Is Cuba ready for the business boom?

Cuba is changing fast.

On December 17 President Barack Obama and President Raul Castro, in simultaneous addresses to their nations, announced that diplomatic ties would be restored – ending over half a century of Cold War era hostility. Communications, banking systems and travel connections would be improved, the two men promised. Since then Mastercard and Netflix have moved into Cuba – although given the speed of internet connections, their presence is as yet largely symbolic. That will change soon, though: an exploratory team from Google visited Cuba this month, and US-based IDT Corp has also agreed with Cuba to provide direct international telephone systems.

On Friday Mr Obama and Mr Castro will come face to face in Panama at the Summit of the Americas, in what is being billed as the first working meeting between the two countries – separated by only 90 miles of sea – since 1959.

And later this month, from April 27-30, a delegation of British businesses led by Lord Hutton will travel to Havana to meet with senior Cuban figures and discuss potential investments. The main sectors being touted include energy (oil and gas as well as renewables), mining, tourism, biotechnology, agribusiness, industry, manufacturing and transport.

“Britain, its interests, and British companies must not be left behind,” said Lord Hutton. There is undeniably the sense that Britain must not miss out. The visit, organised by the Caribbean Council, will take place “at an important time, when Cuban relations with the US, the EU and the UK are evolving,” they say.

And yet, as one British businessman told The Telegraph in Havana earlier this month, doing business on the largest island in the Caribbean is “not for the faint hearted”.

“It’s virgin territory,” said Ricardo Torres, of the Cuban Centre for Economic Studies at the University of Havana. He told The Telegraph there were huge opportunities in mining – especially nickel – and in tourism, with 2015 on course to be a record year. “That’s why it’s so attractive. There are very few foreign companies here. And its conditions are unique.”

Cuba remains one of the world’s last centrally-planned economies, with the president walking a tightrope between the vital loosening of stranglehold restrictions on the economy, and avoiding unleashing full-blooded capitalism. Fidel Castro on a visit to Beijing was famously horrified by the direction that China’s “Communism” was taking, and his younger brother insists that Cuba’s economic development, begun in earnest in 2011, will follow their own “Cuban model”.

“For revolutionary Cuba, foreign investment has been about more than dollars and cents,” said Richard Feinberg, author of a 2012 Brookings Institute study into Cuba’s economic climate. “It’s about cultural identity and national sovereignty.”

FDI in Cuba is shrouded in mystery, he said. Data are scarce and executives rarely grant interviews. Hence, only a few scholars have sought to break through the mist.

“Not surprisingly, Cuba has received remarkably small inflows of foreign investment, even taking into account the size of its economy,” he added.

Since 2011, Cuba has begun encouraging the formation of private enterprises, permitting property and automobile sales, and reducing the role of the state in agriculture.

And it has begun to look abroad.

A Canadian nickel mining and smelter company, Sherritt International, is generating the largest single source of foreign exchange earnings, surpassing sugar. Perhaps surprisingly, given the embargo, the US last year exported almost $300 million worth of goods (mainly in agriculture) to Cuba – although imports were officially zero.

Levels of UK-Cuba trade are relatively low, with the UK exporting to Cuba £25m in 2012 and £22m in 2013. Imports from Cuba accounted for a mere £33m in 2012 and £105m in 2013. Britain is currently the 11th largest trading partner with Cuba – Spain, unsurprisingly, is the top EU collaborator, closely followed by the Netherlands. But worldwide it is Venezuela with whom Cuba does the most of its deals.

And given the precarious situation in Caracas, and in Moscow – a historic crutch to the Castro regime – it is unsurprising that the country is looking abroad.

“We want to emphasise that the UK is ready to support Cuba in the updating of its economic model,” said Tim Cole, the British ambassador to Cuba. This, he said, will “improve its business climate and open itself to foreign investment.”

Last month Mr Cole hosted a seminar in which Cuban government functionaries and British business consultants discussed how to attract investment. Such meetings would have been previously unthinkable.

“Cuba is widely considered a hostile business environment for those not close to the upper ranks of the government,” said Diego Moya-Ocampos, Latin America analyst for IHS Jane’s. “The island nationalised all foreign business in the 1960s when the country embraced communism. FDI was banned until the 1990s when it became necessary to compensate for lost revenues resulting from the fall of the Soviet Union.”

The launch of the $1 billion special development zone at its port in Mariel – funded largely by Brazil, and currently the site of much international interest – “could significantly improve the Cuban business environment,” said Mr Moya-Ocampos.

“Although its full potential will still be limited by the US embargo on the island,” he added.

Only a handful of British businesses are currently present in Cuba.

AstraZeneca operates in Cuba, but with the business managed out of offices in Panama and Costa Rica, and without employing AstraZeneca people in the country. British company Havana Energy has signed a joint venture agreement in Cuba to produce renewable energy with cane refuse and other biomass vegetation. Financial services are yet to operate in Cuba – the US embargo has not only prevented US companies from trading with Cuba, but has been interpreted in such a way by the US Treasury as to have also become a significant impediment to UK companies as well. But British banks could soon follow the lead of MasterCard and expand onto the island – especially if, as expected, the US shortly removed Cuba from its list of state sponsors of terror.

Perhaps the biggest British company currently in Cuba is Imperial Tobacco, which operates a joint venture with the Cuban government – Habanos cigars. The company produces some of the most famous cigars in the world – Cohiba, Montecristo, Romeo y Julieta, among others. Habanos announced global sales of $439 million in 2014, down one per cent from 2013, but with high expectations of a bumper year for 2015, given that Mr Obama announced in December that US travellers could now take $100-worth of cigars out of the country.

“I think we could export $250 million or more,” said Jorge Luis Fernandez Maique, commercial vice president at Habanos, at the annual fair in Havana in January.

Back in Baracoa, however, the bright lights of big multinational businesses seem a long way away. Indeed, the only bright lights Nico and his family see are those from Haiti, shimmering across the waters from the far eastern tip of the island at Maisi.

Maisi is an area being promoted to British businesses this month, with a $285m investment needed for a potential wind farm.

“It will be excellent news for us if all of this happens,” said Nico, sitting on his veranda, his two children at his feet. “We need visitors to come.”

Mr Feinberg, the economist, agrees.

“As Cubans have been well aware since the arrival of Christopher Columbus, the encroaching international economy matters greatly,” he said. “It can be a source of not only harsh punishments, but also great benefits.”

(From: The Telegraph)