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Raul Castro Replaces Fidel; Centrally-Planned "Free Market" Economy Ushered In

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CUBA LIBRE?
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Cuban officials have just wrapped up the closing session of the first Communist Party Congress in 14 years, which saw Fidel Castro step down as the party's First Secretary to be officially replaced by his brother, Raul.

While many Cuba-watchers had high hopes that a younger, reform-minded new guard would be appointed to top government positions at the Congress, the Miami Herald reports that 80 year-old Jose Ramon Machado Ventura will replace Raul as Second Secretary of the Communist Party, and 79 year-old Ramiro Valdes will occupy the number-three spot.

The Herald sounded a cautiously optimistic tone regarding the economy, saying that although the government fell short of naming "a new and younger leadership," at a Congress which, according  to the Christian Science Monitor, centered around "the need to inject more youth into the socialist revolution," the paper makes note of some 300 "bold economic reforms" being ushered in.

“It begins to show people that Cuba is going to be very different under Raul than Fidel,” Andy Gomez, senior fellow at the Institute for Cuban & Cuban-American Studies at the University of Miami, tells the Monitor.

However, the Associated Press reports that Raul told delegates that "Modernizing the economic model is not a miracle that can be accomplished overnight like some believe," and that he will not permit "the return of a capitalist regime."

Euronews says Raul "plans to reduce the size of the state and expand the private sector while keeping central planning and control," which Carlos Alberto Montaner of Firmas Press dismisses as "socialism without subsidies and a capitalism without markets."

Recently, Rob Sequin, a Massachusetts-based consultant serving businesses eager to enter the Cuban market, and the publisher of HavanaJournal.com, discussed the future of Cuba's future economic prospects with us.

He said that Cuba's reforms to that point -- and presumably going forward -- were baby steps, albeit baby steps in the right direction.

“It’s like throwing a glass of water on a house that’s burning down to see if that does anything,” he explained. “Then, when that doesn’t work, they go get a bucket full of water, throw it on the house, and see what that does. When that house burns to the ground, how it will be rebuilt, I have no idea. No one could give you a straight answer on that.”

Indeed, how Cuba's new, strange hybrid of communism and capitalism will work out is anyone's guess. It's been, for better or for worse, successful for China, but, as Sequin told me, "communism and business don’t go together unless you’re China -- and Cuba’s not China.”

American companies would love to see a new trading partner open up a mere 90 miles away from US soil. But a small number of big names have been able to do embargo-era business with the island nation for some years now.

When the Trade Sanctions Reform and Export Enhancement Act of 2000 lifted part of the trade embargo (allowing specific products to be exported, such as agricultural products and medical supplies), those firms have been doing brisk business with Cuba, supplying roughly 96% of Cuba’s rice imports and 70% of their poultry and meat.

In 2001, Archer Daniels Midland (ADM) was the first domestic outfit to do business with Cuba in 40 years. Cargill followed shortly thereafter, and exports of US corn, cattle, wine, cigarettes, and other foodstuffs began flowing south.

In October 2002, the US Food & Agribusiness Exhibition in Havana drew 20,000 Cubans who wanted to taste things they never had before -- among them, products from Hormel (HRL), Tyson Foods (TSN), and Wrigley.

Sequin pointed out that while the definition of an “agricultural product” is broad enough to allow for wooden utility poles (an export quite valuable to the state of Alabama), railroad ties, and newsprint, completing a sale is tricky.

“It’s a real hassle because of the restrictions,” he said. “For example, Cuba has to pay in cash through a third country; companies could do millions and millions of dollars in sales if the US would get out of the way.”

Sequin also noted out that medical sales are severely limited by regulations put in place by the US Treasury Department’s Office of Foreign Assets Control.

“There are a lot of restrictions on what a medical ‘device’ is, which is totally different than medical ‘equipment,’” he said. “A hospital bed with a motor on it, for example, might be prohibited for export while one without isn't. Obama lifted restrictions on US telecoms doing business in Cuba, but AT&T (T) or Sprint (S) aren’t going to Cuba because of two things -- US regulations and the Castro government. Once you get past the US, you have to start dealing with the Cubans, so one way or the other you’re not really going to make any money. I get a couple of calls a week from businesses and entrepreneurs, and I preface everything by saying, ‘You’ll spend a lot of time and a lot of money on this, but you’ll probably lose both. I’ve seen people come and go; they all want to be the first ones in and all that. But you’ve got two hands tied behind your back -- all you can do right now is sort of look around, you can’t really do anything.”

One area of US-Cuba trade that merits mention involves American companies that had property nationalized after the Batista government fell.

“Seized property is a complicated situation,” Sequin said. “When Castro started taking over companies in ‘59 and ‘60, it’s my understanding that other countries around the world settled claims with Cuba, but the US did not. There are millions of dollars in Cuban bonds owned by people out there, but they’re not worth anything because there’s no settlement process in place. It’ll probably never happen, but if it does it might be for pennies on the dollar, after Castro falls.”

Oddly, the company with the largest property claim against the Castro government is OfficeMax (OMX). While OfficeMax never did business in Cuba, a 2003 merger with Boise Cascade made it a claimant to property controlled by Cuban Electric, a stake in which had been owned by a Florida company that Boise bought years earlier.

Other property claimants include ExxonMobil (XOM), as a predecessor company owned a refinery on the island, Starwood Hotels (HOT), which acquired ITT in 1998 -- a company that had property nationalized years earlier, Freeport-McMoRan (FCX), which once owned a nickel mine, later confiscated by the Castro regime, and Chase Manhattan Bank (JPM) which had 11 Cuban branches expropriated, though its claim is largely for the value of securities lost, not real estate.

Beyond the profit motive, a lifting of the Cuban trade embargo would, in many peoples’ minds, advance security as much as it would advance business interests.

“I’d rather have my boys someday go down there and negotiate a cattle contract than be members of a peacekeeping mission,” a Minnesota cattleman named Ralph Kaehler, who was behind the first livestock shipment to Cuba after the agricultural exports exemptions were implemented in 2000, told CNBC. “We’ve never gone to war with a trading partner.”

As for Fidel, the AP writes that, even though he no longer officially runs the government, "Raul said he needed no formal title to continue being the country's guiding light."

"Fidel is Fidel," he said.

 

POSITION:  No positions in stocks mentioned.

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