What You Should Know About Doing Business With Cuba
You may be wondering whether this is a good time for you to consider the possibility of investing in Cuba. Many analysts have arrived at the conclusion that Cuba represents a lucrative opportunity for U.S. businesses because:
- Cuba is home to more than 11 million consumers with nearly 60 years of pent-up demand for U.S. goods and services,
- The Port of Havana is only 198 nautical miles from the Port of Miami, facilitating trade,
- Millions of U.S. tourists will need travel-related services for their planned vacations to Cuba, and
- European companies have already paved the way for foreign investment and business on the island.
On the surface, these factors appear to present a compelling case for doing business in Cuba. However, a deeper analysis paints a different picture. I have studied the Cuban economy for more than a decade, engaging with Cuban economists, small-business owners, struggling entrepreneurs and other members of Cuba's re-emerging and fragile civil society. My family emigrated from Cuba in the 1960s, fleeing Fidel Castro's communist revolution. This seeded a lifelong interest in all things Cuba, especially on how to effectively and peacefully achieve freedom and self-determination for the Cuban people.
While some analysts and commentators are singing the praises of trade with Cuba, I believe small-business owners should be wary for the following reasons:
Harsh business climate. As with all socialist economies, the Cuban government controls the factors of production: manufacturing facilities, distribution centers, large-scale agriculture and energy projects, access to domestic capital, even who you can hire are all under direct government control through a series of massive holding companies. Concepts such as the rule of law, due process and honoring contractual agreements, which we take for granted in the U.S., don't exist in Cuba.
In March 2014, the National Assembly of the People's Power (Cuba’s equivalent of a Parliament) passed a new Law of Foreign Investment, supposedly ushering in a new era of foreign investment. Subsequent to the passing of the law, Cuba issued an international call for $8 billion of desperately needed foreign capital for 250 “shovel-ready” projects. The problem is that the “new” law is very similar to the old one: Cuban-government holding companies will retain majority ownership and control of all projects. While in theory Cuba has permitted up to 100 percent foreign ownership of companies since 1995, in practice it doesn’t happen.
Limited consumer purchasing power. The Cuban government’s control of economic and political life in Cuba has made it difficult for Cubans to make a decent living. The average wage in Cuba is the equivalent of $20 per month, with imported goods (such as deodorant or makeup) costing more than they do in the U.S. A Cuban physician would have to use a week's salary to afford one hour of computer time at an Internet cafe with dial-up speed. Cubans with relatives abroad who send remittances are able to enjoy a somewhat higher standard of living, but only between 15 and 30 percent of the population have access to them. It’s difficult to envision someone buying a $1,000 smartphone, much less a used car or a new tractor, based on their official state-paid wage.
Challenging business culture. The combination of absolute government control coupled with low wages and high prices have led to the creation of a unique business culture in Cuba. “Resolver” (Resolve or get by) is how most Cubans make a living. It's a completely informal and usually illegal way of obtaining goods for resale on the black market. While Cubans are now permitted to own small businesses in certain sectors, the confiscatory tax rates and burdensome regulations leave little option but to also run them on the black market. This culture is in sharp contrast to what most U.S. business owners experience. Many recent immigrants from Cuba have a difficult time adapting to U.S. business culture, and the same is likely for U.S. entrepreneurs heading to Cuba.
Lackluster demand. It's a misconception that U.S. companies are banned from doing business in Cuba. Since 1992, companies have been permitted to sell health-care-related goods and services. Since 2000, the Trade Sanctions Reform and Export Enhancement Act has allowed the sale of both branded and unbranded food and agricultural products. Between 2001 and 2014, nearly $5 billion was sold by U.S. companies to Cuba. The trend, however, is declining, with last year's sales roughly one-third of what they were at their peak in 2008. Did Cuba run out of money? Hardly. From 2008 to 2011 alone, the regime received at least $18 billion from Venezuela in cash, credits and oil for resale.
Dismal track record and high counter-party risk. The Cuban government has a poor track record as a borrower and business partner. Over the past five years alone, Cuba’s debtors have written off more than $40 billion in debt as uncollectible. This is equivalent to the U.S. failing to pay $8 trillion in debt. U.S. law currently prohibits U.S. companies from financing sales to Cuba; they have to pay in cash.
Currently, there are fewer than 250 foreign companies doing business in Cuba, and this number is declining as more partners give up. Many foreign investors fall into two camps: a) those that have lost money on their Cuba ventures; and b) those who have made money only to see the Cuban government take over the now profitable venture, seize assets, arrest executives and/or forcibly renegotiate terms.
Some proponents of business with Cuba point to Vietnam, the Czech Republic and other formerly communist countries as examples of what can be achieved in Cuba with the help of U.S. investment and know-how. Cuba, however, is different in one key way: The current regime has made it clear that it does not plan to change. It seems to see any thawing of relations with the U.S. as an opportunity to secure additional resources to support its single-party political system and centrally planned economy. Cuba certainly has potential as a market for U.S. companies, but not yet; the risk factors may simply outweigh any modest gains that could be achieved. Business owners, beware.
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