Investing in Cuba: Where the State Always Wins
EspañolSince the 2006 announcement by the Cuban government that octogenarian Fidel Castro had transferred power to his brother Raul, there has been increasing speculation regarding political and economic changes in Cuba. More recently, some potential investors seem to have bought the narrative that the Cuban government has embarked on a process of genuine political and economic reforms. But investors beware.
In its 2014 “Index of Economic Freedom” report, the Heritage Foundation ranks Cuba as one of the world’s least free economies with a score of 28.7, compared to a world average of 60.3, and an average of 84.1 for the free economies of the world. Cuba’s economic milieu continues to deteriorate in terms of most of the factors considered in the Heritage Foundation methodology such as trade freedom, fiscal freedom, monetary freedom, and particularly freedom from corruption.
One implication for enterprises seeking to do business with Cuba is that this legacy manifests itself in areas such as official corruption. Notice that my expression is not doing business in Cuba, but rather doing business “with” Cuba since the Cuban government (read the Castro brothers and the military) will obligatorily be the majority partners in any foreign investment under current Cuban law.
As noted in the Index, in Cuba, official corruption is a serious problem, “with a culture of illegality … and a vast state-controlled economy in a country where there is little respect for the rule of law.” US American companies, particularly publicly-traded firms subject to myriad anti-corruption and disclosure regulations, would find it nearly impossible to operate lawfully in such an environment of systemic and endemic corruption.
Let’s take just one aspect of doing business “with” Cuba to illustrate how it offends our values and morality, our labor and business laws, and our expectations of corporate behavior.
Foreign investors operating in Cuba may not establish contractual relationships with Cuban workers. The foreign firm must negotiate with the Labor Ministry a “Contract for the supply of its labor force,” indicating the quantity and qualifications of needed employees. The state staffing agency for foreign enterprises then sends its pre-screened personnel to the foreign firm. The foreign employer pays directly to the staffing agency in foreign currency, or equivalent Cuban convertible pesos (CUC). Cuban workers are then paid by the staffing agency in non-convertible Cuban pesos (CUC). Under this arrangement the state pockets over 90 percent of the worker’s purported salaries.
This practice, of course, violates International Labor Organization conventions as slavery by another name, or as Cuban writer Carlos Alberto Montaner has aptly named it: Cuba the pimp state.
Foreign firms are also required to be a minority partner in a relationship where the Cuban government — the majority partner — is fiercely hostile to free enterprise and has a history of acting arbitrarily and capriciously against the interests of its minority partners.
In the early 1990s, after the collapse of the Soviet Union, Cuba restructured the island’s economy by allowing limited foreign investment through joint ventures and other economic associations. Some foreign investors misinterpreted these crises measures as the beginning of a genuine and irreversible transition to a free market economy. The same misinterpretation is taking place today.
Investors beware, by the end of the 1990s the regime reversed the liberalization measures and recentralized economic power. It is likely to happen again if the regime feels threatened.
In 2009, facing a collapse in bank credits and declining cash flow from meager exports, Raul Castro froze all bank accounts held by foreign companies. The following year, state banks offered a non-negotiable payback plan for the frozen bank accounts over a five-year period. Investors beware, your stakeholders will not be happy.
In Cuba, foreign investors must partner with the Cuban government. The Cuban government expects foreign investments to generate revenue for the state on its terms. If the venture fails to meet the expectations of the state, the government may arbitrarily terminate the agreements and seek another naive investor for the project and there is no independent judicial system to adjudicate any investor claims.
The Cuban judiciary is subordinate to the Council of State and to the Communist Party which, under the Cuban Constitution, is the “superior leading force.” And as Karl Marx made clear in his Communist Manifesto, “Communism may be summed up in a single phrase: Abolition of private property.” Investors beware.