It’s May 23rd. The presidential primaries are coming to an end. Barrack Obama is talking to a crowd of 20,000 people at the BankAtlantic Center in South Florida, all of them excited, grateful to finally get a look at the candidate. Hillary Clinton is across town at the University of Miami, reported to be fatigued and hoarse, preaching her sermon on “electability” to a small choir of supporters, trying to get back the delegates she lost after Florida held its primary ahead of the nationally sanctioned start date. For Obama, the general election has already begun. He’s working hard to hit all the right buttons for this crowd, taking calculated risks on controversial Cuban-American issues.
“I know what the easy thing is to do for American politicians. Every four years, they come down to Miami, they talk tough, they go back to Washington, and nothing changes in Cuba,” says Obama. He says he plans to remove travel restrictions and hold talks with Raul Castro, but he’s going to maintain the embargo. “It’s time for more than tough talk that never yields results. It’s time for a new strategy.” The Cuban-American community in South Florida affects U.S. foreign policy beyond the scope of any other immigrant group. More than two-thirds of the Cubans living in the U.S. reside in Florida (8% of the electorate for a state with 27 electoral votes) and most of them are concentrated within well-defined neighborhoods in Miami-Dade County.
According to the Metropolitan Center Director, Dario Moreno, “The concentration of Cuban-Americans in a vital presidential swing state assures them a voice in national politics.” Under the leadership of a conservative faction of anti-communist zealots, the Cuban-Americans in South Florida have supported the GOP nominee in every presidential and gubernatorial election but one since 1980. There are some who believe this pattern of ideological cohesion is on the verge of transformation. “We have seen for years that Miami and the Cuban–American community is changing,” says Philip Peters, an analyst on Cuba at the Lexington Institute in Washington. “This election will be a test to see if that moderating opinion translates into a political result.”
In February, Fidel Castro officially resigned and news cameras descended on the Cuban-American community in Southwest Miami. Gathered outside of an informal hub, demonstrators held signs, cheering and urging passing motorists to honk their horns. But there were no other jubilant demonstrations on the city streets. Reporters questioned the peculiarity of this tepid response and noted the collective sense of indifference. Castro had temporarily transferred control of Cuba to his brother, Raul Castro, in 2006. Most agree that the difference is hardly noticeable. No one seems to expect major changes any time soon. “There have been small changes in Cuba– letting Cubans stay in hotels that formerly were open only to tourists, letting Cubans buy cell phones, televisions, and computers. These changes don’t affect the population at large, but they do have symbolic value,” says Professor Jose Gabilondo of Florida International University. “Already [Raul Castro] has demonstrated that he’s not following his brother lock-step, in terms of the reforms that have been made. The scope of the change is an open question. It’s something he and the rest of his officials are probably working out on a daily basis. I assume there will be much more market liberalization.”
Begun in 1962 after U.S. property in Cuba was expropriated by the newly formed communist government along with every other piece of private property on the island, the embargo was officially codified into law as the Cuban Democracy Act in 1992. After the fall of the Soviet Union, Cuba’s government managed to sustain itself by developing market reforms and allowing for joint venture investments with foreign entities.
Secretary of Commerce Carlos Gutierrez, a Cuban exile who co-chairs the Commission for Assistance to a Free Cuba, views the transition of power in Cuba with cynicism. “Fidel Castro’s announcement merely represents a change in name only; the same repressive communist regime continues to rule Cuba,” says Gutierrez. The Secretary is an ardent supporter of the embargo who frequently speaks on behalf of the Bush administration’s policy to oppose economic relations with Cuba. Several days after Castro’s resignation, he is at the Council of the Americas, engaged in a lively debate over the embargo. Investors are frustrated, impatient with the political state of interminable stagnation.
“To those who suggest Cuba is an untapped market for U.S. goods and investors, and that lifting the embargo would be a boon to foreign trade, I submit to you that foreign businesses will not flourish on the island as long as there is an active communist regime in control,” Gutierrez tells the Council. “It is naïve to suggest that lifting U.S. economic sanctions would weaken the regime and force change. Castro understands that. The regime has long imposed policies to assure its own control over all economic activities, including those of foreign investors and tourists.”
With the formation of the Senate Working Group on Cuba in March 2003, both chambers of the U.S. Congress now have bipartisan Cuba Working Groups committed to a new U.S. policy. In the House of Representatives, the 50-member Cuba Working Group was formed in April 2002. They produced a “Review of U.S. Policy toward Cuba” and announced a nine-point legislative agenda. “Some of the things that are happening in the U.S. Congress are nibbling around the edges of the embargo,” says Pedro Freyre, co-chair of the global practice group in the law firm of Akerman Senterfitt. “There are interests in the U.S. that are keenly interested in seeing a relaxation, opening the floodgates to Cuba.” Organizations that oppose the embargo are encouraged to engage in grassroots political action to bring about a consensus in both Congress and the White House. “For the time being, there’s no potential for U.S. investors to participate directly because of the Cuban assets control regulations,” says Gabilondo. “U.S. investors won’t be able to do anything directly until the Treasury regulations change or until there’s some kind of statutory reform.”
The U.S.-Cuba Trade and Economic Council website (www.cubatrade.org) is accessed daily by companies from throughout the world. The Cuban American Alliance Education Fund website (www.cubamer.org) provides the phone number for the White House Comment Line (202-456-1111). The Alliance for Responsible Cuba Policy Foundation website (www.responsiblecubapolicy.org) provides information on current legislative initiatives championed by the Senate and House Cuba Working Groups, as well as the names and contact information of its members.
Under legislative Decree Number 50, Cuba still does not allow foreign direct investment in any industry. But joint venture partners– investors paired with a Cuban counterpart– continue to gamble on the risks and reap the rewards of doing business on the island.
The Ministry for Foreign Investment and Economic Cooperation (MINVEC) is the Central Administration Agency responsible for governing and controlling the foreign investment process. To obtain a Business Visa Application Form with full details, send a request with a stamped addressed envelope to ThePCuban Consulate, 167 High Holborn, London, WC1V 6PA. Interested investors submit their joint enterprise applications to MINVEC and applicants are accepted or denied within 60 days. Documents are then recorded at the Chamber of Commerce, after which, disputes are resolved by the State Arbitration System. “Already, Cuba is an important agriculture export market,” says Gabilondo. “The U.S. agricultural groups can sell directly to the Cuban organization that buys all the agricultural goods. Every month, there are trade shows where U.S. agribusinesses go to Cuba, and they execute deals. So already, those goods are being exported.”
The U.S. Trade Sanctions Reform and Export Enhancement Act of 2000 allowed “the export of agricultural commodities, medicine, or medical devices to Cuba,” resulting in a cumulative revenue of $1.6 billion since 2001. Within three years, Cuba went from dead last in U.S. farm export markets to being ranked 25th out of 228 countries–the fifth largest export market in Latin America. Approximately 30% of Cuba’s annual food imports now come from the United States, including 66% of its wheat, 77% of its poultry, and the paper for its official Communist Party newspaper. Investing in Cuba’s tourism and energy industries is still not permitted under U.S. law.
Without the embargo, U.S. companies will most likely continue to elect exports over foreign direct investment (FDI) as an inexpensive and low-risk market serving strategy. “If the embargo changed, Cuba will develop investment policies that identify which sectors need the most foreign investment,” says Gabilondo. “It’s a country that’s been in continuous transition for many years. Any change is going to put pressure on the government, and I assume they will react by having policies about the kinds of investment that would be the most welcome.” At a May 1999 conference in Cancun, Mexico, representatives from 60 U.S. and foreign businesses met to discuss investment opportunities in Cuba. The main areas covered by Cuban economy officials were pharmaceuticals, real estate, agriculture, construction, mining, and merchant shipping. But the risks of doing business with Cuba were not forgotten. The conferees expressed some concerns about the post-Fidel Cuban economy.
Miguel Figueroa, advisor to the Ministry of Foreign Investment and Economic Cooperation, told them Cuba could guarantee “continuity, no matter what happens with the top leadership of the Cuban government.” He added, “When the life of a person ends, the work continues; what you have to believe in is the organization.”
“It’s true that the Cuban economy presents all kinds of risks,” says Gabilondo. “But I don’t think you can generalize across the entire class of investors. There are always investors, especially in a country with a lot of entrepreneurial capital like the United States, that are willing to take risks.”
High-pitched revenue licensing fees and taxes, combined with the nature of uncertainty associated with exploratory drilling, is enough to deter energy investments. But Cuba is a particularly attractive source for U.S. energy project development due to its geographic proximity. According to a 2001 report commissioned by the Cuba Policy Foundation, lifting the U.S. embargo could provide U.S. energy firms with $2 billion to $3 billion in additional revenue.
“Cuba has identified some significant energy deposits in the Straights of Florida,” says Freyre. “We are seeing that there may be the ability to produce oil. And, of course, U.S. technology would be critical for that. The U.S. energy industry at this particular moment would be keenly interested in getting in there.”
Cuba’s state-owned oil company, Cubapetroleo (Cupet), still lacks the start-up capital to access oil and gas fields; it negotiates lease agreements with energy hungry countries that can. With energy costs continuing to rise, competition over Cuba’s undiscovered reserves has intensified.
In 2000, Cupet divided the Gulf of Mexico–an area where industry analysts estimate there could be at least 1.6 billion barrels of crude oil reserves–into 59 deepwater offshore blocks. By the end of the following year, 20 lease agreements had been established. Repsol- YPF of Spain discovered high-quality crude oil in an exploratory well in July 2004, but the quantities were not commercially viable. It subsequently entered into joint-venture deals for six more blocks. Brazil’s state-owned oil company has been added to the list of joint venture investors, having signed a deal with Cuba in January 2008 to begin exploring in the Gulf of Mexico in exchange for a multimillion- dollar aid program.
Oil production has occurred in onshore and “near-shore” reserves located along the northern coast of Cuba, resulting in heavy, sour crude that requires special processing. Currently, two Canadian companies, Sherritt International and Pebercan, are producing oil in this region. The China Petroleum and Chemical Corp. (SINOPEC) signed a deal with Cuba in January 2005, having since spent more than $1 billion searching around the province of Pinar del Rio.
In the 1990s, Cuba lacked the domestic capital to finance anything on its own. Joint venture investments were the predominant form of foreign participation in the tourism industry. Now, nearly half of Cuba’s hotel capacity is operated under another form of foreign investment, hotel management contracts, which offer the foreign managing company a percentage of the gross revenue in exchange for training and international marketing. Management contracts offer several drawbacks for foreign investors–managing services are offered without a share of ownership and most of the money stays in Cuba. But the entire initial capital expenditure is provided by Cuba.
It was Raul Castro who transformed the military into a tourism apparatus after the Cold War. The Cuban Defense Ministry took control of Cuba’s 12,000 hotels and offered foreign partners willing to contribute financial assistance partial ownership. Rental car maintenance and tour bus repairs were provided to foreign companies by former military contractors. Soviet military aircraft was modernized and refurbished to create a domestic airline service. By 2007, there were 42,000 hotel rooms, ten international airports, and 2.4 million annual visitors to the island.
International beach resort brands established at Varadero, a 22-kilometer peninsula two hours’ drive from Havana, include Club Med, Barcelo Sol Melia, Sandals, and Superclubs. In Old Havana, every dollar accrued by the Tourism Ministry is being spent to restore buildings, monuments, housing, and other neighborhood assets associated with colonial architecture attractions. Ecotourism investment opportunities include the geological formations of the Vinales valley, the forests and wildlife of the Sierra Maestra mountain ranges, and the wetlands of the Zapata peninsula.
The chances for investment in any sector continue to be based on potential political changes in both Cuba and the United States. Immediately south of the Florida coastline is an open market of 11 million people, one of the only places where international business operates without U.S. competition, and according to the U.S. International Trade Commission, the embargo costs American firms between $700 million and $1.2 billion per year.
“It’s important to keep in mind that we’re still talking about an economy that controls all of the property. And, more importantly, it’s still subject to centralized planning,” says Freyre. “I don’t think it’s in the cards to have a complete lifting of the embargo, but certainly a softening of some of the provisions. Much depends on a future U.S. administration— whether it’s a McCain or Obama administration—and some of the policy initiatives we may see originate with any one of those administrations. If there is a desire to see some sort of engagement with the Cuban government, it is still up for grabs.”
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