Cuba: Who's There Now–And What's the U.S. Missing?
from January/February 2003
by John R. Engen
The surf crashes hard on the shore near Marina Hemingway, an exclusive enclave on the outskirts of Havana, this most conflicted of cities. Here, over drinks at El Viejo y El Mar, a Canadian-run hotel, or during jogs along the breezy Caribbean shoreline, President Fidel Castro’s courtship of America is a favorite topic of conversation for jaded European expats trying to make a go of it in communist Cuba.
It’s not as though we haven’t witnessed charm offensives by communist leaders before. Mikhail Gorbachev, Deng Xiaoping, and others have sought to position themselves favorably in the American psyche. But Castro?
Over the past year, el Presidente has courted dozens of business leaders, government trade officials, consultants, and virtually anyone else who looks as if they can influence U.S. policy. What Castro wants is clear: more U.S. investment and trade (with financing thrown in for good measure) and more American tourists, though not necessarily in that order.
Until recently, none of this was considered worthy of discussion in Washington. The U.S. government has a 40-year-old trade embargo in place against Cuba, and Americans aren’t allowed to visit the island nation without a special license. There are holes, of course. Telecommunications, air travel, and other services generated more than $500 million in 2001 for U.S. companies, and tens of thousands of Americans have visited illegally, often through Mexico or the Bahamas.
The embargo, intended to force Castro from power, hasn’t worked. And the ground has shifted considerably of late, aided by some astute politicking on the part of Castro and the American businesses that would like a piece of the Caribbean’s largest market.
Recent polls suggest an erosion of support for isolating Cuba. U.S. companies have been exporting medicines to Cuba since 1992, but in 2001 Congress voted to allow the export of food also, provided Cuba pays for it in cash. Since then Castro has placed orders for more than $200 million of commodities, including wheat from North Dakota and pork lard from Indiana. The House more or less decided to wink at illegal travel to Cuba when it opted not to continue funding the enforcement of the ban. The Senate has ignored the tourist issue, and it seems very unlikely that President Bush will push for any détente with Cuba in the foreseeable future—certainly not while terrorists roam the planet.
But the scene at a steamy Havana exhibition center in September shows just how far Castro, 76, is willing to stretch his communist principles. Amid high security and a crush of photographers, the Bearded One, as he is widely called—clad in a dark business suit, no less—stands shoulder to shoulder with a group of American business leaders to officially open that most sickeningly capitalistic of events, a trade show.
In this case it’s the U.S. food industry pitching its wares, and the air is thick with the smell of French fries, soy burgers, and sizzling steaks. Since this is just the second such extravaganza authorized by the U.S. government—some pharmaceutical companies came two years earlier—it’s also thick with history.
Castro seems aware of how all this will play in Peoria. He hobnobs with food-company chieftains and playfully bottle-feeds an imported bison calf. The cameras eat it up. Then he personally signs an agreement to purchase $19 million of rice, soybeans, and other foodstuffs from food giant Archer Daniels Midland, declaring that it’s only a matter of time before the trade embargo is lifted. “Little by little we can build economic ties, and with that come the ties of friendship between peoples,” he says. Though he speaks passable English, he sticks to Spanish and his words are translated by an interpreter.
Of course, most of the 700-some Americans gathered here share the sentiment. Allen Andreas, chairman and CEO of Decatur, Illinois-based ADM, the show’s chief sponsor and a big shaker in the open-trade-with-Cuba movement, says this is yet another small step down the road to normalized trading and investment. “We’d hope that all American companies get the opportunity to do business as freely with Cuba as they do with any other country,” he says.
Today’s Cuba is engaged in a revolution no less startling than the one that nationalized scores of American business interests in the early 1960s. The difference is that this one is rooted in money and foreign investment, as Castro seeks to build a legacy that goes beyond boatlifts and starvation. Maybe it is time for U.S. business to get a piece of the action, and perhaps to usher in a freer regime.
The collapse of the Soviet Union, which had long subsidized Castro, pulled about 30% of the island’s GDP out from under his feet. In short order, food supplies dwindled and thousands left for Florida in ramshackle boats. To prop up the sputtering economy and retain control, Castro began permitting citizens to possess dollars—once a crime punishable by stiff prison terms—and invited foreign investors to put money into Cuba. They did, first in a trickle, then a deluge. Today there are several hundred foreign joint ventures in Cuba—essentially the only way to invest directly in the country, according to the U.S.-Cuba Trade and Economic Council, a nonpartisan organization in New York City.
The investors—Canadians, Spaniards, Italians, and Mexicans, among others—have spent more than $2 billion since 1990 to position themselves in key industries such as mining, tourism, and citrus production, and done an admirable job of it.
It’s tough to figure who’s making money in Cuba, however. Those that say they are include Sol Melia, a Spanish hotelier, which manages 22 joint-venture hotels or resorts; Jamaica’s SuperClubs, which has three outposts; and clothier Benetton. They’re not alone, according to John Kavulich, president of the U.S.-Cuba Trade and Economic Council. He lists a number of companies that he says are profiting from joint ventures, among them Unilever, the Anglo-Dutch household-products corporation, and Sherrit International, a Canadian mining outfit.
Americans, meanwhile, have been left to look in from the outside. Already, says Kirby Jones, a Washington, D.C., business consultant who recently testified before Congress on the embargo, sectors such as telecommunications, cement, and even hotel development are virtually closed.
“It’s terribly frustrating,” says Curtis Nelson, CEO of Carlson Hospitality International, the Minneapolis-based owner of the Radisson Hotels chain. His company was once promised a tract of pristine oceanfront land on which to develop a hotel, provided the embargo was lifted. Today a European firm controls the property. “Our global competitors are getting a huge head start in a market that is poised to explode,” Nelson says, “and legally we can’t do anything.”
Over the past two years, the Cuban economy has slowed dramatically. Tourism, at around 1.7 million visitors in 2001, is the biggest single earner, generating about $2 billion per year. But in a tough global economy, it has dropped slightly. Remittances from Cuban-Americans have leveled off at about $400 million. Direct foreign investment has declined precipitously, to just $38.9 million in 2001, compared with $488 million a year earlier, according to the Cuban government. Despite the presence of foreigners and dollars, GDP today stands at about $19 billion, says the CIA—a 15% decline from the days of Soviet support.
A bigger opening to the U.S. would undoubtedly jump-start the economy. Even the most conservative estimates project that tourism levels would more than double in the years following a lifting of U.S. travel restrictions, and Adolfo Garcia, a Cuban-American attorney and international corporate transaction partner at McDermott Will & Emery in Boston, says it’s not unreasonable to think that America would quickly become both Cuba’s top trade partner and its top foreign investor if given the chance. “There’s pent-up demand everywhere—for investment, for trade, for travel,” says Garcia, whose Cuba-related activities are limited to advising clients on the constraints of U.S. law.
Cuba might seduce even the most guarded of capitalists. Along Havana’s seaside boulevard, the Malecón, horse-drawn carriages share the road with 1950s Studebakers, Chevys, and various Detroit hybrids (not to mention a few Russian-made Ladas), passing miles of dramatic houses, some art deco, others baroque, and many of them crumbling and filled with squatters. Old Havana, with its opera house and grand mansions, is being restored and is in generally better shape. Deeper in, the well-policed streets bustle with the strains of salsa music from open-air cafés. In resort areas like Varadero, 100 miles to the east, aquamarine surf crashes onto talcum-powder-sand beaches as European tourists sip daiquiris and puff on Cohiba cigars.
When it comes to business, the allure is only slightly less powerful. Castro has spent the past decade creating a dual economy in which the U.S. dollar is the de facto official currency. Cuba has even minted its own versions of quarters, dimes, and nickels to facilitate transactions. While stores that accept pesos offer shoppers either empty shelves or shoddy goods, government-run “dollar stores” in Havana and other big cities offer anyone with moneda dura, hard currency, the opportunity to buy a wide variety of imported products. True, the Havana showrooms for Mercedes and Toyota cars stand all but empty. But at La Epoca, a five-story dollar store near central Havana, the aisles are full of Cubans eyeing everything from the latest in French fashions and Spanish cosmetics to Italian-made floor tiles and children’s bicycles from Indonesia. A few American products are here, too. In the shoe department, Nike Air Jordans, also from Indonesia, priced at around $90, compete with an assortment of other offerings. “Nikes are our best seller,” says a clerk. “Cubans love American things.” The basement-level grocery store is stocked with Argentine cookies, Brazilian candies, and Dutch mayonnaise, Coca-Cola (from Mexico), frozen chickens (about $1 per pound) imported directly from Indianapolis-based Marsh Supermarkets, and Marlboros (from the Philippines) at $2 a pack. All over the city, in restaurants, hotels, small shops, taxis, it’s the dollar that rules. For expats here, and a growing number of Cubans—especially those with U.S. relatives or tourism-related jobs—it’s entirely possible to go through daily life without ever encountering a peso.
The Americans at the food show, and others that have come before them—about 3,700 American businesspeople visited the island in 2001—marvel at how much the ostensible reality differs from U.S. perceptions of a communist dictatorship immersed in poverty. But to foreigners with experience in trying to operate here, that sounds like naiveté. Interviews with some two dozen foreign business leaders, diplomats, journalists, and ordinary Cubans paint a picture of a country rife with contrasts and prone to ever-changing regulatory constraints.
Like the Americans today, the Europeans, Canadians, and Asians who flooded into Cuba in the mid-1990s viewed it as a new frontier ripe for business. Never mind that Castro had vowed to continue his communistic ways; the facts said otherwise as the government courted foreign investment, subtly altering the calculus during the so-called special period that followed the Soviet collapse to allow for a less rigid socialism, with hints of capitalism mixed in.
With few exceptions, the experiment has not met expectations. Indeed, the frustrations are so great that some foreign firms contemplate leaving. Nobody dares criticize the government publicly for fear of retribution, but longtime foreign hands complain privately about everything from living conditions and arcane hiring regulations to a system in which the rules change regularly with no notice or means of appeal. “Nothing here is as it appears,” whispers one British executive. “There is little transparency and little rule of law.” And often, little making good on debts.
Despite the movement toward a more capitalistic model, Cuba remains firmly rooted in socialism. For foreign companies, running a business is daunting. Joint ventures—in which they put up the cash and know-how and their Cuban partners (the government or individuals) provide the real estate and labor—often turn contentious. Critics say that the government has been able to change the rules with little or no prior notice, almost always in ways that benefit the hosts, and has a tendency to be heavy-handed and unresponsive.
Hiring complaints illustrate the difficulties. All workers are technically employees of the state. When a joint venture sets up shop, it is usually required to hire a preset number of employees to fill various slots. Some of this is open to negotiation, but the rules are generally rigid, which means that even if, for example, an executive doesn’t want a driver, the company may have to hire one nonetheless.
Cubans are generally well educated, but there’s no way to solicit employees independently. Rather, a company must hire workers through a government employment agency. Once hired, employees aren’t paid directly. The typical foreign joint venture pays the government between $500 and $830 per employee each month. In turn, the government pays each worker the equivalent of about $20 to $30 per month in Cuban pesos.
Under Cuban law, most people don’t own their own homes. They pay about 10% of their monthly salary as rent, and are granted a sort of title to the property, which (if they also get government permission) allows them to move. All Cubans receive free medical care and education, and subsidized housing. While no one is starving, $20 isn’t enough to live well on, and rules against paying incentives make it difficult to motivate workers. Some foreign employers obtain permission to pay extra money directly to employees; many others resort to illegal, under-the-table dollar payments to retain their most valued workers. Moonlighting by the best and brightest of government employees, while frowned upon by the communist masters, is common. Meanwhile, just about everybody guards his tongue, in interviews and during casual conversations in the street. Prison remains a distinct possibility for anyone criticizing the regime, and movement around the island is restricted. The resort areas are off-limits to most Cubans.
For foreigners, things aren’t a whole lot better. New arrivals get take-it-or-leave-it choices of accommodation, and companies that have decent housing are often left scrambling to retain it when executives rotate. Visas and work permits are difficult to come by, even for family members. And if you want to import a car, be prepared to pay plenty for the privilege. One executive tells of importing a late-model Mercedes S-class car, only to have it hung up for weeks in costly “safety checks.”
Beyond all this is the feeling of isolation. There’s but one government-controlled newspaper, La Granma (named for the boat that brought Castro, Che Guevara, and other exiles back to Cuba and their successful revolution), and all local television is run by the state as well. Foreigners can get around such restrictions via the Internet or with satellite TV. But it’s difficult to market a new product without any commercial advertising.
For all that, money matters are what really get foreigners worked up. The financial system, they say, isn’t up to the task of handling their business. Worse, with cash reserves limited, the government is highly selective about whom and when it pays. According to the University of Miami’s Institute for Cuban and Cuban-American Studies, Castro owes foreign creditors well over $40 billion, including $10.9 billion to the European Union, $1.58 billion to Argentina (which, a basket case itself, really needs the cash)—and a disputed $25 billion to the former Soviet Union.
In 2002 the EU, by far Cuba’s largest trading partner, listed a host of grievances in a letter to Cuban vice president Carlos Lage. In response, Castro’s government ministers held a series of contentious conferences with business leaders. In one case, says the head of a British operation that has been owed more than $5 million for six years, a shouting match over missed payments ensued. “You’re nearing the point where companies are going to start leaving because they’re not getting paid,” this executive recalls telling foreign investment minister Marta Lomas. Yet months after the exchange, little has changed. “They said, ‘Thanks for the comments,’ but did nothing,” says a German executive. “The basis for everything is perpetuation of the system,” he warns. “They’ll say one thing to get you here. But when it comes down to operating, it’s quite another reality.”
Not everyone is pessimistic. Dutch lawyer Sebastiaan Berger, who has practiced in Cuba for the past seven years, helping foreign clients set up businesses there, says that joint ventures work when put together carefully and that Cuba’s law affords protection to foreign investors. (For more, see page 72.) Ecuadorian Marcelo Montenegro, the Havana-based president of Wilton Properties, a Canadian hotel developer with plans to build four luxury properties in Cuba, says the government can be a good partner to anyone who takes the trouble to build relationships. He tells of the time he managed several Canadian-run hotels in Santiago de Cuba, the country’s second-largest province. Once Castro himself paid an impromptu visit. “He asked what I needed, and I said we could use a bigger generator” to deal with frequent power outages, Montenegro recalls. “A month later we got it.”
Kirby Jones, the Washington consultant, says that Cubans are generally good businesspeople. They start meetings on time, get right down to the matter at hand, and are open to discussing ways to make enterprises more successful. “The trick,” he says, “is to be flexible and start small—build reliability and trust.” Jones thinks U.S. companies would have some built-in advantages. The Cuban-American community would furnish cultural and business connections that other nations couldn’t match, he says. And most Cubans already know U.S. products, through advertisements on Miami radio stations and the gifts—everything from toothpaste to clothing—brought from the States by visiting relatives.
But John Kavulich of the U.S.-Cuba Trade and Economic Council says that there’s still “a lot of heavy lifting and painful learning” to endure, and cautions that Cuba “has not yet undertaken the kind of fundamental commercial changes” needed to pay off what it already owes, let alone take on more obligations with Americans. Nor do many Cubans have much to spend on ancillary goods.
That makes the current cash-only arrangement with the one buyer that has access to large amounts of the stuff—the government—attractive to the food companies here. “They give us the cash, and then we unload the boat,” says Mohamed Bouras, head of international operations for Marsh, which has sold more than $3 million of commodity and generic packaged products in Cuba. “You can’t get any lower-risk than that.”
Other industries, however, don’t have this option. Carlson’s Curtis Nelson says he’d jump at the chance to get into the market, though that would probably mean buying a stake in an existing hotel. “When U.S. travel restrictions are lifted, it’ll explode as a tourist market,” Nelson says. “We want to be there.”
In the end, talk of U.S. companies doing business in Cuba is highly speculative. As recently as May, President Bush said he opposed any further trade openings until the country liberalized its business laws and held free elections—and the odds of the latter appear to be virtually nil. The prospects look even bleaker for closer business ties, at least while the Bearded One is in power.
Many seem content to wait for Castro’s death. Though it’s not clear what will happen when he departs—speculation about a replacement tilts heavily toward his brother Raul, the present first vice president and minister of defense—some predict that a new-style capitalism will quickly emerge. That could make Cuba, with its well-educated workforce, a promising manufacturing center for exports and could open up nickel, sugar, offshore oil, and other natural resources to U.S. investment once again.
Still, for a growing number of Americans the prospect of fostering change from within, now, is too tantalizing to ignore. If U.S. companies were active participants in Cuba, this line of reasoning goes, their values and practices would eventually rub off on the locals. Even once-staunch embargo supporters like Garcia, whose family fled Castro in 1961, now embrace this notion. “It would be the fastest way to create lasting change,” he says. Many directors of U.S. companies agree.
Similar arguments are winning favor in Congress, bolstered by the promise of more trade and jobs. Archer Daniels claims to have put together one recent shipment of grain with crops harvested in nine different states and shipped through the Port of New Orleans, scoring valuable political points in all those places. September’s food trade show attracted business representatives from 33 states.
With time, Castro’s charm may win out, aided by his capitalist American friends. What U.S. businesses decide to do with the opportunity will, as Andreas says, “depend on the specific circumstances.” But judging by the experiences of foreigners already here, they’d be wise to look past the seduction, tread with care—and, when possible, get their money up front.
