Published by Bloomberg on March 18, 2016. Written by Ezra Fieser and Mike Dorning.
President Barack Obama’s bid to crack open Cuba to U.S. businesses will take a big step forward next week when he becomes the first sitting president to step on Cuban soil in more than eight decades. Just don’t expect U.S. companies to follow en masse any time soon.
More than a year after Obama and President Raul Castro announced a diplomatic thaw, many U.S. investors remain wary of an economy hobbled by a five-decade-old U.S. trade embargo, restrictive Cuban labor laws and a dual currency system. Companies that have or want to invest, like JetBlue Airways Corp., Carnival Corp. and Airbnb Inc., are more the exception than the rule.
“Firms just find it very difficult and don’t want to put a lot of money in,” said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington who has written about normalizing ties with Cuba.
For starters, how do you pay your workers in Castro’s Communist economy? Nearly all foreign companies on the island pay a labor agency or Cuban-majority partner their workers’ salaries in convertible pesos, which are pegged to the dollar. But the workers receive their average $26 monthly salary in an entirely different currency: non-convertible pesos, worth 1/25th as much. The government pockets the difference.
While Castro’s government said in 2013 that it would seek to unify the currencies, little has happened. It’s a tough problem to fix, one that Moody’s Investors Service called the Cuban government’s “single most important macroeconomic challenge.”
“It’s the difference between making money and not making money,” Hufbauer said.
Second, most foreign companies allowed to enter Cuba have been limited to a 49 percent ownership ceiling, with a state-owned company holding the majority stake. Under joint ventures, it is the state-owned company that hires and pays the workers, meaning that foreign investors have little say in hiring their own workforce.
And who is behind that state-owned company? In many cases it is Luis Alberto Rodriguez, a general in the Revolutionary Armed Forces who oversees a conglomerate that comprises at least 57 companies. He’s also Raul Castro’s son-in-law.
While small businesses like hair salons and taxi driving are open to private entrepreneurs, big-money industries, including much of the hospitality sector, are often under Rodriguez’s control. His Grupo de Administracion Empresarial runs companies that account for half of the business revenue produced in Cuba, according to Omar Everleny Perez, a professor at the University of Havana and a researcher at the Center for the Study of the Cuban Economy.
Cuba also has the worst record on human rights in the Americas, according to the Washington-based Freedom House, and the government’s strong-arm tactics have gone beyond cracking down on local dissidents. Canadian businessman Sarkis Yacoubian, who built a business selling automobiles and industrial equipment in Cuba, was arrested in 2011 and accused of spying.
Yacoubian spent two years in jail before being convicted after a two-day trial of corruption and doing economic damage to the government. He was sentenced to nine years in prison and fined $7.5 million before being released in 2014 after having all his assets confiscated.
Finally, there is the infrastructure. Cuba’s crumbling roads and antiquated ports prompted the World Bank to rank it 152nd out of 160 countries, placing it between Yemen and Sudan, on its logistics performance index, which takes into account infrastructure and other factors that affect trade efficiency.
Undoubtedly much has changed in recent years. Direct mail between the U.S. and Cuba has been reestablished, Castro has eased travel restrictions and foreign companies are being encouraged to invest in free trade zones as the the island diversifies away from traditional allies like Venezuela. Unilever Plc. in January announced plans to return to Cuba with a $35 million soap and shampoo factory in Mariel, a port city west of Havana. Under that deal, Unilever will own a 60 percent stake in the venture.
Moody’s said the opening with the U.S. and the island’s decreasing dependence on Venezuela have improved its economic outlook. One factor: tourist visits have surged since the rapprochement, many of them by Americans traveling to Havana from third countries like Canada and The Bahamas. Obama’s March 20-22 trip, followed by a free concert by the Rolling Stones, will only help fuel that enthusiasm.
One historic comparison to Obama’s two-day visit is President Richard Nixon’s 1972 visit to Beijing, which paved the way for stronger economic relations with China. Vietnam is another good example, said Hufbauer.
Both countries found a way to ease economic restrictions to fuel greater prosperity, without giving up total political control.
“As the Cubans get comfortable with it, they will do more and more,” Hufbauer said, citing tourism, agriculture and medical services as key investment opportunities. “Given the geography and the cultural proximity, in 10 years it should be a very different relationship.”
Yet outside of Cuba, the biggest barrier to normalizing ties is beyond Obama’s power to remove: the embargo. Only Congress can do that, and the Republican majority has blocked any attempt to do so.
“The situation today is light years ahead of where it was a decade or even five years ago,” said Scott Gilbert, managing director of Reneo Consulting LLC, who in 2014 negotiated the release of Alan Gross, a jailed U.S. contractor. “The thing is, we are operating with legislation that really does cripple the ability for full U.S. trade and investment with Cuba.”
Until that too crumbles, what separates Cuba from the U.S. will continue to be much more than the 90 miles of the Florida Straits.