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Cuba: is foreign investment the future?

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Cuba’s National Assembly approved a new Foreign Investment law in late March. The law which replaces legislation on foreign investment enacted in 1995 was passed at a specially convened session, and is part Raul Castro’s efforts to ‘update’ the Cuban economy.

Special edition of Granma details the new lawSince he replaced his older brother Fidel as President in 2008 and First Secretary of the Communist Party in 2011, Raul has tried to institute a series of changes while at the same time preserving the revolution and Cuban socialism. Travel restrictions were lifted on Cubans in January 2013 and the state has, since 2010, allowed Cubans to set up and operate their own businesses.

The government has been at pains to assure the public that they are not ‘selling’ the country and that ‘the socialist character of the Revolution will be maintained’.  In a nationally televised speech, Rodrigo Malmierca, Cuba’s minister for foreign trade and investment, said that the law was essential for economic growth.  Malmierca said that Cuba needs to attract $2 to $2.5 billion in foreign direct investment in order to reach its target of 7 percent growth each year.

The Venezuela Question

As William LeoGrande noted on the World Politics Review website, Cuba has recognised that its economy is vulnerable to a ‘future rupture in relations with Venezuela’, where the administration of Nicolas Maduro has been undermined by high inflation and currency problems.  This has undoubtedly acted as a stimulus for enacting new legislation on foreign investment. 

Venezuela has become a key economic crutch for Cuba, and accounts for about 40 percent of Cuba’s trade and 18 percent of its GDP according to a piece on NBC News. At the root of the relationship is oil.  Venezuela exports about 90,000 barrels to Cuba every day, and sells that oil at a significant discount.

Were the Venezuelan government forced to cut aid to Cuba and charge the market rate for its oil, the effects on the Cuban economy would be profound.  It would potentially create a situation akin to that which Cuba faced when the Soviet Union broke up.  That heralded the Special Period in the Time of Peace which was characterised by rationing and shortages of staple items.

Details of the Law

The new Foreign Direct Investment Law exempts foreign investors from paying income tax as well as the 25 percent tax on their labour force. The levy that the government exacts from foreign companies profits will also be cut.  Currently, this stands at 30 percent.  Under the new law, this will be halved.  For the first eight years of their operation, foreign investors will not pay any taxes on their profits. Foreign nationals working in Cuba for a foreign investor will be able to repatriate two-thirds of their earnings. 

While The Council of State or the Council of Ministers will still be required to approve large scale projects, the new law stipulates that these councils must inform any investor of their decision as within 60 days. Smaller proposals that do not require the involvement of either the Council of State or Council of Ministers must be approved or rejected within 45 days.  These time limits have been designed to avoid the slowness that bedevilled previous legislation.

On the negative side, investors must hire their workforce through a state-run employment agency which will be responsible for recruiting Cuban workers, negotiating their salaries and paying them. 

Overcoming Scepticism

Commentators suggest that Cuba will have to work hard to assure foreign investors that their investments are safe.  As Britain’s former ambassador to Cuba Paul Hare told the BBC ‘What the Cubans have to overcome is a record of nearly 20 years of vacillating treatment of investors’.  ‘The regime may want a makeover’, he continues, ‘but the scars will be hard to erase’. 

The latest law has been received with a degree of scepticism in some quarters, not least because Cuba has been here before. While the 1995 law on foreign investment allowed for 100 percent foreign ownership in theory, in practice this was never allowed to happen.

Investors also worry about the safety of their investments, especially given that the first thing the revolutionaries of the 26th of July Movement did after the overthrow of Fulgencio Batista was to expropriate foreign owned property.  The new law seeks to mitigate these concerns by guaranteeing that any foreign investments will be protected. The new law does not rule out expropriation but says that can only happen ‘in cases of “public use and social interest previously declared by the Council of Ministers’”.  Where that happens the government will have to pay a mutually agreed compensation figure.  If a figure cannot be agreed then an agency of what the law calls ‘international prestige’ will be hired to arbitrate.

Whether such language assuages the fears of investors remains to be seen.

Whilst some foreign companies have been able to do business in Cuba, notably Canadian mining company Sherritt International, Swiss chocolatiers Nestle, and Spanish hoteliers Melia Hotels International, other companies such as Unilever have found operating in Cuba difficult. 

In a piece for Reuters, Daniel Trotta noted that Cuba has in the past ‘scared off investors […] by jailing foreign executives, attempting to seize control of businesses once they prove successful and letting active proposals die without offering an explanation’. 

The Reaction from Miami

The reaction from Miami has also been largely negative.  A piece in The Miami Herald claimed that the new law ‘violates a string of international agreements on fair labor practices and could lead to legal demands in the future’. 

Citing Jose Alvarez, a former professor at the University of Florida, the report notes that among other issues, Cuba’s plans do ‘not allow for the international arbitration of disputes, and denies Cuban citizens the right to invest in their own country’.

Cuban-American congressmen have also rather predictably given the new law the thumbs down.  Ileana Ros-Lehtinen, a Republican Congresswoman from Southern Florida, told USA Today that ‘This is the latest desperate attempt effort to maintain its brutal totalitarian control over the Cuban people.  It’s just an old regime ploy to hide its failed policies that have shown that Cuba is not open for business because the Castro regime continues to owe billions of dollars to foreign entities’.

FDI and the US Blockade

Opinion polls in Miami indicate that the views of Cuban American Republican politicians – past and present – like Ros-Lehtinen, Marco Rubio, Lincoln Diaz-Balart and Mario Diaz-Balart are increasingly those of a minority. Most Cuban Americans feel that the US’ 53 year-old embargo should come to an end.  A recent poll conducted by Florida International University found that 52 percent of those polled in Miami-Dade County felt that the embargo should end, and an even larger majority (68 percent) want the US to resume diplomatic relations with Cuba.  This feeling is particularly apparent among young people, who do not feel the same degree of hostility towards the Castro brothers as their parents and grandparents. 

More and more Cuban Americans share the view of The Economist magazine which in a leader from April this year noted that ‘the logic behind the embargo looks ever weaker’.  The piece argued that the embargo has ‘shored up support for Cuba abroad and given an excuse for totalitarianism at home’. 

The new Foreign Direct Investment law brings debates about the validity and usefulness of the embargo sharply into focus.

American business interests worry that while the embargo forces US companies to sit back, Cuba will forge business relationships with Russia (who could easily supply Cuba with its oil needs), China, Canada, Brazil, and the European Union.

The port of Mariel. Photo: Ismael Francisco, CubadebateThis already happening.  The Foreign Direct Investment Law follows on from the creation of the Mariel Special Economic Development Zone.  Focused around the deepwater port of Mariel, about an hour’s drive from Havana, the zone is the largest investment project that Cuba has seen in decades, costing $957 million. Significantly, the Mariel Zone has been funded by Brazil’s National Development Bank (BNDES), and built by the Brazilian company Odebrecht. Cuba wants the Mariel port to compete with ports in Jamaica, the Bahamas and the Dominican Republic to become the main trans-shipment point for container traffic in the Caribbean. It has been built with the embargo in mind.  As the aforementioned Economist leader noted, Mariel’s location on Cuba’s northern coast makes it ‘a prime spot to handle traffic with the United States should the drawbridge come down’.

Finally…

Ultimately, only time and practice will tell whether the Foreign Direct Investment Law truly marks a sea change in Cuban thinking. 

The law is certainly consistent with the narrative of controlled change that Raul has sought to institute, and is a logical extension of various earlier initiatives.  Certainly, it might well encourage investors to take a look at Cuba.  Those that do will doubtless exercise caution and will be mindful of the lessons of history.