Western investment in Cuba: playing the waiting game

Ever since the agreement reached on 17 December 2014 between the Cuban leader Raúl Castro and the US President Barack Obama that their countries should move towards the normalisation of relations, Western commercial interest in Cuba has grown markedly.

Regardless that for Cuba this agreement was motivated less by any damascene conversion to US-style capitalism and more than by necessity – its long-standing patron Venezuela having turned from bankroller to near-bankrupt – many Cubans appear to be enjoying the new-found attention the agreement has since brought: among the recent star visitors to the island nation of 11m people have been figures such as Mick Jagger – reportedly to scout for concert venues – while the French fashion house Chanel is scheduled to host a major fashion show in Havana in May 2016. In the political arena, when Obama visits Cuba in late May it will be the first time a serving US president has visited the island in almost 90 years.

Beyond such high-profile visits, Cuba is expected to attract as many as 3m US tourists annually, once direct flights begin later this year. The island’s nascent private hospitality industry is already responding: in the past year numerous B&Bs and restaurants have sprung up in Havana and elsewhere, many reportedly offering far higher levels of quality than their state-run equivalents, with this trend only expected to grow in line with expected US demand.

Moreover, Cuba has a highly-educated population, and as a result there is felt to be particularly strong potential to development the country’s still embryonic biotech and IT sectors; US companies including Airbnb, Netflix, JetBlue, and American Express have all expressed an interest in doing business there.

But for Western investors, the opportunities remain elusive and the obstacles considerable. Even in the growing tourism sector international hotels companies face some tough decisions, such as whether or not to compete with state-owned firms, or instead to partner with them. This situation is further complicated by the state’s general insistence upon taking a majority stake in partnerships with foreign companies. Additionally, Cuba’s current dual-currency system effectively acts as a further tax on any foreign companies.

Indeed, Cuba continues to send out mixed signals regarding its policy towards foreign investment: on the one hand announcing its intention to attract $2.5bn in foreign investment per annum, while on the other pursuing policies that deter such investments, such as its continuing interference in the wider economy. In the realm of political freedoms and human rights, little progress appears to have been made since December 2014: by most measures – including figures accounting for the detention of pro-democracy activists – the suppression of political dissent has actually increased over the course of the past year.

Illustrative of this continuing resistance to liberalising forces on the part of the Cuban regime has been the experience of Google: the California tech giant received a swift rebuff to its offer in July 2015 to install Wi-Fi towers across Cuba for free – an initiative aimed at increasing unrestricted internet access beyond the current 5% of the population. Still distrustful of US corporate interests, the Castro regime suspected ulterior motives as lying behind this ostensibly generous offer.

In view of these complicating factors therefore, it is perhaps unsurprising that those companies committing fresh capital to Cuba are not completely new to the country. For example, in late 2015 Brascuba – a joint venture between the Brazilian firm Souza Cruz and tobacco giant British American Tobacco (‘BAT’) – confirmed that it was investing $120m in Cuba’s special economic development zone in Mariel. Comprising an $800m port and free-trade zone on the northern coast, and described as a ‘would-be capitalist enclave in a socialist state’, Mariel is intended to attract shipping traffic from the newly-expanded Panama Canal; it was built with Brazilian credit, and is managed by the Port of Singapore Authority (‘PSA’).

Joining BAT in making a commitment to Marciel is Unilever, which in January 2016 announced a $35m investment there. Only recently, however, Unilever came close to leaving Cuba altogether, when the Government demanded in 2012 that it take a controlling interest in its joint venture with Unilever. The issue has since been resolved, the Government relenting and allowing Unilever to retain a 60% stake – thereby paving the way for its significant new investment in Mariel.

Other Western companies have had more consistently positive experiences of doing business in Cuba, however. Those with long-established and profitable businesses include the Canadian nickel mining company Sherritt International, the French drinks maker Pernod Ricard and construction group Bouygues.

Against this background of both opportunities and challenges associated with doing business in Cuba – and while a definitive end to sanctions remains a distant prospect, due to continuing opposition within the US Congress – as the US continues to relax its trade restrictions, more US and Western businesses are likely to follow.

On the Cuban side, the upcoming Communist Party Congress in April this year – the first since 2011 – is meanwhile expected to signal the direction of policy-making as regards the economy and foreign investment. Potential market entrants will be paying very close attention to whether the Government addresses key concerns for investors, including the centralisation of staff hiring policies, currency controls and other forms of government interference. Until there is clear movement on these fronts, many will continue to adopt a wait-and-see attitude.