After Fidel, business as usual? Cuba still poor for investors
President Bush’s hard-line attitude toward Cuba has prompted businesses to pull back from exploring opportunities in the communist nation.
That is not expected to change evenasailing,longtimedictatorFidel Castro lies in a hospital bed and his brother Raul runs the country.
Other factors hindering the potential of doing business there include the island’s small population and poor investment climate, but Mr. Bush’s strong stance is the overarching issue, according to government officials, businesses and longtime observers and analysts.
The Cuban economic embargo, imposed in the early 1960s, allows cash sales only for food, medicine and medical equipment and restricts travel to the island.
During the Clinton administration, U.S. companies visited Cuba on trade missions and considered trade, investment and other business opportunities.
The Bush administration, however, has adopted a tougher approach, including a tightening last year of payment requirements on food exports to Cuba. That, business officials say, has played a major part in discouraging U.S. companies from exploring the Cuban market.
“If you look at the way the administration has tried to restrict food sales to Cuba, even though Congress passed a law permitting them, and at the roadblocks they’ve placed in the path of people and companies trying to visit Cuba, companies don’t have to stare too hard at the tea leaves to get the message,” National Foreign Trade Council President William A. Reinsch said.
“They just give up on trying to plan for business there. There has clearly been a chilling effect on opening doors to Cuba, and the result is that we will be unprepared when restrictions are finally lifted, which everybody knows will happen eventually,” he said. Bush backs embargo
The Bush administration has left little doubt where it stands on the embargo.
Mr. Bush said in 2002 that without political and economic reform, tradewithCuba“willmerelyenrich Fidel Castro and his cronies” and that the bar on U.S. financing for Cuban farmpurchases would continue, saying that it “would just be a foreign-aid program in disguise, which would benefit the current regime.”
Whenever the United States has shown interest in easing relations with Mr. Castro, “somehow it’s always failed,” Commerce Secretary Carlos Gutierrez said in a recent interview.
“You look back at history over the last 47 years and anytime that it looks likewe’re getting too friendly, they go to Angola, they shoot a plane down, they open up their jails [. . . ] and they let out a lot of very nasty people, not political prisoners,” he said.
The administration believes that outside investment will not lead to political liberalization or democratization, stressed Caleb Charles McCarry, the administration’s Cuba transition coordinator.
“Investing in the current economic and political structure in Cuba simply supports the regime, anddoesnotsupporttheaspirations of the Cuban people for genuine change that leads to political and economic freedom,” he said.
Under current law, Cuba would have to establish a transition government that takes a number of steps toward democracy and “does not include” Mr. Castro or his brother Raul for the embargo to be lifted.
Raul Castro is now running the country while the Cuban leader is in the hospital, leading some observers to speculate that the postFidel Castro era has begun. Mr. Castro has not been seen in public since July.
However, even if Fidel Castro leaves office in the next five years, the Economist Intelligence Unit in London said in an October report that it “does not anticipate any sudden, radical alterations in the political system.”
In addition, unless relations with Washington improve, the report said, Havana “will continue to limit dissent on the grounds of national security.”
The report predicted continued hostile U.S.-Cuban relations and sanctions, regardless of Fidel Castro’s presence, saying the sort of fundamental change in the relationship that could lead to liberalization “would require strong political will on both sides to overcome resistance based on ideology and vested interests, and there are no signs yet of any shift in the entrenched positions.” Hill could ease embargo
The election of Democratic House and Senate majorities for the next Congress could lead to efforts to ease the embargo. But without radical change in Cuba or a softened administration stance, those moves would be limited.
Last month, a delegation of 10 members of Congress from both sides of the aisle visited Havana, the largest U.S. legislative mission to Cuba under Mr. Castro to date.
Raul Castro invited the U.S. to talk about the two countries’ relations, including topics such as the embargo, immigration, drug trafficking, capture of fugitives, the environment and oil exploration.
Rep. Jeff Flake, an Arizona Republican who has sponsored legislation to allow U.S. companies to work with Cuba to exploit oil reserves off its northerncoast, said his bill would be more likely to get out of committee in the next Congress and predicted more proposals aroundtheedgesoftheembargo,in such areas as banking regulation.
HeistheRepublicanchairmanof the Cuba Working Group, a bipartisan group of members of Congress who are pushing for changes in U.S. policy toward Cuba.
Rep. Bill Delahunt, Massachusetts Democrat and the probable chairman of the International Relations oversight and investigations subcommittee, plans hearings on U.S.democracyassistanceforCuba. Mr. Delahunt, who is the DemocraticheadoftheCubaWorkingGroup, said Congress initially will focus on travel restrictions, although he crit- icized current overall Cuba policy.
“You’d have to be oblivious to the past 50 years not to conclude that this just hasn’t worked. And now, we don’t understand, I don’t think, what’s happening in Cuba, what the reality is in Cuba, and I think it hurtsusifwewanttohaveinfluence in Cuba as Fidel Castro passes from the scene,” he said.
Rep. Charles B. Rangel, the New York Democrat who is expected to head the Ways and Means Committee, will continue to oppose the embargo through a Treasury appropriations amendment to bar funding of the enforcement of the embargo, according to his staff.
But any push to lift the embargo in the new Congress would not get to the floor for a vote, said Sen. Larry E. Craig, an Idaho Republican who sponsored the oil legislation in the Senate.
He cited both a reluctance in the Senate to take dramatic action until there is a change in Havana and strong backing for the embargo by the Bush administration.
Congress can have some influence on foreign-policy issues, he said, “but if the executive is hard over on an issue, and they are, clearly, on this issue, then it will be very difficult to do anything over the next two years.” Doing business tough
One U.S. official said the administration is not using its embargo enforcement to try to discourage American companies from considering the Cuban market, but to ensure a transition to “real democracy,” including “real economic reform.”
Mr. Reinsch, however, described the situation more ambiguously.
“We don’t think — or can’t prove at any rate — that the administration has overtly told companies to stay out of Cuba notwithstanding the laws permitting them to engage in certain activities there,” he said.
“We do think that their actions have been deliberate and have sent clear signals to the business community that doing business with Cuba won’t be worth the effort.”
Others clearly say the administration’s stance has tamped down business enthusiasm for Cuba.
In 1994, members of the U.S.Cuba Trade and Economic Council came from a variety of industries, including pharmaceuticals, financial services, tourism, food, agriculture and retail, although legal trade was limited to health care products, said John S. Kavulich II, the group’s senior policy adviser. By 2002and2003,hesaid,membership was largely in the food and agriculture industries.
Many businesses that have shown interest in Cuba would not comment for this article.
Cuba has bought more than $1.3 billion in U.S. farm products since late 2001, according to the Congressional Research Service, but even companies allowed to export to Cuba see the embargo as a hindrance.
The U.S. rice industry exports 150,000 to 200,000 metric tons to Cuba a year, but that should be more like 500,000, said Stuart E. Proctor Jr., president of the USA Rice Federation. Cuban officials have said the U.S. would be Cuba’s top rice supplier if it weren’t for the
embargo, he said.
Mr. Proctor said U.S. regulations have made shipping rice to Cuba more difficult, raising questions for Cuban officials about America as a rice supplier.
“You’ve got to be a reliable supplier, and we’re not, in the eyes of the Cubans,” he said. Investment possibilities
Observers instead stress the potential for investment, where opportunities for U.S. companies remain, although companies coming from countries ranging from Israel to China to Britain are already working there.
Investors from other countries havemoved into such industries as nickel mining, telecommunications, infrastructure and citrus production, Lexington Institute Cuba analyst Philip Peters said, although he added that Cuba is looking for partners in other areas.
Potential opportunities for American companies include energy, agriculture, tourism, biotechnology and information technology, Mr. Peters said.
The best initial opportunities will be those that generate hard currency, such as nickel mining, where there is still room for new foreign companies, as well as oil and hotels catering to foreigners, he said.
Some foreign oil companies have signed agreements with Cuba for oil and gas exploration along Cuba’s northern coast, including Repsol of Spain, Sherritt International of Canada and Sinopac of China.
Executives from energy-related U.S. companies such as Exxon Mobil Corp., Caterpillar Inc. and Valero Energy Corp. met with Cuban officials in Mexico City earlier this year to discuss Cuban oil reserves, but are barred from exploring those reserves.
The U.S. Geological Survey has estimated there are between 1 trillion and 9.3 trillion barrels of undiscovered oil and between 1.9 trillion and 22 trillion cubic feet of undiscovered natural gas off Cuba’s northern coast.
If the United States maintains its embargo, India, Spain and Canada could end up drilling for oil 51 miles off the U.S. coast, according to Kirby Jones, president of the U.S.-Cuba Trade Association.
“If you’re a Floridian looking with binoculars away from Key West, if you’re going to see an oil platform, I think you’d feel more comfortable if it was a U.S. platform than a Chinese platform,” Mr. Flake said.
Mr. Jones says the post-Castro era already has arrived, describing the country as a sophisticated, growingbusinessenvironmentwith 350 joint ventures operating and 500 to 600 foreign companies maintaining offices. He said that even in areas that are still open to Americans, opportunities become fewer each day.
Cuba, he said, is much different than it was in 1994, when the first joint venture was set up. Foreign partners already are operating in all the sectors of the Cuban economy where they are allowed — those aside from defense, health care and education — and he said many of them have invested hundreds of millions of dollars in the past 12 years. Other hindrances
The U.S. embargo is not the only obstacle to business, though. Observers note that Cuba only has about 11 million people and they have limited access to hard currency. Vietnam, by contrast, has a population of more than 84 million and is not an island.
One agriculture industry official said his company’s attention to the Cuban market “would not be enormous” if the embargo were lifted but the political situation didn’t change. The official said U.S. companies in the agricultural sector would be interested in Cuban possibilities without the embargo, but that there would be no rush into Cuba as long as the economy is state-driven.
Another agriculture executive said there are appealing aspects to Cuba, including its proximity and the fact that it pays cash, but added it will always be a small part of the market, even without the U.S. embargo.
Outside of agriculture, opportunities for U.S. exports may be limited as well.
“There’s reason to believe that over time the Cuban economy is going to do well and produce a consumer class for American goods, but not in the short term,” according to lawyer Robert Muse, who has substantial experience in U.S. laws relating to Cuba.
“When the embargo’s lifted, some U.S. companies will seek to export to Cuba, but it’s going to be targeted exports. It’s going to be luxury goods for the hotel trade, for example,” he said.
Joint ventures aren’t as numerous as they used to be for investors. Cuban authorities have cut back on the number of small foreign companies active in Cuba since 2003, but are interested in larger companies for major projects in such areas as mining and energy, according to the Economist Intelligence Unit.
In opening to outside investment, Mr. Muse said Mr. Castro “made a tactical accommodation with capitalism” during the 1990s, when the Soviet bloc trading arrangements expired and “Cuba needed serious foreign investment, it needed to, in the expression they used in Cuba at the time, reinsert itself into the world economy.”
It also needed some limited reform to alleviate serious shortages of food, consumer goods and services, according to the CIA’s World Factbook.
“But that situation has bettered itself over time,” Mr. Muse said, adding that Cuba is now more economically stable “and there’s been a direct correlation between the lack of new investment going into Cuba and its financial health,” he said.
Cuba has increased ties with China and Venezuela, which has helped Cuba’s economy. “These relationshipsseemsettobecomemore important” and will overshadow Cuban relations with Organization for Economic Cooperation and Development countries, according to the Economist Intelligence Unit.
Cuban authorities would not comment for this article, but others pointed to Cuban government policies as a barrier to investment.
The Economist Intelligence Unit described Cuba as “one of the world’s least attractive foreign investment destinations” from 2001 through 2005. The situation is likely to improve only slightly through 2011 because of state domination of Cuba’s economy and limited opportunities for private business, the report said.
Outsideinvestmentalsohasbeen hindered by outstanding claims on expropriated property and by U.S. sanctions, which increase costs of such activities as shipping and restrict the export market for Cuban products, the report said.
Cuba’s inhospitable investment environment may mean that there are still opportunities for U.S. firms, should relations ease between the two countries.
Mr. Muse said Mr. Castro’s “genuine distaste for international capitalism and the profit motive” probablyhasleftmuchoftheinvestment market relatively open, adding that “verylittleisforeclosedfromAmerican companies at the moment.”
However, he added that in areas where there is room for only one foreign investor, primarily in raw materials, American companies could lose out.
Tourists in a carriage drove past a billboard with an image of Cuban President Fidel Castro in Havana. Hotels in Cuba catering to foreigners are among the most promising opportunities for U.S. investment.