Doing Business in Cuba: InvestorsBeware*

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  Doing Business in Cuba: Investors

  Beware**

  The possibilities of entering the Cuban market is of significant interest to American enterprises.

  However, upon closer examination the Cuban market offers American companies a very

  unfavorable risk-benefit analysis.

  Unlike most markets where the corporate due diligence focuses on examining the market

  conditions for doing business in a given country; the Cuban due diligence must begin by examining

  the conditions for doing business with Cuba. That is, with the Cuban government and more

  specifically with the Cuban military, which controls most businesses in the island.

  There is no private sector in Cuba in the sense that we use that term in free market economies. The

  so called self-employed (cuentapropistas) in Cuba are not equivalent to a private sector. These are

  individuals that have been granted permission by the State to operate in one of 201 highly specified

  domestic commerce and under very restricted conditions. They do not have legal standing as would

  a sole proprietorship, partnership or corporation in the United States. It is therefore very misleading

  Issue 263

  November 30, 2015
• to speak of a private sector. American businesses must understand that they will have to operate in

  partnership with the oppressive Cuban government.

  Doing business in Cuba means doing business in partnership with the Cuban military.

  The first section of this report will highlight some of the requirements for doing business with

  Cuba under Cuban law and the second section will highlight some of the market conditions for

  doing business in Cuba.

  I. Doing Business With Cuba

  Legal Environment

  Written in 1976, and extensively revised in 1992 and later in 2002, the Constitution clearly defines

  the power vested in the Communist Party. Article 5 states that “the Communist Party is the superior

  leading force of the State.” Article 3 of the Constitution adds that the socialist system “shall be

  irrevocable and Cuba will never return to capitalism.”

  As a communist regime, the national economy is centralized, planned and run by the State (Article

  9). It is also based on a socialist ownership of the means of production (Article 14). These laws are

  specific and a prevalent part of Cuba’s legal system. They have not been set aside by the new

  Foreign Investment Law.

  The communist constitution does not allow room for doubts on the issue of property ownership

  rights. On the contrary, it is clear, direct and precise. It states that “sugar mills, factories and all

  enterprises, banks and installations that have been nationalized and expropriated from imperialists,

  large estate owners and the bourgeoisie” (Article 15) are the property of the state.

  The State controlled legal system in Cuba fails to protect foreign investors. Judges and lawyers are

  appointed by the State and follow party and military orders. A recent example is the arrest 3 years

  ago of Cy Tokmakjian, a Canadian investor that languished in jail without trial. On April 30, 2014,

  Peter Kent, Chairman of the Canadian House of Commons Defense Committee, complained

  publicly about the arrest and criticized Cuba for not protecting foreign investors. Mr. Tokmakjian

  has been released since.

  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.

  General Raul Castro is opening for business but in his own communist terms.

  The Military in the Economy

  The military is the key power over economic decisions. Military officers involved in the economy

  manage the means of production, economic institutions and financial activities. The most important

  of these officers is General Luis Alberto Rodríguez López Calleja, son-in-law of Raul Castro, in
• 

  charge of GAESA (Enterprise Administration Group, S.A.), a conglomerate of state and mixed

  enterprises.

  All foreign trade and investments are funneled through its regime powerful conglomerate.

  Some businesses operated by Cuba’s military and GAESA S.A. are:

  • Gaviota S.A.: hotel and tourism industry marketing and sales.

  • CIMEX (Comercio Interior, Mercado Exterior): largest commercial corporation in Cuba.

  Manages businesses in the areas of real estate, banks, retail stores (over 250), shopping centers, fast

  food restaurants, gas stations, etc.

  • Servicio Automotriz S.A.: car rental services for tourists, car repair and gas stations.

  • Aero Gaviota: manages tourism and airlines.

  • Tecnotex: import/export of technology and services.

  • Almacenes Universal: warehouses located in Wajay, Mariel, Cienfuegos and Santiago.

  • Almest: real estate and tourism services.

  • Antex: customer service and commercial operations in Africa.

  • Agrotex: agriculture and livestock.

  • Sermar: exploration of Cuban waters and naval repair (shipyard).

  • Servicio la Marina: provides security and support to GAESA (some employees are operatives of

  the MININT’s Intelligence department M-6).

  • Geocuba: geodesy and cartography.

  • Cubanacán: tourism

  Doing business with a corrupt military oligarchy that can, arbitrarily, make a negative and

  detrimental judicial decision on any matter affecting the investor’s corporate interest is a powerful

  deterrence for potential investors in Raul Castro’s Cuba.

  II. Doing Business In Cuba

  Widespread Corruption

  In the 2012 corruption report by Transparency International, Cuba was below most countries in the

  Caribbean and Central America. It defined corruption as “the abuse of central power for personal

  gain.” Corruption can take many forms, from minor use of influence to high ranking government

  officials, institutionalized bribery and extortion. Widespread corruption is recognized as a major

  obstacle for a nation’s sustainable economic development.

  State controlled Cuban newspaper Juventud Rebelde reported that over half of workers in retail

  enterprises routinely steal from cash registers. The paper stated that some state owned services are

  being used for personal profit. The report also added that many of the principal state enterprises are

  dysfunctional, unable to supply essential products and maintenance material to their retail outlets.

  The reason is theft.

  On May 2013, the Cuban Minister of Foreign Commerce and Investment reported on “the

  irregularities detected in the functioning of businesses with foreign capital.” The Minister also

  stated that “corruption and theft are rampant in the fuel sector.” Stealing from government owned
• enterprises and their foreign investor partners is an acceptable way of life in the impoverished

  island in which the military oligarchy controls over 75% of the economy.

  In the book, “Corruption in Cuba,”* two prominent scholars argue that the Cuban privileged

  leadership has contributed to institutionalized corruption with rampant practice of nepotism,

  cronyism, bribery, control of production materials, pricing and lack of accountability. According to

  the study, few citizens hesitate to steal from government and enterprises.

  Today, large corporations are trying to focus on anti-corruption mechanisms to protect their

  international reputation and the best interest of their stakeholders. Doing business in a corrupted

  business environment is also very costly, estimated to add 10% or more to the cost of operations.

  Investors are discouraged by corruption since it increases the financial burden on the business.

  Unlike taxes, that are known and predictable and can be built into the expected cost, bribes, theft

  and extortions are difficult to control and unpredictable in magnitude and will negatively impact

  cost control, reduce profits, undermine investor confidence and unleash a commercial climate of

  fear and uncertainty in a country in which the revolutionary leadership control the judicial system.

  Corporations doing business in Cuba are required to cooperate with State Security. This includes

  the use of cameras and microphones in hotels, restaurants, stores and other business enterprises to

  keep track of customer and employee activities. State Security repressive methods violate

  employee and workers’ rights.

  Another issue for potential investors is that Cuba’s physical infrastructure is moving rapidly from

  acute decay to fatal collapse.

  Deteriorated Roads, Bridges and Railroads

  The island’s roads and bridges are unsafe and in need of urgent repair and the state lacks the needed

  funds to make the repairs. The fatigue, cracking and exacerbated deterioration of the bridges and

  roads are caused by low quality materials combined with inconsistent repair practices. As noted by

  a relevant study, “the lack of investment and maintenance are reflected in the deteriorated condition

  of the transportation system.” In addition, hundreds of bridges throughout Cuba are in need of

  rehabilitation.

  In the global market, trucking is a vital commercial component and the decay of the national

  highway system presents a major obstacle for the safe and timely transportation of commercial

  cargo.

  Cuba’s railroad system suffers from multiple infrastructure problems including rotten cross beams,

  rusted rails and loose tie plates. The dilapidated conditions of the railroad grid demand that in some

  areas the trains go at a maximum of 20 km an hour to avoid accidents. Railroad bridges are also in

  precarious conditions with sinking foundations that disrupt the angles on the tracks. The task of

  repairing the infrastructure is beyond Cuba’s financial capacity. The acute deterioration of the

  transportation system is among the perils of investing in Castro’s Cuba.

  Inadequate Ports With Mariel as the Exception
• With the exception of the mega transshipment Port of Mariel, with a draft up to 49 feet and a

  capacity to store over 3 million containers, Cuba’s principal ports (Havana, Matanzas, Santiago de

  Cuba and Cienfuegos) are unable to accommodate large, modern vessels.

  Experts have pointed out that in Cuba’s ports “all basic infrastructures, including connectivity to

  ground transportation networks, energy, telecommunication and water have suffered. All such

  systems are antiquated, unreliable and incapable of supporting the demands associated with a

  consumer-oriented economy.”

  The U.S. Trade Commission stated that the ports’ poor maintenance has created a situation where

  loading and unloading cargo can be a hazard. Furthermore, there is limited availability of cold

  storage, a crucial infrastructure component necessary for perishable food products. In addition, the

  availability of equipment and trucks used for moving loads on to and off the ports is inadequate and

  they lack spare parts needed for repair and maintenance.

  The modern Port of Mariel, just 45 km West of Havana, is designed to serve super-container ships.

  However, the future possibility of serving as a container transshipment facility for a U.S. (post-

  embargo) commerce has major competition from high-tech Port of Miami, the closest American

  port to the new Panama Canal expansion. The Port of Miami enlargement has a dredge of up to 50

  feet in depth and is capable of berthing even the largest container vessels in the world, including

  the future Maersk Triple E Class, which will have a draught of 47 feet and will be nearly 200 feet

  wide.

  The mega Port of Miami has completed an under the bay tunnel for trucks to bypass Downtown

  Miami, doubling the port’s traffic capacity. So, why would the Pacific exporters choose the Port of

  Mariel if they could bring their cargoes directly into the U.S. via the excellent highway

  infrastructure of the Port of Miami? This fact should be a major concern for the Port of Mariel

  investors.

  Unreliable Energy

  Cuba has an aging and expensive centralized electrical power network that reaches 95% of the

  island’s population. Fossil fuels generate 85% of the energy. There are seven major power plans

  that use inefficient equipment from former Soviet Union and Eastern communist countries, as well

  as old American equipment. All plants are operating below their estimated capacity level.

  Cuba’s oil consumption is 80,000-100,000 bbl/d, while domestic production is about 55,000 bbl/d.

  Therefore; Cuba has to import most of its fuel needs. Over 100,000 bbl/d are imported from

  Venezuela. Thus the financial stability of Cuba depends almost entirely on the largesse of Nicolas

  Maduro’s regime in Caracas. If support from Venezuela is reduced or ended, Cuba’s energy sector

  will have to find, urgently, another country willing and capable of providing Cuba with petroleum

  at similar concessionary terms as Venezuela.

  Outdated Water and Sewer System

  In Cuba, the water supply and sewer infrastructure is at a breaking point and close to catastrophic

  failure. Throughout the island, the water and sewer infrastructure is failing due to the deterioration

  of the pipelines, inefficient maintenance practices, antiquated equipment and substandard plumbing
• materials.

  According to a 2013 report published in Granma, the Cuban government’s official newspaper, 58%

  of potable water is lost through leakage.

  Havana’s sewer system, which was built almost one hundred years ago, has been due for major

  repairs for almost five decades and it serves over two million citizens- well beyond its original

  design capacity of 400,000. The wastewater infrastructure is a serious concern. Fifty nine percent

  of the 2,160 contaminants recognized by UNEP are released into Cuba’s environment without any

  treatment.

  For over 54 years, the wastewater process has been substandard as a result of decades of neglected

  infrastructure and pollution control. This has taken a severe toll on the land which is now

  recognized as one of the most polluted in the world. The growing deficiencies of clean water

  supply and wastewater contaminants are a major problem for corporations committed to clean

  environments.

  Outdated Internet Communication and Information System

  The global economy relies on modern internet communication technology for secure, reliable, swift

  and precise commercial, industrial and professional activities. This is a crucial factor for the

  successful fulfilment of trade exchange and distribution of goods. In Cuba, the high tech

  infrastructure is at a minimum level of performance while the communication system relies on

  antiquated equipment. Censorship is also among the most severe in the world.

  Although some efforts at modernization are being implemented, the State lacks the financial

  resources. Additionally, the Cuban government fears the powerful impact of new communication

  technologies on the people’s ability to share news and develop social networks among themselves

  .

  Cuba has one of the lowest rates of population with internet access among all countries; with less

  than 3 percent of Cubans having access to internet. The State also controls the flow of high tech

  internet equipment and information that reaches the island.

  Due to the outdated and restricted communication infrastructure, Cuba’s information technology

  (IT) sector has not developed to modern standards. Unlike in free market economies, IT experts on

  the island do not focus on the integration and strengthening of systems that facilitate transactions.

  Instead, they emphasize technologies that simplify the government’s supervision of activities. An

  unfriendly business environment hinders a swift and successful participation in the global

  economy.

  Violation of Workers’ Rights and Foreign Investors’ Complicity

  General Raul Castro’s regime systematically violates the rights of workers to bargain for wages and

  labor conditions with the complicity of foreign entities engaged in joint ventures with the Cuban

  government. There are no free, independent labor unions and there is no collective bargaining.

  Article 33.3 of the Foreign Investment Law clearly states that Cuban workers “shall be hired

  through a contract between the company and an employing entity” controlled by the State.
• Article 33.4 states that payment to Cuban workers “shall be made in national currency which must

  be obtained beforehand from convertible foreign currency” by the Cuban entity.

  With the exchange rate of about 25 pesos (CUP) per dollar, the foreign investor entity pays a fixed

  salary to the state employment agency in convertible pesos, or CUC (1 CUC= $1). The

  employment agency then pays the Cuban worker in Cuban pesos, CUP. Thus Cuban workers

  receive 1/25 less per peso after the currency is exchanged for CUP. The Cuban government keeps

  over 80% of what the foreign entity pays.

  This is an ethical travesty in which the workers’ real monthly wage is around 10% of the payment

  for its labor. A shameful business practice condemned by labor organizations worldwide.

  A foreign investor in Cuba should carefully consider the unethical, unfair and abuse labor practice

  of workers’ exploitation when considering a joint venture with Cuba’s military oligarchy.

  Low Purchasing Power

  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.

  The High Risks of Venezuela’s Financial Collapse

  According to Moody’s report of April 2014, Venezuela’s economy is in a downgrade, negative

  outlook rating and Cuba faces the risk that Venezuela will be forced to reduce or eliminate its huge

  financial support of over $6 billion yearly. General Raul Castro’s regime is among the most

  vulnerable recipients of Venezuelan oil subsidies. Every day, Cuba receives over 100,000 barrels of

  oil from Venezuela in exchange for medical services.

  Moody explains that when it downgraded Venezuela, last December, to a negative outlook rating,

  the key drivers were unsustainable macroeconomic imbalances, and a materially high risk of

  economic and financial collapse. For Cuba’s subsistence economy, this is a catastrophic possibility.

  Conclusion

  Given these conditions and risks, only very daring investors are likely to pluck large sums of

  money into Cuba. A hostile state and a controlled legal system together with a collapsing

  infrastructure does not make Cuba an attractive investing location. The issue of confiscated

  properties is still pending. All U.S. and Cuban properties were confiscated in the 1960’s. Many

  U.S. firms as well as Cuban-American stand ready to use American courts to try to recover their

  losses or at least to prevent U.S. trade with and investment in Cuba.
• 

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  * Diaz-Briquets, Sergio and Perez-Lopez, Jorge. Corruption in Cuba: Castro and

  Beyond.University of Texas Press. 2006.

  **This report was submitted to the U.S. International Trade Commission on October 22, 2015.

  The CTP can be contacted at P.O. Box 248174, Coral Gables, Florida 33124-3010, Tel: 305-

  284-CUBA (2822), Fax: 305-284-4875, and by email at ctp.iccas@miami.edu. The CTP

  Website is accessible at http://ctp.iccas.miami.edu.