The stock image of Cuba is of a US automobile from the 1950s, a subtle jab that the Caribbean’s largest country has been standing still ever since the Communist revolution nearly six decades ago.
While change has taken place in Cuba, albeit at a much slower pace than similar economies based on agriculture and tourism, a ground-shifting change is now under way, as the Cuban and US governments move to repair diplomatic ties and normalise trade relations.
US president Barack Obama and his Cuban counterpart Raúl Castro simultaneously announced last December the beginning of the process of restoring relations between the two countries. Obama called US policy since the early 1960s a failure, while Castro said his government had embarked on the “task of updating our economic model in order to build a prosperous and sustainable socialism”. The first face-to-face meeting between the leaders could happen in early April during the Summit of the Americas in Panama.
Timid steps at economic engagement have already been taken but huge leaps are expected, and investors are lining up to figure out how best to tap into a market isolated from the US for more than 50 years.
“The decision on Cuba is huge,” says Walter Molano, head of research at investment bank BCP Securities. “It may be a cliché, but this is a game changer. The combination of a skilled labour force, low wages, natural resources and its location will make Cuba a magnet for foreign investment.”
Tom Popper, president of insightCuba, which brings groups to the island on cultural exchanges, says his office has been flooded with calls from businesses since the December announcement and a subsequent definition of policy changes in January. “Everyone is trying to figure out how to get in at the beginning as 50-plus years of embargo wind down,” he says. “It may be 90 miles off the coast but for many it is a complete unknown.”
It is hard to pinpoint amounts of potential investment flows, with some estimates close to $20bn in the next five years. This is enormous compared with the size of the economy, officially $120bn but closer to $70bn based on private sector estimates. Cuba had an estimated trade deficit of $9bn last year and GDP growth was an underwhelming 1.3%. The official forecast is 4% growth for this year.
US companies have been trading with Cuba, despite the embargo, since an initial policy opening in 2000 authorised cash-in-advance transactions. Total exports since 2001 topped the $5bn mark last year, with $291m added in 2014. US exports were $24.8m in the first two months of this year, according to the non-profit US-Cuba Trade and Economic Council, which includes as members a long list of US Fortune 500 companies.
There is a kind of exuberance about Cuba today,” says Council president John Kavulich. “This is not Dubai 93 miles south of Key West, Florida.”
A few service providers, such as American Express and MasterCard, have announced that they will allow their cards to be swiped in Cuba, while Netflix, the online movie and TV company, will make its service available to the island’s 12m people. The first deal since the new thaw came on March 11 between US telecom company IDT and Cuba’s state-controlled Etecsa, allowing for direct long distance communications. Calls were previously routed through third countries.
Hard investment in infrastructure will likely take time, but the Cuban government offered a glimpse of what it would like in an official document, Portfolio of Foreign Investment Opportunities, released in November. The document focused on nearly 250 projects that would require about $8bn of investment in the short term and $20bn over the medium to long term.
Many of the projects are in sectors where Cuba wants investment to boost the local economy and potentially ramp up exports. Nearly 100 projects are in energy, 56 in tourism and 32 in agriculture and food production. Most of the energy programmes are joint ventures but the government is willing to allow full foreign ownership of renewable power generation, particularly wind farms. The plan calls for nearly $500m of investment in two wind farms that would produce 276MW of power. Cuba now has three small wind farms generating 12MW.
What Cuba really wants is to find oil and it hopes companies will jump on opportunities to explore onshore and offshore blocks. The country relied on cut-rate crude exports from the Soviet Union for decades but the elimination of oil subsidies was a key motivation for the Special Period.
More recently, Cuba has benefitted from cheap oil provided by Petrocaribe, the energy assistance programme for Caribbean and Central American countries set up in 2005 by the late Venezuelan president Hugo Chávez. Venezuelan authorities pledged in early March that Petrocaribe would remain in place but doubts continue to mount over the capacity of Venezuela’s state oil company, PDVSA, as low international crude prices cut into its margins.
Tourist lift
Despite US froideur, Cuba has become a big tourist destination. Slightly more than 3m holidaymakers visited Cuba last year, up 5.3% from 2013 and generating more than $2bn of revenue. The government would like to see 20 new five-star hotels in provinces outside Havana. The investment plan lists the construction of hotel-golf-residence complexes with price tags above $300m.
The US decision to relax restrictions could lead to a big new influx of visitors. Popper says bookings for insightCuba’s cultural exchanges have jumped by double digits since December. The number of US tourists could rocket if the US government lifts more restrictions — today there are 12 categories for US citizens who want to visit the island — and authorises regular commercial flights between the US and Cuba. The same would be true if US cruise ships began docking in Havana.
Land of plenty — potentially
The changes so far offered by presidents Castro and Obama focus on agriculture but there is a wide gap between their ideas, particularly when it comes to production of sugarcane and tobacco used to make the country’s iconic rum and cigars. The Cuban investment plan would allow for some management contracts of sugar mills, but the industry would remain under state control and foreign investment would not be allowed in the tobacco sector.
The government has made a major admission regarding agriculture, however, conceding that only 2.3m hectares (5.7m acres) out of 6.3m hectares of farmland are under cultivation.
The changes in US legislation in the last decade allowed for agro-exports to Cuba, and the Obama administration is broadening this by authorising the export of farm equipment to small, non-state producers. Yet only 15% of Cuba’s agriculture production is in private hands. This restriction to the private sector, which also applies to other sectors, is a critical detail that could limit US exports and future investment if it stands.
Kavulich at the US-Cuba Trade and Economic Council says there would be much greater investment and trade flows from the US if this limitation were lifted. “The restrictions on the sale of agricultural and building materials will slow trade,” he says. “Both sides recognise this so change is likely sooner than later.”
Facilitating these changes is the decision to let US banks open corresponding accounts with Cuban financial institutions and a change in the cash-in-advance provision for exports. However, investors, while probing the Cuban market for opportunities, will likely wait until the US State Department finishes its review of Cuba’s inclusion on its list of countries that support international terrorism.
“The sanction list is like the Sword of Damocles,” says Kavulich. “The most important thing will be removing Cuba from the list. It will happen soon.”
The amount of investment and trade with Cuba also depends on policy changes to be made by the Castro government.
Bureaucracy in Cuba, as in many other Latin American countries, is cumbersome and needs to be streamlined. There is also a serious infrastructure gap, with ports, roads and airports urgently needing improvement. “Transportation networks are relics of the 1950s as is the country’s electricity and communications grid,” says Molano.
A new Mariel Free Trade Zone outside Havana will help but it is still underdeveloped. Molano says Cuba’s location and easily accessible deep water port could be turned into key trans-shipment points, but this depends on foreign investment.
And there are political considerations that go beyond Cuba. The Cuban government remains cautious regarding a number of potential imports, with telecoms and electronics at the top of the list. The Obama-Castro deal was predicated on the release of prisoners, including US businessman Alan Gross, accused by Cuba of smuggling telecom and computer equipment into the country.
On a broader level, rising tensions between the Obama government and Venezuela could slow progress. Cuba has come out strongly against US sanctions imposed on Venezuela, its chief trading partner. Venezuela was a staunch critic of the US embargo of Cuba so it is only natural that Cuba would step up for Venezuelan president Nicolás Maduro.
Kavulich, nevertheless, says Cuba is aware of the risks of relying too heavily on Venezuela because of its past experience with the Soviet Union. “If there is a hard landing in Venezuela, it would create a crater in Cuba that would be hard to get out of any time soon,” he says.
And while there is caution on both sides after decades of mistrust, “a learning process is under way,” Popper believes. “Progress is being made but companies going in need to see this with a long term vision.”