News and Facts about Cuba

Cuba Inc. open to foreign capitalists, but within limits

Cuba Inc. open to foreign capitalists, but within limits
Mon Jun 8, 2015 8:38am EDT
By Daniel Trotta and Marc Frank

HAVANA (Reuters) – Communist Cuba’s newfound interest in foreign capital
has its limits, as Philippe Pouletty found out.

A French doctor, venture capitalist and founder of biotech company
Abivax, Pouletty is working with Cuba’s Center for Genetic Engineering
and Biotechnology to develop a therapeutic vaccine to treat chronic
Hepatitis B that could be on the Asian market in two years and in Europe
after that.

But when he pitched the idea of floating a company on the pan-European
stock market Euronext with the Cuban state as a shareholder, that was
clearly too much, too soon.

“I told him in a half serious, half joking mode, that I had a capitalist
proposal,” Pouletty said of his conversation with Cuban revolutionary
leader ’s eldest son, Diaz-Balart, a science
advisor to the government.

“His response after more than 30 seconds was ‘That’s indeed very
intriguing, but if you want us to reach an agreement quickly, that’s not
the fastest route. It’s a few years too soon.'”

Instead, Abivax agreed to buy vaccines at a predetermined price and pay
royalties to Cuba when the product is on the market.

Pouletty’s story offers a peek into the mindset of Cuba Inc.

Convinced their country needs capital, Cuba’s leaders are welcoming
businesses under a foreign law passed a year ago, but they
want tight control over the pace of change.

U.S. business interest in Cuba has exploded since December, when
President Barack Obama and Cuban President announced they
would restore diplomatic relations after decades of hostility.

“In the morning on Dec. 17, Cuba was still a word spoken in U.S.
business circles with hushed tones. By the afternoon, half of corporate
America was rambling around forming a Cuba team,” said Mark Entwistle, a
former Canadian ambassador to Cuba and now a partner at Toronto-based
merchant bank Acasta Capital who advises companies interested in Cuba.

Among those joining a recent New York state delegation to Cuba were
executives from JetBlue Airways Corp JBLU.O, Pfizer Inc PFE.N and
MasterCard Inc MA.N.

Most U.S. companies are still blocked by the 53-year-old trade embargo,
although Obama has relaxed it for some imports, travel and
telecommunications. That has allowed for minor deals such as Netflix
NFLX.O streaming movies in Cuba and Airbnb listing Cuban rental
properties online.

If Obama can convince Congress to end the embargo, U.S. firms would be
free to do business here, though they would still face major obstacles,
including a multi-layered bureaucracy, an unpredictable legal system and
highly regimented labor market.

Many foreign companies have thrived over the years. They run hotels,
build ships, refine oil and pack meat. Some have a share in bottled
water, beer, soda, rum and cigar businesses.

’s Sherritt International S.TO is perhaps the most vested. It has
been here since 1992 and generated 73 percent of its C$1.136 billion
revenues in 2014 from Cuba-related businesses.

Sherritt mines nickel in Cuba and refines it in Canada in a 50-50 joint
venture with Cuba’s government. It also produces 20,000 barrels per day
of oil that it sells to Cuba and has a one-third interest in an
electricity joint venture.

Even in a business subject to price swings, Sherritt says it has always
made a profit or at least broken even with Cuban nickel.

“We would tell others that Cuba’s a great place to do business,” said
Sean McCaughan, vice-president for investor relations, even though the
embargo means top Sherritt executives are banned from setting foot in
the United States and the company is cut off from U.S. capital markets
or shipping through U.S. territory.

Other companies have failed miserably in Cuba and were forced to leave
or had their executives imprisoned and their assets confiscated. Petty
bribery can land people in jail.

And at least one billionaire real estate mogul came away from a recent
trip to Cuba unimpressed.

“I didn’t find there were lot of great opportunities. It was like going
back in time,” Stephen Ross, chairman and founder of The Related
Companies, told CNBC television. “You need a government that really
wants change, that really wants business, and really wants to see
growth, and you don’t really have any of that feeling at all.”


Those who have been successful have simple advice: be flexible and
listen to Cuban officials, because they will tell you exactly what they

“There are foreigners who come here with an attitude of superiority. In
other words, ‘We’re going to show the Cubans.’ In general, those are the
ones who fail spectacularly,” said Alexandre Carpenter, co-president of
cigarette-maker Brascuba, a joint venture between Cuba and the Brazilian
subsidiary of British American Tobacco BATS.L.

There is no escaping the state’s central planning. Foreign firms in
joint ventures must order raw materials a year ahead of time. Property
is leased from the state, it is not up for sale.

Cuba regularly draws up a portfolio of projects it wants foreigners to
help with. The latest one, issued in November, outlines 246, most of
them joint ventures, that need investments totaling $8.7 billion.

In one of the most attractive sectors, tourism, the portfolio lists five
construction projects; two golf resort developments; and contracts
to manage 33 existing hotels.

But the government rarely tries to force its Marxist ideology on foreign
partners as long as Cubans do not get rich.

“To the contrary. They demand that the business grow and generate more
profits every year,” Carpenter said.

One of the largest foreign firms in Cuba is Brazil’s Odebrecht
[ODBES.UL], which built a $900 million port at Mariel, the centerpiece
of an economic development zone designed to attract capitalist ventures
with a more liberal import-export regime.

Odebrecht wants to build a plastics factory there and it also has deals
to expand Havana’s international , operate a sugar refinery, and
build two hotels.

Mauro Hueb, head of Odebrecht’s operations here, says the advantages of
operating in Cuba include an educated, low-cost workforce and low
logistical costs, and that to take advantage a company needs to learn
and respect local .

“You have to have the capacity to adapt,” said Hueb. “Here in Cuba, we
consider ourselves a Cuban company.”

Other successful ventures, some with U.S. stockholders, include Sherritt
and French builder Bouygues BOUY.PA. Swiss conglomerate Nestle NESN.VX
has a bottled water and soft drinks business. Spanish hoteliers
Hotels International MEL.MC, and NH NHH.MC have established
footholds in tourism and global beer giant Anheuser-Busch InBev ABI.BR
brews Cuban suds.


Cuba’s communist government first opened to international firms in the
1990s amid economic crisis caused by the collapse of the Soviet Union,
its main ally and benefactor.

Results have been mixed. Cuba says around 60 percent of foreign
investment projects begun since the 1990s have had to close. Sometimes
it kicks foreign partners out, saying they failed to live up to their
side of the deal. Sometimes the companies leave on their own.

The corporate landscape is still sparse, with only around 100 direct
investment projects and a similar number of deals in which foreigners
manage a Cuban company without an equity stake.

While U.S. firms hope the normalization of relations and economic
reforms under way in Cuba will improve the investment climate, experts
say change will be gradual.

For years, foreigners’ biggest complaints have been the lack of control
over labor, the uncertain legal environment, and the multiple layers of
bureaucracy to get a project approved.

“Forget owning a piece of the rock. The most you can hope for is a 50-50
venture with a state-run partner,” a European economic attaché said.
“And that will be the exception. The rule remains a minority interest.”

British-Dutch consumer goods giant Unilever ULVR.LUNc.AS became the
first major corporation to enter Cuba after the fall of Soviet communism.

Desperate for hard currency and consumer products, Cuba agreed to a
50-50 venture on a factory complex but when the 15-year deal came up for
renewal it insisted on majority ownership. Unilever left the country
although it is now in discussions on returning, several sources familiar
with the talks said.

When business goes wrong, it can be dire.

An extreme example is that of Canadian businessman Cy Tokmakjian, who
served three years in jail for bribery and other charges before being
freed in February.

Tokmakjian had done business in Cuba for 20 years, then suddenly was
in 2011 and his company shuttered as prosecutors accused him of
wooing officials and their families with gifts. His company called it a
“travesty of justice”.

Stephen Purvis, the former development director of British investment
fund Coral Capital who built hotels and planned a golf course in Cuba,
was arrested in 2011 in a crackdown on corruption.

Purvis said he was falsely accused by a rival, interrogated for five
days, and denied a lawyer for a month. He was eventually after
being convicted on a minor charge.

“There is a virtual 100 percent conviction rate,” Purvis said. “Once
detained you will be charged and found guilty. It’s just a question of
what for.”

(Reporting by Daniel Trotta and Marc Frank; Editing by Kieran Murray)

Source: Cuba Inc. open to foreign capitalists, but within limits |
Business | Reuters –

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