The Pros and Cons of Doing Business with Cuba
Since President John F. Kennedy signed the Presidential Proclamation 3447 on February 3, 1962, the United States has not been able to invest or do business with Cuba, as an “embargo on all trade” was declared. However, within the past two years, major changes have been made to reopen business opportunities between the U.S. and Cuba. In December 2014, President Obama met with Raul Castro and made the controversial decision to restore diplomatic relations with Cuba. More recently, in July last year, both countries reopened their embassies and U.S. companies such as Verizon, Netflix, and Airbnb have expanded into the Cuban market. Many believe that now is the ideal time to start doing business with Cuba; however, there are also a wide variety of potential issues that could complicate future transactions.
The 1962 embargo was enacted in response to Fidel Castro taking power in Cuba and seizing billions of dollars worth of U.S. corporate property. Castro’s ruling eliminated discrimination in legal terms, but did see improved employment rates as a response. Unfortunately, he also managed to limit land ownership and heavily rid the country of its numerous private businesses. The country relied significantly on support from the Soviet Union, but when the USSR collapsed in the 1990’s, the Cuban economy significantly declined. Even though Castro himself was able to restore some of the country’s previous trading partners, he passed control to his brother in 2006 and resigned in 2008.
Today, there are a number of flourishing private entrepreneurs operating within Cuba, according to a recently published article by Entrepreneur. This can partially be attributed to the Cuban government altering its policies to help local business leaders, private farmers, and employees of Cuba’s joint ventures to live, thrive, and survive. Currently, the private sector of the Cuban workforce comprises about one-third of the entire Cuban workforce and is expected to grow over time. Cuba is home to 11 million consumers with nearly 60 years of pent-up demand for U.S. goods and services, and its Port of Havana is only 198 nautical miles from the Port of Miami, easily facilitating trade between the two countries. Millions of U.S. tourists will need travel-related services for planned vacations to Cuba, and finally, European countries have already paved the way for foreign investment and business on the island.
While the advantages listed above may seem attractive to potential investors and businesspeople, there are far many more risks that could dissuade them from doing business with or in the country. Cuba’s harsh business climate, for example, is a major disadvantage for those wishing to do business there. The government controls the factors of production including manufacturing facilities, distribution centers, large-scale agriculture and energy projects, access to domestic capital, and even who you are able to hire because of the massive holding companies. Concepts such as rule of law, due process, and honoring contractual agreements don’t even exist in Cuba. In March 2014, the Cuban Parliament equivalent, called the National Assembly of the People’s Power, passed a new Law of Foreign Investment. This law was, unfortunately, very similar to the old one, and was designed so that Cuban-government holding companies could retain majority ownership and control of all projects. While theoretically the goal of this law was to permit 100% of foreign ownership of companies, in practice it hasn’t happened. In virtually every case, the government seeks a 51% ownership stake.
Limited consumer purchasing power is also a key issue in the country. The average wage in Cuba equals about $20 per month, with imported goods costing substantially more than they do in the U.S. A Cuban doctor, for example, would spend a week’s salary just to access an hour of computer time at an Internet café with dial-up speed. While Cubans with relatives abroad sending remittances are able to enjoy a somewhat higher standard of living, only between 15 to 30% actually have access to them. Business culture is also challenging in Cuba, as the combination of absolute government combined with low wages and high prices has led to alternate means of conducting business. “Resolver” is used as a completely informal (and usually illegal) way of obtaining goods for resale on the black market. Cubans are now able to own small businesses in certain sectors, but the established confiscatory tax rates and regulations leave them having to essentially run their businesses on the black market. Many immigrants have recently had difficulty adapting to U.S. business culture, and it would likely be similar for U.S. entrepreneurs heading to Cuba.
As a nation, Cuba has a poor track record as both a borrower and a business partner. Within the last five years alone, Cuba’s debtors have written off more than $40 billion in debt as uncollectable, the equivalent of the U.S. failing to pay $8 trillion in debt. Because of this, U.S. law currently prohibits companies from financing sales to Cuba; they have to pay in cash. There are now fewer than 250 foreign companies doing business in Cuba, and this number is only expected to decline as more partners give up along the way. Many foreign investors fall into two scenarios: they either have lost money on their Cuba ventures or have made money, only to see the Cuban government seize their assets, arrest executives, and/or forcibly renegotiate terms.
Cuba is different from other formerly communist countries such as Vietnam and the Czech Republic in that it has no intentions of changing. According to Eric Leenson, president of SOL Economics, “they’re not transitioning from socialism to capitalism. What they’re doing is ‘updating’ their socialist system so that it’s more viable. A large part of that means allowing for more private enterprise activities.” The country seems to view thawing relations between the U.S. as an opportunity to secure additional resources to support its own political system and economy. Rules have relaxed in regards to some imports, such as travel and telecommunications services, but most U.S. firms will not be able to set up shop until the embargo is entirely lifted. Those firms considering entry must learn to function within the framework of socialist policies and strict legislative controls. However, the potential market for U.S. companies is not there yet, and the risk factors outweigh any potential gains that could be made.