Cuba on the Mind: Foreign Investment Hurdles

By Scott B. MacDonald

Cuba has long held an attraction for U.S. business. Indeed, there is now an intense debate in the U.S. Congress over whether to abandon the U.S. economic embargo on the country, with the U.S. agricultural lobby pushing hard for the right to sell its goods to Cuba. Well before the break between the United States and Cuba following Fidel Castro’s coming to power in 1959, American businessmen were highly active in the island-state. Since the 1960s, U.S. business has been almost entirely absent, forced to leave the field to the Europeans, Canadians, Japanese and other Caribbean and Latin American economies. Yet, for all the criticism U.S. policy toward Cuba has received, especially over the boycott on investing in the Caribbean nation, it is not been smooth sailing for the Europeans, Canadians and others. Indeed, Cuba has been a difficult business environment.

Foreign companies operating in Cuba contend with excessive red tape, lengthy negotiations with the government, and sometimes a lack of skilled talent. The European Union, the largest foreign investor, recently complained to the Cuban government about a lack of information on business laws and regulations as well as their discriminatory application vis-à-vis foreign firms. In addition, the EU indicated that its country’s businesses operating in Cuba were forced to repeatedly renew visas and work permits, eating up valuable time.

Although the Cuban government became more flexible in terms of allowing foreign investment into the country during the crisis years of the 1980s, it remains opposed to the idea of privatization nor will it provide foreign investors access to much of the economy. Tourism, once a shining new sector that helped to generate badly needed foreign exchange, has slumped and investment which averaged $268 million over the last five years, trickled to a meager $38.9 million in 2001.

The E.U.’s official complaint was acknowledged by the Cuban government, which indicated it would seek to reduce red tape and shorten the length of negotiations between the local bureaucracy and foreign companies. These negotiations currently take about a year.

The Cuban government has another incentive for easing foreign business regulations. Considering that Cuba is largely dependent on external energy sources, it is actively courting foreign companies to invest more in offshore oil exploration. Some 59 exploration contracts in Cuba’s 112,000-sq km section of the Gulf of Mexico have been put up for auction. As the London-based Latin American Caribbean & Central America Report (August 2002) commented: "By opening up its oil sector to joint ventures with foreign companies, Cuba has increased its oil production sixfold over the last decade, to the 3.4 m tones (27 m barrels) recorded last year. It is understandably keen to increase foreign investment."

Two other reasons for greater flexibility from Cuba exist – it badly needs foreign investment to diversify away from sugar and investment prospects would be enhanced if the U.S. ever ends the economic embargo. Economic diversification is critical considering that sugar prices have languished throughout 2002 and that Cuba’s industry is not cost efficient. The government has embarked upon a plan to restructure the sugar industry by closing plants and cutting jobs. It is also promoting other forms of agriculture, both for export and domestic use. This too requires foreign investment.

Greatly complicating matters for Cuba’s economic transformation, the Caribbean nation has a debt problem. Many of the same governments that have been willing to let their nationals trade and invest in Cuba have also provided trade finance. Most have found themselves out of pocket. Cuba earlier in the 1980s defaulted on its external debt. As Moody’s noted in August 2002: "Faced with major financial difficulties, the government has fallen behind on its external financial obligations and has defaulted on short-term debts and supplier payments. The situation has forced several foreign creditors to roll over short-term debts or to reschedule financial obligations." The rating agency also commented that the attitudes of European governments and investors toward Cuba have "soured in recent years leading to a significant decline in foreign investment inflows, which fell to $39 million in 2001, compared with an annual average of $280 million during the previous five years."

In September, it was announced that the French government froze $175 million in short-term credit to Cuba after the Caribbean nation failed to repay an earlier loan. Other countries have indicated that Cuba is in arrears, including Japan (which it owes $1.7 billion), Argentina, Spain, and South Africa. Any new move to provide U.S. credit to finance trade to Cuba should consider the Cuban track record in repayment Consequently, while many U.S. companies look with envy upon their European, Japanese and Canadian counterparts conducting business in Cuba, they should be aware that the grass is not always greener on the other side.