CUBA 2015: IS IT REAL THIS TIME?
Posted on January 28, 2015
Every decade or so the economic promise of Cuba appears on the radar screen of international investors.
With the disintegration of the Soviet Union in December of 1991, Cuba lost its main benefactor. Confronted with severe economic hardship – the years following the fall of the USSR were euphemistically called the “Special period” – Cuba began opening to foreign investment and in 1995 adopted Law 77 (Foreign Investment Act).
At first the initiative generated considerable enthusiasm but concrete results ultimately fell far short of expectations. Foreign investors, primarily European, Canadian, Mexican and Australian, fully expected Cuba to follow Eastern Europe and transition to a mixed economy. To say that this did not happen is an understatement.
In 2008 Raoul Castro took over from his brother and in early speeches acknowledged that improvement was required and instituted modest economic reforms. Again, interested investors, at first intrigued by the changes, rapidly looked elsewhere for opportunities.
A year after the death of Hugo Chavez – Cuba’s new benefactor – Cuba published its new Foreign Investment Law (April 16, 2014). The law addresses some, but by no means all, of the shortcomings of Law 77.
In December 2014 the United States and Cuba, with assistance from the Vatican and to a much lesser extent Canada, stunned the world by agreeing partially to normalize relations. The announcement was the culmination of an 18-month process.
Needless to say that this last event has generated much curiosity, if not serious interest, in the United States. From my dealings with Cuba since 1994, I have learned five lessons:
- Necessity: The Cuban leaders, at least openly, like their system and are only looking to improve it. They are not looking to change it. Economic liberalization is done out of strict necessity and the default is always to revert to the status quo. This attitude permeates the bureaucracy and state enterprises.
- Short Term: Cuba does not do something unless it expects to benefit from it. This is sensible enough. The problem here is that Cuba has a shorter term horizon than most serious investors. Cuba has considerable financial needs and wants early returns from foreign investments. This disconnect has caused much friction and increased upfront costs, sometimes to the point of rendering viable businesses uneconomical.
- Control: The Cuban government does not want to relinquish control and will not hesitate to roll back measures if it believes that it is threatened.
- Broad Principles: Cuban negotiators are intelligent, educated and sharp. In short, they are very good and tenacious negotiators. They do not like detailed documents. They prefer broad statements and shorter documents. In theory this allows for adjustment required by changed circumstances. In practice, this breeds uncertainty and leads to near continuous negotiations and much horse trading. In Cuba, patience at the beginning of the process is very much a virtue and a hastily agreed agreement is a recipe for much financial and other pain.
- Complexity: Doing business in Cuba is complex. Among other things, your Cuban employees are not your employees. They are the employees of a Cuban enterprise that hires them, disciplines them and pays them only a small fraction of what the Cuban enterprise charges for their services. This way of proceeding is most unfortunate on many levels. From a business standpoint it raises issues as to loyalty, authority, productivity, overstaffing and nepotism.
It is clear that the economic future of Cuba is closely tied to the United States and that eventually Cuba will see considerable US investment – much to the detriment of the rest of the Caribbean. The rest of the world has done what it could in Cuba and it is now the turn of the United States. However, at this time those eager for first mover advantage should proceed with caution.