• • 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.
  • • 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.
    • • 

        An Information Service of the

        Cuba Transition Project

        Institute for Cuban and Cuban-

        American Studies

        University of Miami

        This message is sent in compliance with e-mail Bill HR 1910. If you no longer

        wish to receive emails from the CTP, please click here to unsubscribe.

        NOTE: The following article represents the authors' views and not necessarily

        the views of the Institute for Cuban and Cuban-American Studies or the Cuba

        Transition Project.

        Staff Report

        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.
      • 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.

      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.
    • as.miami.edu.

    as.miami.edu.
• p.iccas.miami.edu.