only allowed to use the convertible currency, and the official exchange rates distort the currency values. Reforms are promised, but the uncertainty will likely discourage some investors. One other important concern for investors is the size of the Cuban domestic market. The country is attracting several million tourists per year, and many Cubans do receive financial support from abroad, but purchasing power is still limited. On the attractive side, the markets are poorly developed, so businesses might be attracted to getting in on the ground floor. Education levels are very high, and the government provides health care and other aspects of the safety net.”

A: Carlos A. Saladrigas, chairman of the Cuba Study Group and Regis HR Group: “Cuba’s economic reforms so far have been too little, too late and too timid to result in significant economic performance. No doubt that U.S. sanctions on Cuba place an enormous burden on Cuba’s ability to implement major macroeconomic reforms and its ability to attract investment capital. Yet, the continuing economic mismanagement, the numerous distortions in Cuba’s economic and political systems, a stubborn ideology, an obtuse and weighty bureaucracy and the fears of change harbored by Cuba’s leaders all play even more heavily in keeping Cuba’s economy from reaching its full potential. Cuban leaders continue to expect ‘silver bullet solutions’ to their economic woes. The port of Mariel is a perfect example. Pinning hopes of an economic recovery on mega-projects or a few foreign investments take attention away from the core distortions and inefficiencies plaguing the entire domestic economy. Fear of change and ideological rigidity can be clearly seen in Cuba’s eight-month-old foreign investment law. Since the law was passed, Cuban authorities still don’t have any significant major investment projects to report. The foreign investment law was a great missed opportunity to really send a message to the world, and specifically to the United States, that Cuba is ready for business. Such a message would have added great momentum to the anti-embargo movement, which is building momentum in the United States and in Miami. Yet, they chose more of the same, leaving arbitrariness, lack of clarity and burdensome regulations.”