Challenges for Investors in Cuba*

 

Jaime Suchlicki, Institute for Cuban and Cuban-Aamerican Studies, University of Miami

 

President Obama’s recent visit to Cuba encouraged many in the United States to expect that economic relations would bring about major changes in the island. There is a strong belief among U.S. policymakers that economic considerations can influence Cuban policy decisions and that an economically deteriorating situation will force the Castro brothers to move Cuba toward a market economy and, eventually, political reforms.

 

This is not happening. General Raúl Castro introduced limited economic reforms in an attempt to muddle through a difficult situation. Yet the reforms are not structurally profound, nor are they propelling Cuba toward a free market. In Cuba, economic decisions are determined by political and ideological considerations.

 

The changes introduced by General Castro are not liberalizing foreign investment regulations, as most Cubans cannot partner with foreign investors. Investments in Cuba are only allowed with joint ventures controlled by military leaders or in partnerships with Grupo Gaesa, a large military group of state businesses directed by General Castro’s son-in-law, General Luis Alberto López Calleja.

 

Investors in Cuba face a maze of difficulties. These include the inability of bureaucrats to make decisions at the local level. Fearful of making mistakes, they tend to seek permission from higher authorities. Widespread corruption and cronyism make it difficult to navigate the island’s investment requirements.

 

The changes introduced by General Castro are not liberalizing foreign investment regulations, as most Cubans cannot partner with foreign investors. Investments in Cuba are only allowed with joint ventures controlled by military leaders or in partnerships with Grupo Gaesa, a large military group of state businesses directed by General Castro’s son-in-law, General Luis Alberto López Calleja.

 

These are not the only problems U.S. investors will face after the embargo is terminated. American businesses will be competing with European, Asian and Latin American companies already established in the island. With a bankrupt economy, Cuba will need substantial international credit in order to purchase U.S. goods. A corrupt and government-controlled legal system, where judges and lawyers are appointed by the state, will complicate legal transactions and limit access to courts to litigate commercial issues.

 

From the Cuban government’s point of view, the critical challenge facing General Castro is to balance the need to improve the economy and satisfy the needs of the population while maintaining continuous political control. Rapid economic reforms may lead to a loosening of political control, a fact feared by General Castro, the military and other government allies bent on remaining in power. The Cuban regime welcomes American tourists while limiting U.S. trade and investments and maintaining an anti-U.S. posture. Indeed, Cuba is a close ally of Iran, Russia, Syria and North Korea. The Castro brothers are strong supporters of Hamas and other enemies of Israel.

 

Under the current, slow reform scenario, only limited political and economic changes can take place. While a significant number of U.S. citizens are expected to visit Cuba if the U.S. travel ban is lifted, investment is likely to be on a small scale. If the U.S. embargo is modified or lifted, U.S. companies will attempt to enter the Cuban market and claim market share, as some Canadian, Asian and European companies have already done.

 

Given Cuba’s need for many products and consumer goods, the potential for trade with the United States is significant. Yet demand alone is not sufficient. Cuba must have the ability to pay for foreign goods and services. These resources will initially come from tourist dollars spent on the island. Eventually, Cuba must sell its products, primarily tobacco, agricultural goods, seafood and nickel, in the U.S. market. Trade will flourish only with massive U.S. tourism and large-scale U.S. purchases of Cuban products.

 

Investments will be limited, however, given the lack of an extensive internal market, the uncertainties surrounding the long-term risk to foreign investment, an uncertain legal system and the opportunities provided by other markets in Latin America and elsewhere. Modest initial investments will be directed primarily to exploiting Cuba’s tourist, mining and other primary resources.

 

Unless major reforms take place, it is unlikely that the U.S. government or corporations will be willing to commit significant investment funds in Cuba. The U.S. government may provide limited financial aid, but it will not grant Cuba other benefits such as North American Free Trade Agreement (NAFTA) membership. Foreign investment will be limited in scope as U.S. firms wait for Cuban measures to assure investors that the reforms taking place are irreversible and that they represent a major step toward a comprehensive transformation of the economy.

 

Under any scenario, however, post-Castro governments will face significant challenges, including massive economic reconstruction. Cuba’s economy became addicted to an unnatural and immense subsidy inflow for nearly five decades, first from the Soviet Union and, more recently, from Venezuela. Cuba does not have a viable economy of its own. As nearly every category of exports and imports continues to decrease, a vicious cycle of poverty has descended on the island.

 

Cuba has a weak internal market. Consumption is limited by a strict and severe rationing system. Many transactions take place in the illegal black market, which operates with dollars and merchandise stolen from state enterprises or received from abroad. The Cuban peso has depreciated considerably, and its purchasing power has decreased. According to the Cuban Statistical Office, the average salary of Cubans is the equivalent of US$22 per month [1]. The absence of virtually any stabilizing fiscal and monetary policies has accelerated the downward spiral of the economy.

 

Production of sugar, Cuba’s mainstay export, has dropped to levels comparable to those of the Great Depression era, and prices of other Cuban commodities continue their downward trend in international markets. With low prices, a decline in worldwide consumption, an increase in alternative, competitive producers and the widespread use of artificial sweeteners, sugar is a losing commodity with dire future prospects.

 

In addition to these vexing economic realities, there will be a maze of legal problems posed by the issue of the legality of foreign investments and the validity of property rights acquired during the Castro era. Some Cuban nationals, Cuban-Americans and Americans whose properties were confiscated during the early years of the revolution will want to reclaim them or will ask for fair compensation as soon as this becomes feasible. The United States and other countries whose citizens’ assets were seized without compensation stand ready to support their nationals’ claims. Cubans living abroad await the opportunity to exercise their legal claims before Cuban courts [2]. The Eastern European and Nicaraguan examples are good indications of the complexities, delays and uncertainties accompanying the reclamation process.

 

Cuba’s severely damaged infrastructure is also in need of major rebuilding. The outdated electric grid cannot supply the meager needs of consumers and industry; transportation services are totally insufficient; communication facilities are obsolete; and sanitary and medical facilities have deteriorated so badly that contagious diseases of epidemic proportions constitute a real menace to the population. In addition, environmental concerns such as contaminated water and pollution of bays and rivers are in need of immediate attention.

 

Creating a new society where human rights and freedom are respected will be a complicated endeavor. First, the issue of confiscated properties must be resolved. Without respect for property rights, it will be difficult to construct a fair and prosperous society. Property rights are part of a human rights process. Few investors will put their money in Cuba unless there is respect for property rights. Second, abuses of the past must be ended and a legally tolerant society established. Third, street protests are a daily occurrence. Known troublemakers are jailed or placed under house arrest. Small groups that stage street protests are arrested or beaten. These practices must be terminated, and the right to dissent must be respected. Fourth, only Cuban government elites and a very limited number of Cubans have access to the Internet. It is estimated that less than 5% of all Cubans have access [3]. Fifth, all daily newspapers, radio and TV stations are censored by the state. Content is dictated by Cuba’s Communist Party. Cuban bloggers are persecuted, and their market penetration in the island is very limited. A free press and Internet are indispensable tools to create a new society.

 

Societal, economic and legal problems are not the only challenges in Cuba’s future. One of the critical problems that a post-Castro Cuba will need to confront is the continuous power of the military. Cuba has a strong tradition of militarism. During recent years, the military has acquired unprecedented power—more than 60% of the economy is under military control. Under any conceivable scenario, the military will continue to be a key, decisive player. Not unlike Nicaragua, Cuba may develop a limited democratic system, with Cubans able to elect civilian leaders, but with the military exercising real power and remaining the final arbiter of the political process.

 

An immediate, significant reduction in military political power may be difficult, if not impossible, to achieve. A powerful and proud institution, the armed forces will see any attempt to undermine its authority as an unacceptable intrusion into its affairs and as a threat to its existence. Its control of key economic sectors (i.e., tourism, sugar, communications, transportation) under General Castro will make it more difficult to dislodge it from these activities and to limit its role to the barracks. Reducing the size of the armed forces will be problematic as the economy may not be able to absorb the unemployed members of the military and the government may not be able to retrain them fast enough to occupy civilian positions.

 

The role of the military will also partly be determined by social conflicts that may emerge in a post-Castro period. For the first half-century of the Cuban republic, political violence was an important and often determining factor in society [4]. Many Cubans developed a belief in the legitimacy of violence to effect political changes. This violence will probably reemerge with a vengeance in the future. The Castro communist rule has engendered profound hatred and resentment. Political vendettas will be rampant; differences over how to restructure society will be profound; factionalism in society and in the political process will be common. It will be difficult to create mass political parties as numerous leaders and groups vie for power and develop ideas on how to organize society, what to do about the economy, what type of regime should be established and how to unravel the legacy of decades of communist dictatorship.

 

A free and restless labor movement will complicate matters for any future government. During the Castro era, the labor movement has remained docile and under continuous government control. Only one unified, Castro-controlled labor movement has been allowed [5]. Investors are forced to hire workers from the state. Salaries are paid to the government in hard currency and the workers receive pesos, 1/10 of the money paid by foreigners [6]. In a democratic Cuba, labor will not be a passive instrument of any government. Rival labor organizations will develop programs for labor vindication and will demand better salaries and welfare for their members. A militant, vociferous and difficult labor movement will surely characterize post-Castro Cuba.

 

Similarly, the apparent harmonious race relations of the Castro era may collapse within a free society. Over the past several decades, individuals of Afro-Cuban descent have accounted for a great proportion of the Cuban population. Because of greater intermarriage and the exodus of more than one million mostly white Cubans of differing socio-economic backgrounds, black and mixed-race Cubans form a larger proportion of the population. This has led to some fear and resentment among whites. On the other hand, black Cubans feel that they have been left out of the political process, as white Cubans still dominate the higher echelons of the Castro power structure. The dollarization of the economy has accentuated these differences, with black Cubans receiving few dollars from abroad. The potential exists for significant racial tension once these feelings and frustrations are aired in a democratic and free environment.

 

One of the most difficult problems that a post-Castro leadership will face is acceptance of, and obedience to, the law. Many Cubans violate laws every day in order to subsist with low pay and inadequate government rations: they steal from state enterprises; participate in the black market; and engage in widespread graft and corruption. They do this to survive. Eradication of these vices will not be easy, especially since many of them predate the Castro era. Graft and corruption, as well as disobedience of laws, have been endemic in Cuba since colonial times. Obedezco pero no cumplo (I will listen but not obey) is one of the most lasting and pervasive Spanish legacies to Cuba and the Latin American world.

 

The Cubans’ unwillingness to obey laws will be matched by their unwillingness to sacrifice and endure the difficult years that will follow the end of communism. An entire generation has grown up under the constant exhortations and pressures of the communist leadership to work hard and sacrifice more for society. The young are alienated from the political process and are eager for a better life. Many want to migrate to the United States. If the present rate of requests for visas at the U.S. consular office in Havana is any indication, more than two million Cubans want to move permanently to the United States. Under the regulations, Cubans are free to visit the United States. Many come as tourists and overstay their visas. Others are claimed as legal immigrants by their relatives who are already naturalized citizens of the United States [7]. A new Cuban migration is already underway, posing additional problems for U.S. policy and immigration authorities at a time of increasing anti-immigration sentiment and legislation in the United States.

 

While many Cubans will want to leave Cuba, few Cuban- Americans will abandon their life in the United States and return to the island, especially if Cuba experiences a slow and painful transition period. The Institute for Cuban and Cuban-American Studies (ICCAS) estimates that less than 20% of Cuban-Americans will return to the island. Although those exiles who are allowed to return will be welcomed initially as business partners and investors, they will be resented, especially as they become involved in domestic politics. Adjusting the views and values of the exile population to those of the island will be a difficult and lengthy process.

 

The future of Cuba is clouded with problems and uncertainties. More than five decades of communism will surely leave profound scars on its society. As in Eastern Europe and Nicaragua, reconstruction may be slow, painful and not totally successful. Unlike these countries, Cuba has at least three unique advantages: proximity to and a long tradition of close relations with the United States; an attractive tourism sector; and a large and wealthy exile population. These three factors could converge to transform Cuba’s economy, but only if the future Cuban leadership creates the necessary conditions: an open, legally fair economy and an open, tolerant and responsible political system. Unfortunately, life in Cuba is likely to remain difficult and will only improve slowly.

 

Endnotes

 

[1] Anuario Estadístico de Cuba: Empleo y Salarios, Oficina Nacional de Estadísticas (2015).

[2] The U.S. government is only legally obliged to support the claims of individuals who were U.S. citizens at the time of a property’s nationalization. Individuals who became U.S. citizens after their property was confiscated (i.e., most Cuban-Americans) are not covered.

[3] Institute for Cuban and Cuban-American Studies (ICCAS), University of Miami, Issue No. 263 (2015), Doing Business in Cuba: Investors Beware, http://ctp.iccas.miami.edu/FOCUS_Web/Issue263. htm.

[4] These include the anti-Estrada Palma uprising in 1906, the uprising of black Cubans in 1916, the anti-Machado violent struggle in the 1930’s, violence in the 1940’s, the anti-Batista rebellion in the 1950’s and numerous political assassinations.

[5] Namely, the Cuban Confederation of Labor. Its elections are organized and controlled by Cuba’s Communist Party. As a result, the Party selects labor leaders.

[6] Foreign enterprises in Cuba are forced to hire and fire their workers through a state agency. The salaries of these workers are paid to the state, which in turn pays the workers 1/10 in Cuban non-convertible pesos (CUP). The CUP is estimated at 26 to 1 USD. The Cuban convertible pesos (CUC) is quoted at slightly higher than the U.S. dollar. Most tourists exchange their currency for CUC, paying a premium to the Cuban government.

[7] Under the 1995 revision of the Cuban Adjustment Act (known as the “wet foot-dry foot policy”) by the U.S. Congress, Cubans reaching U.S. shores are automatically permitted to stay in the United States. If intercepted in the ocean, they are returned to the island.

 

 

*Previously published in the International Law Quaterly Fall 2016 issue.

 

 

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