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."
Yankee, Stay Home
Though the State Department describes Cuba as having “a hostile investment climate, characterized by inefficient and overpriced labor, dense regulations, and an impenetrable bureaucracy,” there are strict rules to further dissuade stateside investment. Under US law, Americans doing business in Cuba face swift, severe (and constitutional) penalties. From the website of SGR LLP:
This, obviously, leaves more opportunity for Europeans and South Americans, minus the Canadian, French, Czech, Chilean, and English ones who have been jailed or summarily deported.
One of the Cuba success stories is Spain’s Meliá Hotels International, the world’s largest resort hotel company, currently operates 25 properties throughout the country.
It’s a market Meliá’s US-based competitors have (cautiously) desired for quite a while. In 2008, executives from chains including Marriott (MAR) and Wyndham (WYN) expressed interest in Cuba, according to a Bloomberg report, as did Orbitz (OWW) and Royal Caribbean Cruises (RCL), whose CEO called the island “the Holy Grail of cruising.”
It would also open up a market previously closed to American credit card issuers like Visa (V) and Mastercard (MA), which could serve at least a portion of Cuba’s estimated three million annual tourists.
Domestic firms will face a steep learning curve when and if the trade embargo that has made it illegal for US firms to do business in Cuba since 1962 is lifted. But Meliá, industry insiders say, will benefit immediately, building on two profitable decades there.
“They’ve been thriving with their joint ventures in Cuba for 20 years, they’ve expanded year after year, and I’ve never heard anything bad about them from the Cuban government,” Rob Sequin, publisher of news service HavanaJournal.com tells me. “Whatever they’re doing, they must be doing right.”
What Meliá has been doing -- right or wrong -- is business with Cuba’s Fuerzas Armadas Revolucionarias, or Revolutionary Armed Forces.
The State Department describes the FAR as playing “a dominant role in the economy, particularly in tourism, civil aviation, foreign trade, and retail operations.” Of course, President Raul Castro was General Raul Castro until Fidel handed him the keys to the store in 2008.
The Institute for Cuban and Cuban-American Studies at the University of Miami describes the structure as follows:
The man behind the transformation of Cuba's Fuerzas Armadas Revolucionarias (FAR) into a major economic force is Gen. Raul Castro, Cuba's defense minister and designated successor to elder brother Fidel. Beginning in the late 1980s, as materiel and subsidies from Moscow progressively dwindled, Raul Castro introduced the "Sistema de perfeccionamiento empresarial (SPE)," or enterprise management improvement system, that streamlined the Cuban military's operations. With the disappearance of the Soviet bloc by 1991 and the ensuing severe economic crisis that threatened the regime's survival, the younger Castro went further and established state corporations like the Gaviota tourism group for joint ventures with foreign capital. Today, the military is not only a largely self-financing institution but a major player in the overall Cuban economy.
Raul Castro entrusts a military managerial elite for the day-to-day oversight of the FAR's business empire. Vice minister of defense, General Julio Casas Regueiro, and Maj. Luis Alberto Rodriguez Lopez-Callejas, son-in-law to Raul Castro, serve as GAESA's chairman and CEO, respectively. Key money-making enterprises are also headed by high-ranking officers, as in the case of Gaviota whose CEO is Brig. Gen. Luis Perez Rospide.
The short answer is, no one knows.
Cuba policy and the future of the trade embargo have been hotly debated for years, without much movement.
The US Treasury has issued a handful of travel licenses, which permit American travelers to visit Cuba on “people-to-people” cultural exchanges, defined as trips that “have a full-time schedule of educational exchange activities that will result in meaningful interaction between the travelers and individuals in Cuba.”
However, as Rob Sequin points out, it remains illegal to bring so much as a bottle of rum back with you.
Kirby Jones has been waiting for the embargo to be lifted since his first trip to Havana in 1974.
“Everyone is there, except us,” he told a group of travel agents, hoteliers, tour operators, and charter companies in 2010. “There are offices and representatives of over 500 companies around the world. Nobody knows when it will open up for Americans, but it will.”
While movement on the US side has been glacial, Cuba continues to move forward without us, in its own way.
“If you told me back in the '70s that I would see what I’m seeing today, I’d say you were nuts,” he says. “After the state cafeterias started closing in the factories, people were on their own; they had to get their own lunch. That led to a birth of private food stands. In Cuba, you now see a growing entrepreneurial class; 300,000 Cubans now operate their own businesses. They may not be the kind of businesses we’re accustomed to seeing, where you hang out a sign that says ‘Joe’s Plumbing Store,’ but you have plumbers working and doing business -- just without the trappings of a business.”
The gamechanger for the island as a whole, Jones says, will be the successful discovery of oil in Cuban waters, though he does see one societal shift that may be even more transformative than the elusive Gulf crude that may or may not be sitting offshore:
“For years, the Cuban system was built on the philosophy of, ‘If I can’t have it, you can’t have it either,’” he says. “Now, certain people will have more than others, which will lead to certain inequities. That’s a big change, but that’s the new Cuba. And they’ll get used to it.”
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