Cubanálisis El Think-Tank

ARTÍCULO ESPECIAL EN EL THINK-TANK DE CUBANÁLISIS

For U.S. businesses, road to Cuba fraught with uncertainties

 

Victoria Guida, in Politico

 

Moves by the Obama administration and members of Congress to make up with Havana have had businesses strategizing since mid-December about how to break into the Cuban market.

 

But even if Congress were to lift the decades-old embargo tomorrow, Havana’s trade hurdles won’t just disappear.

 

As the White House pushes forward with negotiations to reopen embassies at a fast clip, business leaders are struggling to navigate Cuba’s challenging business environment — from the communist bureaucracy’s tight control over the distribution of imports and its clampdown on Internet access to its abysmal credit rating and the country’s dearth of hard currency.

 

The National Cooperative Business Association is one group that’s trying to be proactive about building up the private sector in Cuba. The nonprofit trade association’s international arm, the Cooperative League of the USA, launched a working group on Tuesday with the goal of helping foster the cooperative business model in Cuba, in which farmers, auto mechanics or other private entrepreneurs band together in common interest, CLUSA communications director John Torres said.

 

“It is an exciting time for Cuba, and we also think it’s an exciting time for the nascent cooperative community inside Cuba,” Torres said.

 

But while the Communist Party of Cuba has promoted cooperatives and more self-employment as part of its economic reforms, businesses need to go into the country with a long-term strategy in mind, not with the idea of getting rich quick, said Mark Entwistle, a former Canadian ambassador to Cuba and founder of the merchant bank and advisory firm Acasta Capital. “For smaller companies that are living from account receivable to account receivable,” he said, “Cuba’s probably not your place.”

 

Supply chain problems

 

Cuba’s economic stagnation requires that the country import far more products than it exports, so Havana could decide to open its arms to the bulk of goods and services Washington has approved, including equipment and supplies for construction and farming.

 

“Somebody described Havana as a city in need of a billion gallons of paint,” said Pedro Freyre, a partner at the law firm Akerman. “I suspect, if I were a member of the Cuban government, I would say bring it on, because it’s positive. It’s a good thing for the country.”

 

But red tape at the ports, including excessive paperwork and other bureaucratic delays, remain a major obstacle, including for agricultural imports, which supply 60 percent to 70 percent of the country’s food for a $2.2 billion market in 2015, according to the U.S.-Cuba Trade and Economic Council.

 

“If you have perishables and have them stuck on a dock in a loading terminal, that can be deadly to the business,” Entwistle said. “That kind of logistical stuff can happen.”

 

With trains in disrepair, imports move by truck in a vertically integrated delivery system in which port facilities, trucking fleets and warehouses are controlled by national import agencies. But controlled distribution and undeveloped wholesale and retail sectors offer no way for Cuba’s emergent crop of entrepreneurs -the target of the expanded U.S. exports- to do business directly with foreign markets.

 

“[T]he intention is to permit supplies, goods and money to wind up in the hands of Cuban entrepreneurs, but [administration officials] recognize there will need to be government pass-throughs,” said Jake Colvin, vice president of global trade issues at the National Foreign Trade Council. “Understanding the logistics of that, who’s able to take receipt of goods, … distribution arrangements, what’s acceptable to the U.S. government, that is going to be the first challenge.”

 

Despite the obstacles, Erick Erickson, vice president of the U.S. Grains Council, said Cuba is still a “substantial current market opportunity for U.S. agricultural products.” In 2008, for example, the U.S. provided 100 percent of Cuba’s corn imports. “If we’d been at 100 percent last year, it would’ve been our 12th largest market,” he said.

 

Telecom blackout

 

Cuba faces another big hurdle in its lack of Internet service and telecommunications access in general, which play a huge role in international business deals. The Obama administration’s new policy allows telecommunications companies to build up infrastructure in Cuba and exempts computers, cellphones and televisions from licensing requirements.

 

But if U.S. companies build it, will Internet access come?

 

Havana’s track record hasn’t given much reason for optimism. About 25 percent of Cubans have access to the Internet, according to the International Telecommunication Union, but that so-called access is heavily censored; the White House puts the number with full access at closer to 5 percent. Meanwhile, about 13 percent of Cubans have computers in the home -with 3 percent reporting Internet access- and 18 percent have mobile phone subscriptions, the United Nations agency says.

 

While Havana might prove leery of unwittingly importing U.S. surveillance along with American telecom services and equipment, the White House decision to ease telecom exports at least has the effect of taking away Havana’s claim that the reason Cubans don’t have access is because the Americans have been standing in the way, Freyre said.

 

Cash flow

 

Cuba’s longstanding trade deficit has made hard currency scarce. The government’s attempts to gain access to private sources of U.S. dollars led to a two-tiered monetary system in which services employees with access to tourists’ money, as well as other sources, are often better off than Cubans in other state jobs who are paid in the nation’s less-valuable peso.

 

While the “convertible” peso -the currency of tourists, foreign trade and upscale stores that stock imported products- is pegged to the value of the U.S. dollar, the national peso, used for purchases of food staples and other rationed items, is not, and has fallen to about 1/25th of the value of the convertible peso.

 

The upshot: Not only does the average Cuban not have the money for higher-end U.S. goods, but the overall lack of currency drives down exports to the island because Cuba’s import agencies sometimes can’t pay for shipments from the U.S. with cash in advance, as required by the U.S. embargo.

 

To help build up Cuba’s currency resources, the Obama administration raised the cap on the money Cuban-Americans can send family members on the island, quadrupling it to $2,000 a quarter. It also eased travel and spending restrictions, a move that is sure to exceed the 600,000 Americans who visited Cuba in 2013; if travelers each spend $1,200 while in the country, Cuba’s gross revenue could go up by tens of millions of dollars, U.S.-Cuba Trade and Economic Council President John Kavulich said.

 

Credit woes

 

Foreign companies, meanwhile, aren’t interested in extending credit to Cuba for business transactions -despite Havana’s list of roughly 250 economic priorities, including energy and agricultural development- because Havana has been defaulting on its debts. Just last April, Moody’s downgraded Cuba’s credit rating to CAA2, a very high risk.

 

“While I think that the business community recognizes Cuba’s potential, there’s also the reality that Cuba is bankrupt,” Freyre said. “Cuba is grossly in need of investment … but they don’t have a philosophy, don’t have the legal infrastructure to support any kind of mid-level to even higher-level industry.”

 

And when the idea of floating credit came up in the early 2000s, U.S. agricultural companies weren’t interested either, Kavulich said.

 

“Which one of us wants to have our CEO on CNBC explaining why our stock just tanked because we had to report a default from Cuba?” he said of the general thinking at the time.

 

But Entwistle said companies need to understand the need for patience when doing business with Cuba. While they may delay payments, Cuban importers generally won’t renege on them, he said.

 

“Some of the foreign business guys don’t really understand the … payment regime, and don’t have the patience to wait it out and to see it through,” he said.

 

Congress

 

But the embargo itself remains the biggest roadblock — something a bipartisan group of senators, including Amy Klobuchar (D-Minn.), Debbie Stabenow (D-Mich.), Dick Durbin (D-Ill.), Patrick Leahy (D-Vt.), Jeff Flake (R-Ariz.) and Mike Enzi (R-Wyo.), wants to change. They’ve introduced a bill to remove the remaining trade and travel restrictions, which they say are ineffective, blocking benefits for U.S. companies and damaging the nation’s image.

 

“If we can get this passed, if we can take away one of the communist government’s talking points as to why they shouldn’t be engaging with the U.S., that’s a big step forward,” a Senate aide said of the legislation, adding that Havana’s concerns over ushering in more openness is another reason to pursue the bill.

 

“As we build a history, creditworthiness goes up, those things [hurdles to trade] can get resolved. Even if it’s only a symbolic move, it is still a necessary one. You can’t even begin to address all those other issues until we address [the embargo] first.”

 

A handful of House Democrats and Republicans have introduced more than a half-dozen such bills, although, as in the Senate, the Republican leadership is unlikely to take them up.

 

Flake, who also introduced a bill to end the travel restrictions, told POLITICO that ban would be much easier to scrap in this Congress than the entire trade embargo, adding, “There’s just increasing consensus that this is the right thing to do.”

 

Public opinion polls show increasing support for such a move. A Feb. 14-15 Gallup poll found that 59 percent of respondents favored lifting both the travel and trade embargoes, while 30 percent opposed ending the travel restrictions and 29 percent the trade ban.

 

But Congress’ Cuban-American contingent is dead set against such moves. Longtime House Foreign Affairs member Ileana Ros-Lehtinen (R-Fla.), Senate Foreign Relations Committee ranking member Robert Menendez (D-N.J.), and potential presidential candidate Sen. Marco Rubio (R-Fla.), who is also a panel member, say no olive branches should be offered to Cuba until the Castro regime makes human rights reforms.

 

“For what are these negotiations?” Ros-Lehtinen said at a recent hearing on the administration’s policy shift. “So that more Americans can travel to Cuba and see what the regime wants them to see? All the while the regime fills its coffers, and we ignore the real truth? Because who owns the hotels? The Castro regime. Who runs the hotels? The Castro military. The truth about the Cuban regime is that it is a regime that severely punishes dissent, forbids reform and will do anything to maintain its grip on power.”

 

Critics say the administration squandered the chance to force Cuba’s hand, with internal pressures mounting on the Castro regime now that its major benefactor, Venezuela, is in an economic crisis because of slumping oil prices.

 

Kavulich said Havana’s troubles likely played into its willingness to reopen talks with Washington. But while the Castros might try to show they’re serious about economic reforms by allowing more privately owned businesses, Freyre said, “I would be astonished if you were to see a political opening with dissidents, public space for debate. That would be anathema to them because in their mind that would signal weakness.”