The Cuban evolution

Brian Nicholson

Once a Cold War flashpoint, Cuba has moved from economic and diplomatic isolation to open up its markets to foreign investment. The thawing of relations with the United States is fuelling expectations – but lack of legal certainty and the prospect of a hard line under President Trump mean caution is still advisable.

Fly into Havana on a major American or European airline, stay at a global-brand hotel full of foreign businessmen and tourists, pay with an international credit card, check your e-mail on Wi-Fi, and you could be tempted to ask: ‘Embargo? What embargo?’

That said, the United States’ 55-year-old ban on commercial, economic and financial links with the island nation remains in force, albeit somewhat relaxed recently, and a new foreign investment law introduced in 2014 by President Raúl Castro has yet to convince.

So the essential questions remain: is Cuba now a safe haven for trade and foreign direct investment (FDI)? And what does the future hold, particularly with US President Donald Trump intending a ‘full review’ of relations with Cuba on the back of campaign promises to revisit concessions made by his predecessor, Barack Obama?

‘The new foreign investment law represented an important change,’ explains former IBA President Fernando Peláez-Pier, a founding partner of Hoet Peláez Castillo & Duque in Venezuela, who has long had involvement in the island. ‘Unlike previous legislation, it regards FDI as a necessary complement [to the Cuban economy]. But the law is still subjective, meaning that everything requires the approval of the competent Cuban agency. This leaves investors in the hands of those reviewing the proposal and, in my opinion, there are contradictions within the Cuban government on the position vis-à-vis foreign investment.’

There is a group that supports this evolution. Others feel it betrays the spirit of the Cuban Revolution

Fernando Peláez-Pier
Former IBA President and a founding partner of Hoet Peláez Castillo & Duque

Is Peláez-Pier talking about ideological disputes? ‘In my view, there is a group that supports this evolution, and others who are not convinced; they feel it betrays the spirit of the Cuban Revolution,’ he says.

Raúl Castro took over from his elder brother Fidel in 2008, and started slowly opening up the economy. Many observers suggest he may have felt constrained from moving faster by Fidel’s continued presence up until his death last November.

At the same time, the process of normalising relations between Cuba and the US – instigated by President Obama in 2014 – has seen the two countries reopen their embassies, renew direct commercial air travel, re-establish limited trade relations and more, culminating in Obama’s historic three-day visit to Cuba in March 2016.

‘We are not going and will not go to capitalism. That is completely ruled out by our Constitution,’ Raúl told the country’s parliament in Havana in December 2016, according to Granma, the official Communist Party newspaper. However, he added that Cubans ‘must overcome once and for all the obsolete mentality, full of prejudice, against foreign investment.’ Raúl pointed to ‘frequent, excessive delays in the negotiating process’ and called for training of specialist staff.

Mixed opportunities

Some $1.3bn of FDI projects were approved in the two and a half years since the new foreign invesment law was introduced, against an annual target of $2bn, Foreign Commerce Minister Rodrigo Malmierca said in November 2016. But the outlook ahead looks far more promising.

His ministry publishes an English-language Portfolio of Opportunities for Foreign Investment. The 2016–2017 edition runs to 278 pages and lists 395 projects totalling $9.5bn, two-thirds of them in tourism, petroleum and agribusiness. Examples include $2.6m to boost banana production and $6m to modernise rum production and marketing.

However, all require some form of Cuban state participation, and normally the foreign partner must put up all the cash. A $200m solar energy project, described as a ‘100 per cent foreign capital enterprise’, specifies a state partner to own the land and buy the power.

Data through 2015 show 214 agreed foreign investments, of which nine were ‘100 per cent foreign owned’. The rest were joint ventures and ‘international economic partnership agreements’ – for example, hotel management.

Yosbel Ibarra, Co-Chair of Greenberg Traurig’s Latin American and Iberian Practice, says projects that are not on the government list could be proposed, but wouldn’t be seen as a priority. Asked if there is now ‘adequate’ judicial security, Ibarra suggests the best thing for both Cuba and potential investors would be ‘to get into a huge argument with a foreign investor and, win or lose, have it arbitrated or litigated in an open forum so that the investment community can see what happens, what the outcome is and what Cuba’s reaction to it is. Because what’s on paper can be one thing, but practice can be quite another.’

Commonly-cited problems, like the ban on foreign land ownership and the requirement to hire and pay labour through a state agency, are secondary to bureaucracy, explains Ibarra: ‘You don’t even worry about such issues until you reach agreement with the Cuban government to move forward – that’s the major delaying factor.’ Corruption is a lesser concern. Cuba was placed 60th out of 176 countries on Transparency International’s 2016 ranking of corruption perceptions, better than all Latin American and Caribbean countries except for Chile, Costa Rica, French Guiana and Uruguay. However, the country doesn’t feature at all on the World Bank’s Ease of Doing Business ranking.

After Raúl

São Paulo-based Marcelo Calliari, Head of competition law at TozziniFreire and Chair of the IBA International Trade and Customs Law Committee, says the lack of legal certainty and stability remain hurdles to trading with Cuba, although the trend is probably towards improvement. ‘Many people see opportunity in a virgin market – Cubans are eager to buy foreign goods. The problem is, do they have the money to pay for them?’

Calliari sees a partial parallel with China, where the government has used limited economic opening and increasing living standards ‘as a way to keep people quiet’, without introducing political reform. However, this implies ongoing pressure on the government to preserve and expand economic reforms. The new deep-water port of Mariel, some 50km west of Havana, could also be important, he says. Tax breaks at the 465 square kilometres Mariel Special Development Zone are designed to attract industry.

Many people see opportunity in a virgin market – but do Cubans have the money to pay for foreign goods?

Marcelo Calliari
Head of competition law at TozziniFreire and Chair of the IBA International Trade and Customs Law Committee

Hanging over everything is what happens if and when the 85-year-old Raúl Castro steps down, as pledged, in 2018. Economic opening is expected to continue; political opening less so. But a lot depends on policy over 1,000 miles north of Cuba, in Washington, DC.

David Gutiérrez, a founding partner at Berwin Leighton Paisner (BLP) and Senior Vice-Chair of the IBA Latin American Regional Forum, stresses the importance to countries in Central America of President Obama’s abolition of the so-called ‘wet foot, dry foot’ policy in January 2017. Under the policy, Cuban migrants without visas were repatriated if intercepted at sea, but were allowed to stay if they reached US soil. The abolition of the policy encourages regular, safe and orderly migration, with Cuban migrants ‘processed’ in the same way as those from other countries. ‘Costa Rica had been asking for this change for some time. Once, we had 4,000 Cubans [who were trying to reach the US] stuck when Nicaragua closed the border,’ he explains. In recent years, most migrants have been economic, rather than political, and some observers suggest that removal of the US option could now increase pressure for change at home.

But much now hinges on President Trump, who has stated his intention to conduct a ‘full review’ of US foreign policy towards Cuba, leading many to expect Washington to take a harder line.

Many of Trump’s fellow Republicans have criticised Obama for ‘giving too much and not demanding enough in return – for example, in terms of human rights and institutional reforms,’ says Gutiérrez. On the other hand, Trump has pledged a foreign policy focused on economic benefit for the US.

‘Cuba is a very romantic and sexy market just now, but it has been more or less irrelevant since the end of the Soviet Union,’ concludes Gutiérrez. The island has good natural resources, but most of the 11 million Cubans are relatively poor, meaning it’s a very long way from being a major new emerging market.

Brian Nicholson is a freelance journalist and can contacted at brian@ukeditorial.co.uk