TO INVEST OR NOT TO INVEST, THAT IS THE QUESTION

Cuba in its new stage: A SWOT analysis

                                                                                                                                                      Carlos Alberto Montaner *

Precisely today, Aug. 14, 2015, the Stars and Stripes will be raised in Havana, formally reestablishing diplomatic relations between the United States and Cuba, interrupted on Jan. 3, 1961, 54 years ago, when Ike Eisenhower governed in Washington and Fidel Castro ruled in Havana.

U.S. President Barack Obama and his secretary of State, John Kerry, are among many personalities who have requested lifting the economic embargo imposed on Cuba by John F. Kennedy in 1962, in the midst of the Cold War. German, French, Dutch and Spanish high officials have passed through Havana recently intent on building bridges to the island nation.
The perception then is that Cuba, the largest of the 13 Caribbean markets and the most populous island followed closely by the Dominican Republic, is opening anew to international trade and international relations.

For the purpose of brevity and objectivity, given the composition of this audience, I am going to use the structure of the so-called SWOT analyses to contribute to the business decision to either invest in that market, abstain from doing so, or wait for more clarity or better business conditions. My function will not be to recommend what should be done but to place certain data and basic elements on the table of decision-makers who will decide what should be done.

As you are aware, SWOT analysis lists positive Strengths, perceived Weaknesses, current Opportunities and Threats ahead.

Strengths

1. The thaw announced simultaneously by president Barack Obama and general Raúl Castro on Dec. 17, 2014, and the various steps taken by both governments towards “normalization” of relations, have created an atmosphere of triumphalism, stacked with positive expectations over Cuba’s economic future.

2. According to recognizably resourced surveys, support for Obama’s measures comes from a significant majority of people in the United States and inside Cuba, and there are reasons to believe a substantial percentage of Cuban exiles also support them.

3. As part of that rapprochement, expectations are many foreign companies will explore the feasibility of investing in the island. Cuba’s human capital is remarkable: more than 800,000 university graduates and a generally healthy and educated population.

4. The Cuban government, after 56 years of uninterrupted rule, appears to be in solid control of the country, without any person or group visibly challenging its authority with any possibility of success.

5. Following the election of Hugo Chávez to the presidency of Venezuela in late 1998, this oil-producing country has transferred vast resources to Cuba. Economist Carmelo Mesa-Lago estimates the amount of aid at its peak reached over $13 billion per year.

6. A quarter-century after the disappearance of the Communist bloc, the Castro government has shown to be, along with North Korea, the exception to the norm: maintaining control without renouncing the principles of Marxism-Leninism and single party rule, while cautiously attempting to modify its productive apparatus.

7. In that spirit of “within-the-system reforms”, in April 2015 Raúl Castro introduced what is known as The Guidelines, which outline his government reforms, creating spaces for foreign investment and “cuentapropistas", self-employed entrepreneurs.

8. The institutions with the most sizeable weight and greatest visibility in Cuban society, the Armed Forces and the Assembly of the People’s Power, appear to fully support the steps taken by General Raúl Castro, in the direction of re-engagement with the United States.

9. Some foreign ministries in the European Union -such as the Spanish, German and Dutch- look approvingly upon the situation, as does the Vatican, which has participated in secret meetings to achieve an end to the conflicts between Cuba and the United States. Pope Francis has announced he will soon visit Cuba as a way to support the announced changes.

10. Cuba exerts enormous influence on the ALBA countries and is clearly the leader of what are known as "21st-Century Socialism Nations": Venezuela, Bolivia, Ecuador and Nicaragua.

11. We must add to this list the sympathy and solidarity Cuba inspires from the governments of Argentina, Brazil, Uruguay, Chile and El Salvador. In sum, never before has the island been so favored internationally.

Weaknesses

1. The government of Raúl Castro clearly does not want regime change but seeks to improve the communist model initiated in 1959. According to published statements, the intended prototype is neither Chinese nor Vietnamese but Military State Capitalism where the government reserves for itself the control over the nation’s 2,500 largest businesses, capitalizing on them directly through its military apparatus or in a controlling partnership with foreign capitalists. The Cuban people will have no access to the means of production but only to small service enterprises, e.g. private restaurants, barbershops…

2. Raúl Castro does not believe, as did Deng Xiaoping in 1992, that "to get rich is glorious." Raúl and Fidel continue to believe capitalism is a wicked expression of the worst human tendencies and despise those who practice it. In Cuba, entrepreneurs are not encouraged but repressed. Capitalists can be necessary under certain circumstances but always under the strict control of the political police, so as to prevent the people’s ideological contamination and thwart the excesses capitalists are capable of. The government continues to maintain its supremacy in central planning over the market and the virtues of frugality and non-consumerism.

3. Entrepreneurs looking to evaluate country-risk before investing, first check its Moody’s or Standard & Poor’s rating. According to these risk-assessment evaluators Cuba stands in the "Most Dangerous" column. There is a long history of delinquency or simply breach of obligations and refinancing events which have eventually proved to be useless. Havana has not been willing to pay because of a serious basic quandary: Cuban society is highly unproductive due to the collectivist system imposed upon it and because of the amount of, and the priorities in, public expenditure set by the government.

4. The Cuban government lacks substantial reserves and generates barely sufficient revenue to survive month to month. This determines its lack of minimum resources to undertake major public works needed and, therefore, requires international loans to meet them. This presents a relevant problem because the government is not a trustworthy credit subject.

5. Cuba has no impartial courts to which complainants may turn to deal with a civil law controversy, much less a criminal case. There is an absolute absence of legal defense in any instance of conflict with the government or a state-owned business. The government, according to its needs, persecutes, arrests or releases any citizen arbitrarily, including foreign businessmen with whom it has engaged in a controversy. In other words, the opposite of true Rule of Law. Panamanian Simón Abadi, Chilean Max Marambio, Canadian Sarkis Yacoubian, and dozens of others can testify to this.

6. Foreign businessmen in Cuba live under the "not-so-discreet" surveillance of the Security apparatus, always on a paranoid search for the mythical and sinister CIA agent. Most Cuban bureaucrats and simple neighbors or potential friends dare not associate with foreign businessmen for fear of losing the government’s trust or find themselves under orders to submit written reports of every voluntary or involuntary contact made with them.

7. Cuba has not solved the key problem of the currency. Officially, the Dollar exchange rate is close to par to the Cuban Peso. In the parallel market it is currently fixed at 24 Pesos to 1 Dollar. Cubans are paid in Pesos but the government sells to them in Dollars, which generates much unconformity and an overwhelming feeling of injustice.

8. Wages are critically low (about $24 a month), which determines the practical inexistence of a potential market of 11 million consumers. Cubans have the lowest purchasing power per capita in all of Latin America.

9. The banking system is insufficient and primitive. Dollar deposits can be frozen at the government’s discretion, as in recent occasions.

10. Bureaucracy is excruciatingly slow and insecure. Functionaries dare not make decisions and the instructions they receive are in many instances contradictory.

11. The hiring of workers is done through a government-owned HHRR firm which charges investors in Dollars and pays Cuban workers in Pesos. In the transaction, the Cuban government pockets 94 percent of the wages paid by the foreign, or foreign participated, employers. This practice is contrary to international accords subscribed with the International Labor Organization “ILO".

12. For over half a century, Cubans have been accustomed to stealing from the State in order to survive, selling the product of the pilfering on the black market. These habits have been carried over to private enterprise, especially self-justified as Cubans have lived under an intense propaganda campaign against capitalist exploiters. They know socialism leads to disaster but they also believe capitalism is a practice of voracious wolves.

Opportunities

1. The country needs to totally rebuild its infrastructures. Everything is either obsolete or in ruins: running water and sewage, power lines, bridges and roads, telephone lines, the Internet, houses and buildings. Housing deficit is conservatively calculated at over 1.5 million units.

2. Land is fertile and well suited for local food production. Cuba imports 80 percent of foodstuffs and consumables expended by people and animals. The reverse ratio of pre 1959.

3. The sugar industry, the backbone of the Cuban economy prior to the revolution with an average yearly production of 6 million tons, now produces close to 2 million tons a year.

4. Tourism is a most promising area. The island, with its beautiful and varied landscape, spread out through more than 1,100 islands and cays on both coastlines is ideally suited for the development of tourism hubs similar to Puerto Banús in Spain or Casa de Campo in the Dominican Republic.

5. Considering the number of researchers in the field of medicine, relevantly underutilized, the country could potentially become a valuable partner to major international pharmaceutical industries for the development and production of new medical products and systems.

6. Given the prestige of its health system (presently more diminished), Cuba could potentially rise as an excellent destination for medical tourism establishing links with U.S. health insurance groups. Havana is much closer to Key West than Miami to Orlando, Fla.

7. As soon as relations are truly normalized, travel restrictions are eased and visitors to the Island multiplied, Cuba will become an ideal retirement destination for tens of thousands of Americans and Cuban-Americans with Social Security incomes averaging $1,800 a month.

8. Cuba, with a population of 11 million, presently welcomes roughly 3 million tourists a year. In very few years, it could host 11 million tourists and achieve paradise rating. A few bold and smart developers could transform the coastline of Cuba, nearly 4,000 miles long (roughly 1.25 times the Atlantic coastline of Florida), with 289 natural beaches and 200 natural harbors, to become one of the top 10 tourism destinations in the World. The Atlantic Coast of the US and the Caribbean is home port to over one million motor yachts and sail boats that could sail to Cuba and dock in existing marinas and those yet to be built.

9. Should relations between the U.S. and Cuba continue to strengthen, a foreseeable Free Trade Agreement would allow the island to export without limitation to the U.S., the world’s richest market.

10. Thanks to its strategic geographic location, Cuba is an ideal hub for distributing passengers and cargo by sea and air between North and South America, and Europe.

11. As the Taiwanese did to China, Cuban-Americans could bring to Cuba their business expertise and relations as well as capital they have created, inserting the island into the commercial and entrepreneurial world of the United States.

12. As in post-communist Eastern Europe, Cuba would quickly become a paradise for the United States’ best known fast-food and business franchises: MacDonald’s, Burger King, KFC, etc.

13. Same as would happen with retail store chains such as Zara, Corte Inglés, Macy’s, Sears and the rest of the most renowned retailers and merchants.

Threats

1. A substantial part of the policy of reconciliation between Obama and Castro is contingent on lifting of the US embargo. Although there is great pressure by the White House and surveys show most Americans want sanctions to end, there are no guarantees this will happen during the current presidential term. Nor can anyone predict what will happen to relations between both countries if the upcoming elections are won by a Republican Party candidate. Two of the most prominent White House contenders, Jeb Bush and Marco Rubio, have adamantly criticized President Obama for his new Cuba policy and announced their intentions to reverse sanctions relief should Human Rights and Freedom still remain sequestered by the Castro regime.

2. Repealing the Helms-Burton Act of 1996 is one of the key requirements for Cuba to approach the Inter-American Development Bank, the International Monetary Fund or the World Bank to vitalize its affiliation to those institutions. Lacking this prerequisite, the Cuban Government will have no access to loans for the reconstruction of the costly infrastructures the country needs. It should be a very slow process and will take considerable time.

3. In great measure, Cuba depends on subsidies from Venezuela, but Chavism is going through a difficult period that could lead to its implosion and replacement by a government unfavorable to “The Cubans”. The disappearance of Chavism in Venezuela would be an economic and political catastrophe for Cuba. President Nicolás Maduro’s popularity rating is below 20 percent today.

4. To this day, the Cuban regime’s political stability has depended on the control exercised by Fidel and Raúl Castro. Fidel became 89 years old yesterday and Raúl 84 in June. With their relief from power ends the generation of the Revolution and a door is opened to younger leaders, led by Raúl Castro’s chosen heir, engineer Miguel Díaz-Canel, 55. What will happen then? Will the regime be able to transmit authority within the single-party communist model without the caudillos who have up to now given shape and sense to the government? Will there be an upsurge of uncontrollable ambitions by other candidates, presumably young military officers, intent in seizing command and control? Nobody knows. However, Cuban history has shown its violent and bloody face when regimes become exhausted. They have typically been replaced violently.

5. It will be quite risky to invest in properties confiscated from their legitimate owners during the early years of the Revolution. Both in the United States and Spain, there are organizations of aggrieved plaintiffs ready to go to court in defense of their rights retaining counsel to that end. Originally, victims of confiscation were Americans or Spaniards but, with the passing of time, Cuban-Americans and Cuban-Spaniards have come aboard claiming their property rights. Legislators of Cuban provenance and ancestry are a force both in the House and Senate of the United States and in the Spanish Parliament.

6. The Nicaraguan experience will probably apply in the Cuban scenario. Nicaraguan exiles, infinitely less numerous and powerful than Cuban-Americans and lacking representation by Nicaraguan-origin legislators in Washington, managed to precondition U.S. aid to the solution of the confiscations they suffered during the first Sandinista decade. Predictably, grieved Americans and Cuban-Americans will manage to paralyze U.S. aid and benefits to Cuba until their confiscated properties are returned or compensation for the stolen properties is paid.

7. Although there is a distinct possibility to profit in Cuba’s tourism industry, it is unlikely U.S. hotel industry holding companies, nearly all listed in Securities Exchanges and subject to U.S. legislation and union pressure, will agree to collaborate with Cuban counterintelligence facilitating clandestine recordings and covert filming inside hotels as Meliá and other European hotel chains conduct today, in violation of Cuban law which allegedly defends the inviolability of privacy. American lawyers are mindful of the high price paid by German companies who cooperated with the Nazis, e.g. Volkswagen, Bayer et al.

8. Inasmuch as it’s not a question of investing in a country under a dictatorship, but rather of partnering with a dictatorial government to exploit the workers and the companies, it is very likely that, when the opportunity arises, business people linked to the Cuban government will be brought before a court with claims for the confiscation of 94 percent of their workers’ salaries through the Dollar/Peso exchange fraud and other violations of ILO rules. Workers’ claims will be enormous, and there are legal offices in the U.S. ready to file suits on a success basis for a percentage of compensations eventually awarded.

9. Finally, two articles in the current Cuban Constitution describe the inflexibly communist nature of the regime, resulting in a permanent threat against foreign investors. Article 5: The Communist Party of Cuba, Martían and Marxist-Leninist, organized vanguard of the Cuban nation, is the superior leading force of society and the State. Article 62: None of the freedoms recognized for the citizens can be exercised against norms established by the Constitution and the laws, nor against the decision of the Cuban people to build socialism and communism. Violation of this principle is a crime punishable by law.

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* Presented at the Business Council of Latin America "Annual Conference: Latin America and International Trade in San Juan, Puerto Rico on August 14, 2015.

 

Cubanálisis - El Think-Tank

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