Doing Business with Cuba, What's Next?

capitolhillcubans

bbc.co.uk

Remarks today by Mauricio Claver-Carone at World Trade Center Orlando:

"Doing Business with Cuba, What's Next?"

Thank you so much for your kind invitation. I'm thrilled to be back in Orlando.

As some of you know, I'm a former resident of Orlando.  I'm a proud graduate of Bishop Moore High School and Rollins College.  So I share a great deal with all of you.

Obviously, Cuba and U.S. policy towards Cuba -- including the issue of trade -- are topics of great passion, and seemingly endless comment, reflection and debate -- or at least for those of us that deal with it on a daily basis.

Unfortunately, too many times at these events, speakers tend to hype and cherry-coat business opportunities in Cuba, disregarding some of the unpleasant economic and political realities involved.

For example, in September 2011, our neighbors here in Tampa announced the launch of charter flights to Cuba with great fanfare.

At the time, U.S. Rep. Kathy Castor (D-FL) and other Tampa officials heralded the charters as a huge business coup.

She'd even started a "Gateway to Cuba" initiative to market Tampa as the jump-off point for Cuba travel.

"And this is just the beginning," Castor said.

Well, just this week, it was announced that these charter flights would be significantly scaled back.

Similarly, Cuba charter service planned from Baltimore-Washington, Atlanta, New York and San Juan has also has been halted for financial reasons.

Others will point to European and Canadian investors, and argue that they are getting a "head-start" on business opportunities in Cuba.

How have these European and Canadian investors fared?

You tell me.

In the last few years, European investors have had over $1 billion arbitrarily frozen in Cuban banks by the government.

As Reuters reported, "the Communist-run nation failed to make some debt payments on schedule beginning in 2008, then froze up to $1 billion in the accounts of 600 foreign suppliers by the start of 2009."

In the last few months, the CEOs of three companies with extensive business dealings with the Cuban government were arrested and are now sitting in jail -- without charges.

They are Cy Tokmakjian of the Tokmakjian Group and Sarkis Yacoubian of Tri-Star Caribbean, both from Canada, and Britain's Amado Fahkre of Coral Capital.

Let me stress that these were not casual investors. They these were three of Cuba's biggest business partners, having invested hundreds of millions, with direct access to the highest officials.

And in the last few weeks, Iberia, the national airline of Spain, which accounts for over 10% of all foreign commerce with Cuba, announced the elimination of its Havana routes -- for they are no longer profitable.

While my presentation may sound somber for the short-term -- I promise it is optimistic in the long-term.

I note your logo here at the World Trade Center Orlando is "prosperity through trade."

I completely agree.

In full disclosure, I am a free-trader.  I believe and advocate for the principles of free trade.  However, I do so without the distortions that some would like for us to accept under the guise of trade.

I believe in the principles of free trade as were envisioned by its original thinkers.

In The Wealth of Nations, a book considered to be the foundation of free trade, Adam Smith held that trade, when freely initiated, benefits both parties.

Smith did so in criticism of the mercantilist policies of the 17th and 18th centuries, whereby commerce was simply a tool to benefit and strengthen the authoritarian nation-states of the time.

I believe -- as did Smith -- that free trade requires property rights and the rule of law as pre-conditions. If no such rights exist, then there is no real opportunity to trade, for the government could just take from you what they want, when they want, wherever they want -- for their sole benefit.

Do these pre-conditions exist in Cuba today?

According to the 2013 Index of Economic Freedom, an annual guide published by The Wall Street Journal and The Heritage Foundation, which was just released this week:

Cuba ranks 176th out of 177 countries in the world in terms of economic freedom. The only country that ranks worse is North Korea.

It is the least-free economy in the Western Hemisphere and internationally, it ranks worse than some pretty unattractive investment environments, including Iran and Zimbabwe.

According to the report:

"A one-party Communist state, Cuba depends on external assistance (chiefly oil provided by Venezuela's Hugo Chávez and remittances from Cuban émigrés) and a captive labor force to survive. Property rights are severely restricted. Fidel Castro's 81-year-old younger brother Raul continues to guide both the government and the Cuban Communist Party. Cuba's socialist command economy is in perennial crisis. The average worker earns less than $25 a month, agriculture is in shambles, mining is depressed, and tourism revenue has proven volatile. But economic policy is resolutely Communist, and the regime rejects any moves toward genuine political or economic freedom."

Regarding the rule of law, it states:

"The constitution explicitly subordinates the courts to the National Assembly of People's Power and the Council of State. Corruption remains pervasive, undermining equity and respect for the rule of law."

Within this framework, let me also address Cuba's political system, as it has important implications for the subject of trade with Cuba.

First of all, Cuba is not China and it is not Vietnam. It is not an authoritarian bureaucracy.  Cuba is one of a handful of totalitarian states remaining in the world - alongside North Korea, as the 2013 Index for Economic Freedom correctly notes.

I hate to sound patronizing, but it's important to understand the dynamics of a totalitarian state in order to understand the Cuban reality.

A totalitarian state strives to control every aspect of public and private life. Totalitarian regimes, such as Cuba's, maintain themselves in power by means of an all-embracing cult of personality; propaganda disseminated through a state-controlled media; a single party that controls the state; absolute control over the economy; restrictions on discussion and criticism; the use of mass surveillance; and state terrorism to foment fear and submission.

None of this has changed.

Some of you are probably wondering:

What about the "economic reforms" that have been so widely reported in the media?

Let me address some of these:

a. Agriculture: The most aggressive "reform" announced has been in agriculture, where the Cuban government enacted a law in 2008 seeking to distribute idle agricultural land to small farmers and cooperatives. These lands are granted in usufruct -- with ten years leases for individuals and 25 years for cooperatives, both renewable.  The government retains ownership.

Yet, according to a report last month in The New York Times, "Because of waste, poor management, policy constraints, transportation limits, theft and other problems, overall efficiency has dropped: many Cubans are actually seeing less food at private markets."

Despite this failure, the government is now similarly experimenting with some non-farm cooperatives. There's no reason to expect the results will be any different as the fundamental remain the same.

b. Self-employment: After the collapse of the Soviet Union in 1991, the Cuban government sought to ease economic pressure by temporarily allowing -- through special licenses -- limited self-employment. These licenses were streamlined starting in 1998, when the Cuban government secured massive oil subsidies from Venezuela.

Faced with similar economic challenges today, Raul Castro has once again eased some restrictions on self-employment, which allow individuals to lease the practice of one of 181 pre-approved services, e.g. taxi drivers, artisans, in-home restaurants. However, all means of production are legally owned by the state.

Overall, there's nothing particularly new here. I'd also note that more than 25 percent of those self-employed have returned their licenses because of the government's burdensome oversight and predatory taxation.

c. Home Sales: The Cuban government has now allowed citizens to buy and sell the homes in which they reside.  Cubans have supposedly owned the property where they reside since 1986, although they couldn't be sold. Cubans dealt with the no-sell edict by "swapping" homes amongst each other and setting up a black market in housing. The government routinely confiscated homes of those who left the island and in 2000 the police began to crack down on the swaps and black market transfers.

Nonetheless, the newly-authorized sales are subject to limitations -- not least of which is a regular Cuban's $25 per month income. Another notable restriction requires the transaction be made in hard currency and that it be deposited in Cuba's Central Bank, pending the government's approval of the sale and an investigation into the source of the funds. At the time of closing, the Central Bank will issue a check to the seller in non-convertible (worthless) Cuban pesos. It is not surprising that the number of formally recorded sales remains minimal.

d. Migration Restrictions: Just today, the government is enacting a new law that eliminates the infamous "exit permit" required for Cubans to travel abroad. However, most of the restrictions and the high costs of the "exit permit" have been transferred to the passport process. Those who apply for travel abroad will still need a stamp of approval from the Ministry of the Interior. Dissidents, athletes and certain professionals will remain ineligible to travel abroad. The devil here is still in the details and its implementation.

What role do foreign investors play in these "reforms"?

None. Foreign investors in Cuba cannot do business with private citizens. They can only do business with the Cuban government through minority joint ventures. Moreover, the Cuban government's constitution clearly states that all foreign commerce is strictly reserved for the state.

Foreign investors cannot hire or pay workers directly. They must go through the Cuban government employment agency, which picks the workers. The investors then pay the Cuban government in hard currency for the workers, and the Cuban government pays the workers in worthless pesos.

For example, some foreign companies pay the Cuban government $10,000 a year per Cuban worker, which is a bargain in itself. But it's even more of a bargain for the Cuban government, which then gives the workers about $20 a month in pesos -- and pockets the difference. This is a violation of international labor norms.

Even the most unconditional advocate of business ties with the Cuban government would admit that Raul Castro has done little to attract foreign investment since taking the reign from his brother Fidel. To the contrary, as I mentioned earlier, he's stifled it.

The one exception has been off-shore oil exploration, which is directly tied to the Cuban government's fear of the demise of Hugo Chavez and his generous subsidies of 100,000 free barrels of oil per day. These subsidies comprise nearly two-thirds of Cuba's energy consumption.

Despite much anticipation throughout 2012, these off-shore oil exploration efforts -- in joint ventures with Spain's Repsol, Malaysia's Petronas and even Venezuela's PDVSA -- have been a bust.

Frankly, this was predictable since Brazil's Petrobras and Canada's Sherritt stated in 2011 such ventures were not commercially-viable. Yet, like with all things Cuba, they begin with a big media flurry until reality strikes.

Speaking of changes, I'd be remiss not to mention that one significant and tangible change that has taken place in Cuba under Raul Castro is a dramatic rise in repression.

In 2012, documented political arrests of peaceful democracy activists reached the highest levels (6,602) in decades. These have been accompanied by the mysterious deaths of some of Cuba's leading pro-democracy figures, including the founder of the Ladies in White, Laura Pollan, and the head of the Christina Liberation Movement and author of the Varela Project, Oswaldo Paya.

Impunity still reigns in Cuba.

If the Cuban people are prohibited from engaging in foreign commerce, then who is the Cuban counter-part for foreign investors?

The armed forces' holding company, called GAESA, is the dominant force in the Cuban economy. Founded by Raul Castro in the 1990s, GAESA controls a wide array of companies, ranging from the very profitable Gaviota S.A., which runs the island's tourist hotels, restaurants, car rentals and nightclubs, to TRD Caribe S.A., which runs all retail operations. In plain words: GAESA controls virtually every economic transaction in Cuba, making it -- by far -- the most powerful company in Cuba's totalitarian-command economy.  It is run by Raul's son-in-law, Colonel Luis Alberto Rodríguez Lopez- Callejas.

(Reports from Cuba indicate that Raul's daughter Deborah is divorcing Lopez-Callejas, who has a weakness for infidelity and domestic violence, so his days of glory may be counted.)

As relates to the U.S., American companies are prohibited from investing in Cuba or conducting commercial, financial or tourism-related transactions. However, there is one exception: The sale of agricultural commodities, medicines and medical devices, which were legalized on a cash-payment basis by the 2000 Trade Sanctions Reform and Export Enhancement Act (TSREEA).

The counter-part in Cuba for these U.S. agricultural sales is a state company called Alimport. Therefore, to speak of "trade with Cuba" is in itself a misrepresentation. To "trade with Cuba" is not about trading with the people or non-state actors; for only one company is allowed to transact business with American exporters for these commodities -- that company is called Alimport.

I'm a regular Cuban citizen, I have a self-employment license, and I want to import rice from Louisiana. I'm not allowed to - even if I had the capital to do so. Only the head of the Cuban government's Alimport, is authorized to import products to Cuba - to the entire island. That's it.

Thus, every dollar that the nearly 200 companies from 35 U.S. states have transacted in agricultural sales with Cuba since TSREEA has only had one Cuban counterpart.

I always jest with my colleagues from the various farm bureaus and trade associations that we should be forthright and call it "trade with Alimport," or "trade with the Cuban government" -- or mercantilism, which Adam Smith rightly defined as antithetical to trade.

What is the future of U.S. policy towards Cuba?

The US has a dual track policy towards Cuba. It seeks to - first and foremost -- provide support to the constantly besieged Cuban civil society (by civil society, I'm referring to opposition groups, religious organizations, independent journalists, and other marginalized, independent - and therefore illegal -- trade groups); while -secondly -- denying hard currency and resources to the Cuban dictatorship. In other words, U.S. policy seeks to weaken the Cuban government's absolute monopoly over power and resources, in order to help the Cuban civil society create some sort of "playing field" for itself, despite the grossly disproportionate circumstances it faces.

Within this context, U.S. policy sees sanctions as an important tool that not only denies resources to the regime, but also provides important moral and political support to the Cuban civil society. However, U.S. sanctions towards Cuba are not defined indefinitely, they are subject to conditions, and have been specifically codified into U.S. law as such.  Since 1996 -- with the codification of this policy -- the power to ease or terminate sanctions shifted from the executive to the legislative branch of the U.S. government.

According to law, the U.S. will only lift the remaining sanctions and normalize relations with the Cuba when three essential conditions are met:  1. the unconditional release of all political prisoners, 2. the recognition and respect of the fundamental human, political, and economic rights of the Cuban people, and 3. opposition parties are legalized leading to free and fair elections.

Currently, there is strong bipartisan support in the U.S. Congress for this law. Thus, these conditions are unlikely to change in the new 113th Congress. I'm not going to blow smoke at you and tell you otherwise.

Moreover, even some long-time Congressional advocates of unilaterally lifting these conditions - by changing the law - in order to further facilitate the terms and financing of agricultural sales have taken a hiatus from these efforts, as the Cuban government has imprisoned an American development worker, Alan Gross, who has been held hostage since December 2009. Mr. Gross had been helping the island's small Jewish community with Internet connectivity when he was arrested.

(Not only is Cuba one of the least-free economies in the world, it is also one of the most hostile to Internet connectivity.)

Speaking of financing, Cuba also remains one of the world's greatest credit risks. With a debt of $30.5 billion dollars, Cuba ranks second on the Paris Club's list of debtor countries.  Indonesia ranks first with a debt of $40.2 billion -- despite a population 23 times the size of Cuba. Cuba's unpaid debt represents nearly 10% of the Paris Club's total outstanding claims.

Today, the total of nearly $75 billion in foreign debts and claims against the Cuban government is nearly impossible to repay for a country with an economic output barely one-fifth the size of Greece's (similar population to Cuba) own troubled economy.

This is even more troubling considering that in 1959, when the current regime took power, Cuba had foreign exchange reserves totaling $387 million -- worth more than $3.6 billion today adjusted for inflation. Cuba's reserves were third in Latin America, behind only those of Venezuela and Brazil, despite having just a fraction of the population.

The good news is that the U.S. currently has zero credit exposure to Cuba, as U.S. law prohibits the extension of credit to the Cuban government.

However, the Cuban government still has not paid compensation for the approximately $8 billion worth of property that was confiscated from U.S. citizens. Let's not forget that this remains the largest uncompensated taking of American property by any foreign government in the history the U.S. Outstanding claims range from companies like Coca-Cola, to Ford, to Texaco, to Chase Manhattan Bank.

As previously stated, I have mostly focused on the U.S. Congress because the executive branch can only authorize the commercial and financial transactions with Cuba that have been previously mandated by Congress. President Obama has the authority to modify regulations related to purposeful travel, e.g. family, religious and academic travel, and remittances - and he has amply done so. Yet, even in this case, tourism-related transactions ("tourism travel") were codified into law in 2000 - and only Congress can authorize them.

What's next?

The current Cuban government, since its taking of power in 1959, has always survived off subsidies. With the exception of a brief period in the 1990's, foreign subsidies have always been Cuba's main source of income.

First, the Soviet Union provided $6 billion dollars in yearly subsidies through 1991. Cuba received more money from the Soviets than all of Europe received from the U.S. Marshall Plan after World War II.

Thereafter, Venezuela has provided $10 billion dollars in yearly subsidies since 1998.

With the pending passing of Hugo Chavez, the Cuban government is looking for its third major subsidy -- though I doubt there will be any takers -- or as the drama in a Havana hospital unfolds; they are figuring out how to somehow keep Hugo Chavez and his cronies on ice.

Moreover, with Fidel Castro at 86-years old and Raul Castro at 81-years old - and their appointed successor Jose Ramon Machado Ventura at 82-years old - it's safe to say time is not on their side.

Cubans are extremely smart people, they know that it is not the U.S. or sanctions that prohibit them from freely expressing themselves; that keeps them from entering and enjoying those beautiful resorts, with their restaurants and bars owned by the military; that keep them enjoying the fruits of their labor; or that keeps them from choosing their own destiny. It is the Cuban government that does so.

Furthermore, Cubans on the island know what democratic ideals are. In many cases, they have given the ultimate sacrifice in pursuit of those ideals. Let's not forget, Cuba has the largest prison population - per capita - in the world. Ten percent of the Cuban population has died, either trying to cross the Florida Straits, executed or imprisoned. Add to that another ten percent that has been exiled. Those are Stalin-Mao proportions.

So the questions remain:

Do we make a short-term investment in Cuba's current fledgling government that monopolizes the lives of Cubans, or do we make a long-term investment in its future leaders?

Do you want to deal with a trading partner that is as poor as North Korea, or would you rather deal with a neighbor as rich as South Korea?

Do we want to be in the position that European companies recently found themselves in post-Qaddafi Libya or two decades ago in post-apartheid South Africa -- begging for forgiveness and scrambling for the opportunity to renegotiate deals with the former victims of those dictatorships?

Or, do we want to be in a position of market preference -- eventually gaining what I like to call a "freedom premium" -- similar to that which Coca-Cola enjoyed in the former Soviet bloc pursuant to the fall of the Berlin Wall.

Hopefully, the answer will be the latter.

In a bit of corporate history, Pepsi first entered the Soviet Union in 1972, pursuant to a barter agreement in exchange for Stolichnaya vodka. Pepsi was infamously perceived to have been deeply entrenched with the communist government. Meanwhile, Coca Cola didn't make a move until the fall of the Iron Curtain.

However,immediately upon the fall of the Berlin Wall, Coca-Cola's former CEO Roberto Goizueta made sure that every automobile that crossed the border received free cases of Coke and those on foot got six-packs and single cans.

Perhaps Goizueta, a Cuban-American, who experienced first-hand what it was like to be a victim of oppression, instinctively knew that those newly-free would reward them in some fashion -- for they stood in solidarity with them during their darkest hour.

Tom Standage, author of "A History of the World in 6 Glasses," a book that divides world history into the beer, wine, spirits, coffee, tea and Coca-Cola ages - notes that when the Berlin Wall fell in 1989, East Germans began buying Coca-Cola by the crate-load:

"Drinking Coca-Cola became a symbol of freedom."

In 1991 Pepsi was outselling Coca-Cola 10-to-1 in the former Soviet Union. By 1994, Coca-Cola gained the lead, and retains it to this day.

Even more broadly, it is not a mere coincidence that the countries of Eastern Europe, who lived through similar ordeals, are the staunchest allies the U.S. has in the world today.

So let's focus on the big prize: a free and democratic Cuba that within a decade could --once again -- become one of the richest countries in the Western Hemisphere. This will not be because of its beaches and natural resources -- that only goes so far -- but because of its people. Note I haven't even mentioned Cuba's emblematic sugar and tobacco industries, which are in shambles.

An economy based on imagination, creativity, risk-taking and hard-work needs a rule of law and political freedoms. Cubans have proven this ability from the moment they set foot in exile, whether in the U.S. or in any other democratic country in the world.

And in the meantime, let's work on re-orienting some of those Canadian and European tourists visiting Cuba and bring them here to Disney World, Universal Studios and to enjoy all that Central Florida offers.

Thank you so much. I look forward to your questions.