Risky Business: Investing in Cuba Is More Than Just a Financial Gamble
"It's hard to argue against weeding out corruption. Sometimes, in the process, you break a couple of eggs."
October, 2011: Fakhre, the Lebanese-born, Havana-based CEO of Coral Capital -- which claimed to have invested $75 million in Cuba, with more than $1 billion worth of projects in the pipeline -- is woken at dawn and arrested by Cuban authorities. Coral Capital's offices are shuttered and declared a crime scene. Fakhre has been held without charges ever since.
April, 2012: Coral Capital's COO Stephen Purvis, is picked up by Cuban government agents as he prepares to walk his children to school. He too, has been held without charges, and no mention has been made of either case in Cuba's state-run media.
Before their disappearances, Fakhre and Purvis seemed to have no shortage of confidence in Coral's ventures.
"We're not virgins at this," Purvis told a reporter, regarding the Bellomonte Golf Club, a 650-acre property under development at the time of his arrest.
Indeed, Purvis and Fakhre were not beginners -- Coral Capital was formed in 1999 to invest in Cuba and successfully restored Havana's Hotel Saratoga, where rates climb as high as $900 per night. They also opened the island's first Land Rover dealership, which was admittedly a work in progress (they sold a total of one car, to themselves…but these things take time).
Coral Capital was not the only foreign company paid back by the Cuban government with a complimentary stay at Villa Marista, the state security torture facility that apparently also doubles as a guesthouse.
Vahe "Cy" Tokmakjian, CEO of Ontario, Canada's, Tokmakjian Group, which sold buses, trucks, and mining equipment to Cuba and served as Cuba's exclusive distributor for Hyundai, was an experienced Cuba hand.
"I came to Cuba 21 years ago when the times of economic trouble began and, despite my banker's advice, I considered I could trust Cubans; so that's how I came here, why I'm here now and why I will continue to be here," he told Cuba Plus, a publication produced by Vancouver's Taina Communications in partnership with the Cuban government.
To be sure, Tokmakjian, whose company did an estimated $80 million worth of business with the island annually, continues to live in Cuba -- held without charges since September 2011, when he was taken into custody by state security and his company closed. (A second Canadian, Tri-Star Caribbean CEO Sarkis Yacoubian, has been held by the Cuban government without charges for almost a year.)
As Fakhre, Purvis, et al (over the past two years, Cuba has sent 52 foreigners, as well as hundreds of Cuban ministers and officials to jail, and has expelled more than 150 foreign business owners and operators) have now discovered, part of the reform process appears to include President Raul Castro making good on a 2008 vow to root out the rampant corruption that has been a part of daily life for decades.
A noble goal, hampered by the fact that no clear definition exists of what, exactly, constitutes "corruption."
A centrally-controlled command economy such as Cuba's, with a near-total lack of transparency, ensures that "every act is fraught for anybody trying to exist, from businesspeople to the average Joe," says a diplomatic official who agreed to speak to me anonymously.
"The Cubans have very publicly made examples of what they perceive to be corruption issues," the source explains.
One of those, in an interesting reversal of the norm, is what might be referred to as a "maximum wage law," which reportedly hovers around $20 per month. According to the Economist, Raul Castro "considers letting foreign firms pay market wages a step too far," forcing companies "to break the law -- and run afoul of his newfound efforts to enforce it."
"We are somewhat in the dark here," said a European businessman based in Havana. "If I pay my manager an extra $100 a month, as I feel I should, is that a crime against national security?"
The answer is, in a Communist country, yes. Money is power, and the inevitable income disparities that result from capitalistic concepts like bonuses collapse the order of a "classless society."
Here's former UK Ambassador to North Korea, John Everard:
The regime's distaste for markets is easy to understand. Because of the markets, people who had been brought up to depend on the state to provide everything had developed some economic independence. Customers had learned the importance of price and had learned to choose their purchases, while market traders had emerged who had learned the subversive skills of bargaining, procurement, and logistics. People had also learned the usefulness of markets as sources of news and gossip outside official control. The results of decades of ideological work were at risk.
Sometimes, the bribes are blatant, like the "free trips abroad, computers, flat-screen TVs or large deposits of cash in foreign bank accounts for senior officials" reported by a South American importer doing business in Cuba before he was accused of corruption and expelled in 2009. Other times, they may be inadvertent (a few dollars for gas) or perfectly acceptable in market societies (paying commissions).
"The forms of persuasion -- let's call it that -- are nearly infinite," said the importer.
And illegal. As one Facebook commenter who appears to be acquainted with Stephen Purvis, writes: "Steve has meant well by 'subsidising' the marginal salaries of Cuban management staff -- but we all know that ANY payments of foreign currency to Cubans is strictly prohibited and is regarded as paying bribes."
Some have suggested that the Cuban leadership simply looked at its runaway accounts-payable column and decided to have the intelligence services "buy out" the government's foreign partners at an extremely favorable price.
Foreign investors in Cuba have dealt with this before. A backgrounder from the UK Trade & Investment office describes the events of early 2009, when the global financial crisis "sparked a shortage of hard currency on the island and led Castro to freeze the bank accounts of joint ventures operating there." Castro has been slowly paying out the money, estimated at more than $800 million, since then."
Sometimes, this is what doing business in a Communist country entails. And, in fact, it's something a certain type of investor needs to expect.
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