Wednesday, 05 Dec 2012
Overseas Business Risk - Cuba
Political and Economic
Cuba is a centrally planned one party state run by the Communist government and Party. President Raúl Castro formally took over from his older brother Fidel Castro as head of state and government in February 2008 and as First Secretary of the Party in April 2011. Fidel, who led the 1959 Revolution and held the presidency for nearly five decades, continues to be an influential figure behind the scenes.
Raúl Castro is president of the Council of State and Council of Ministers, which wield executive and administrative authority. The National Assembly (Asamblea Nacional del Poder Popular) is the supreme organ of the state, and meets twice a year to ratify government decrees and decree-laws. Its 609 deputies are elected for five years by direct vote at the Municipal Assemblies. The most recent elections took place in April 2010.
Cuba’s population of 11.2 million is highly educated and life expectancy and child mortality rates are on a par with developed countries. Cuba is ranked 51st out of 187 countries in the 2011 UN Human Development Index. Long life expectancy (80 years for women, 76 for men), low birth rates and outward migration (particularly to the US - with some 25,000 visas issued a year, plus an estimated 10,000 illegal economic migrants) is resulting in a rapidly ageing population. This presents challenges for the government in financing universal access to health care, education and state benefits – in a country with negligible tax revenue and a struggling economy.
The April 2011 Communist Party Congress agreed a package of economic reforms designed to boost productivity and promote economic efficiency. Unsustainable public expenditure will be reduced through large-scale public sector job cuts with a parallel expansion in self-employment and small private businesses. Heavily subsidised food rations are being phased out, along with subsidies on utilities. Long-awaited reforms to permit Cuban citizens to buy and sell homes and vehicles will allow many to take advantage of capital growth opportunities though the measures are still hedged with restrictions.
Under changes introduced in late 2011, private entrepreneurs and farmers can now apply for bank loans, providing much needed start-up capital, and, importantly for the latter, trade directly with hotels, rather than go through state authorities.
The reforms have been broadly welcomed as a positive step in the right direction. But people remain impatient for better economic opportunities, higher wages and implementation of promised rights to travel abroad. At the same time, many fear losing public sector jobs and some of the gains of the Revolution, particularly free healthcare. Popular discontent with low wages (averaging US$20 a month), rising food prices and planned job cuts affecting over 1 million public sector jobs (20% of total employees) could lead to growing social and political tensions although the state authorities exercise firm control and protests are not tolerated. Internationally, Cuba is an influential member of the UN, G77, Non-Aligned Movement and ALBA (an alliance that includes Venezuela, Cuba, Bolivia, Ecuador, Nicaragua, Antigua & Barbuda, Dominica, Grenada, Saint Vincent and the Grenadines). Cuba has diversified and strengthened its external relations with the BRICS, other emerging markets and countries across the developing world.
The UK has maintained unbroken diplomatic relations with Cuba since its independence and in July 2011 signed a UK/Cuba Declaration on Bilateral Cooperation. Amongst priority areas agreed for closer cooperation are trade and investment, biotechnology, climate change, low carbon development, countering drug trafficking and organised crime, human rights and disaster preparedness and response. Relations between the EU and Cuba were strained by the adoption of the EU Common Position on Cuba (1996), and subsequent measures agreed by the EU following the arrest of government critics in 2003. These measures were lifted in 2008, and an EU/Cuba political dialogue and development programme introduced. But public criticism of human rights in Cuba by EU member states, including the UK, continues to rankle.
Despite measures taken by the Obama Administration to reduce some restrictions on travel and remittances and previous freeing up of food and medicines exports, the US has maintained an embargo on business with Cuba since 1962. Measures include extra-territorial sanctions through the 1996 Cuban Liberty and Democratic Solidarity Act (popularly known as the Helms-Burton Act) which can affect foreign companies with business links with Cuba. [See under Risks below.] The designation of Cuba as a state sponsor of terrorism by the US Treasury Department’s Office for Foreign Asset Control (OFAC) has also affected companies with a presence in the Cuban market making bank transfers.
Cuba stands out from the rest of Latin America and the Caribbean in having one of the world’s few remaining centrally-planned economies in which the state is the only important economic actor, controlling some 90% of the economy and employing around 85% of the total workforce. Almost all business interactions for exporters and investors will be with state-run enterprises, and the government also regulates and supervises all trade and investment activities. Decentralisation of some economic decision-making and business activities over the last two decades has not led to real liberalisation of the economy.
Following the April 2011 Communist Party Congress, Cuba is now set on a course of incremental steps towards a more market-oriented economy. These should create new opportunities for foreign investors and exporters. [see under Opportunities below.] But the reforms agreed fall well short of Chinese or Vietnamese-style opening and the “Guidelines for Cuban Economic and Social Policy” adopted by the Congress stress that “in updating the economic model, [state] planning will be paramount, not the market”.
The average Cuban's standard of living remains at a lower level than in the 1980s before the collapse of the Soviet Union crippled the Cuban economy with the loss of preferential trade (oil for sugar) and substantial aid. Many Cubans rely on state handouts, remittances from abroad and black market activities (trading in goods stolen from the state).
Cuba opened to foreign investment during the 1990s following the loss of economic support from the Soviet bloc. In response to the crisis, a new tourist industry was developed and licenses for self-employment were issued creating a small private sector (e.g. restaurants and B&Bs) catering largely to foreign visitors. Significant investment was made in Cuba’s pioneering biotechnology and pharmaceuticals sector; and oil and gas, mining, manufacturing and other sectors were opened to foreign investment.
Registrations of new joint ventures between foreign companies and Cuban state enterprises were at their height in 2001/2. They have fallen since as a result of a partial reversal of measures to open the economy after the 1990s crisis abated. Self-employment also fell, but has been rapidly expanding since the end of 2010 with the development of the private sector. To reassure fears of a possible future reversal of the reforms now underway, President Raúl Castro stressed in his speech to the National Assembly in December 2010 that this time there would be no going back.
Cuba is a predominantly services economy. Its main export earnings come from tourism (with 2.7 million tourists in 2011 projected to rise to 3 million in 2012), nickel (Cuba has the 4th largest global reserves), biotechnology and pharmaceuticals (exported to more than 25 countries). Export of professional services, especially medical, has grown significantly in importance. Since 2000 Cuba’s close political ally Venezuela has been providing oil on highly concessionary terms. In 2010 Cuba and Venezuela signed a further 10 year agreement under which Venezuela will supply around 115,000 barrels of oil per day. In exchange, Cuba has sent thousands of healthcare professionals, teachers and advisers to work in Venezuela.
Cuba’s leading economic partners are Venezuela (whose exports to Cuba are greater than those of the whole of the EU), China, Spain and Canada. Despite the US embargo, an exemption for exports of food and some pharmaceuticals makes the US Cuba’s 5th largest trading partner. The agricultural sector (accounting for less than 5% of GDP) is particularly inefficient, and as a result up to 80% of food is imported. Once a major sugar exporter, production levels have slumped to lower than a century ago. Cuba’s dependence on imported food and oil leaves it vulnerable to rising world prices, fluctuations in commodity prices (particularly nickel) and the knock-on effects of economic downturns on tourism. This is mitigated by financial support from Venezuela, but heavy dependence on one country (as on the USSR and the US in the past) leaves Cuba vulnerable to political and economic developments in Venezuela and the future of the Chavez government.
The Cuban government is now pursuing a policy of diversifying its economic partners. China and Brazil have become major investors and they and others also offer credit lines. Rising prosperity in China and Latin America is diversifying the tourism market from Canadians (some 900,000 a year), the UK (some 175,000-200,000 annually) and other European nationals. Since the Obama Administration lifted restrictions on travel to the island by Cuban Americans, there has been a rapid increase in numbers (totalling over 300,000) – knocking the UK into 3rd place as a source of visitors. Cuba is the only country to have seen a rise in family remittances from the US (estimated at US$ 1bn a year by CEPAL), during a time of economic recession when remittances have generally fallen. Exchanging US dollars in Cuba attracts a 10% tax – to generate foreign exchange earnings. But the country’s trade imbalance (-$6.6bn in 2010) caused by poor export performance contributes to continuing shortages of foreign exchange.
In 2008/09 Cuba suffered a liquidity crisis caused by a combination of higher cost oil and food imports, a collapse in revenue from key exports (particularly nickel) and the devastating impact of three major hurricanes - which cost the country US$ 10 billion. This resulted in widespread defaults in payments to foreign creditors and suppliers, with priority given to essential imports (like food). Foreign companies’ bank accounts inside Cuba were frozen and they were required to obtain Central Bank approval to transfer money out of the country. In response to the crisis, the government sharply reduced imports, which fell by at least 30%.
The value of the country’s foreign exchange reserves is a state secret. But indications are that, following adjustment measures (including energy savings) the liquidity crisis has eased. No official figure was given for Cuba’s external debt in 2011 (estimated at US$21.02bn by the EIU)
Official figures for 2011 show growth of 2.4%, a 131% increase in exports of goods and services (mainly tourism and medical services), a rise in imports of only 119% and a budget deficit of 3.8% of GDP. The EIU estimated growth closer to 1.3% in 2010, and the 1.4% official inflation figure is contested by independent economists – given fuel prices alone increased by between 14-18%, with knock on effects on food prices.
Prospects for 2011-15 depend on the government’s success in implementing its programme of economic reforms, the results of the offshore oil drilling underway, and possible external shocks (eg commodity prices, political changes in Venezuela and the US, major hurricanes).
Businessman reading a newspaper
The government’s economic reform plans to boost exports, reduce dependence on imports and modernise infrastructure will necessitate significant new foreign investment. New opportunities for foreign investors in priority economic sectors include tourism infrastructure: hotels, golf courses, amusement parks, marinas and hotel management contracts. Other sectors include renewable energy (biogas, solar, wind and hydraulic), regenerating agriculture, including the sugar industry (making full use of bagasse and other by-products).
Cuba has impressive biotech & pharmaceuticals R&D and has developed and exports prize winning pharmaceutical products. There are long-standing links between Cuban research institutes and UK universities to build on, and potential for sales of high tech laboratory and medical equipment. Cuba is also keen to develop new capabilities, such as in nanotechnology. Plans to modernise transport infrastructure (particularly ports and railways) should create other openings for foreign companies.
Cuba has oil and gas reserves (an estimated 20,000 million barrels according to the Cuban government; only 9,300 million estimated by the US) and hopes one day to become self-sufficient. 21 out of the 59 blocs in Cuban waters in the Gulf have been contracted to foreign companies including Spanish, Venezuelan, Russian, Vietnamese, Norwegian, and Malaysian interests involved. Spain’s Repsol withdraw after poor results but others including Gazprom, Petronas and PDVSA remain optimistic. The discovery of significant exploitable oil reserves would represent a dramatic change to Cuba’s economic future and could also have a significant impact on the relationship between the United States and Cuba. The process has created opportunities for providers of services and training, and machinery/high-tech equipment exporters.
Investment decisions by the Cuban government are generally driven by four main factors: a focus on their priority sectors, the amount of capital offered by the foreign company, potential to increase exports, and access to technology.
UK exports to Cuba in 2011 saw an increase of 64% in volume on 2010. But official UK statistics do not take account trade through intermediaries in 3rd countries (eg Spain). UK imports from Cuba (mainly lubricants, cigars, rum, raw sugar, honey) totalled just over £53 m. UK trade with Cuba is dwarfed by Spain, Italy, Germany and the Netherlands. Planned development of new wholesale markets to supply the expanding small private business sector should create new opportunities for exporters. Promised rationalisation of state importing companies might reduce the transactional costs for exporters – who would deal in future with a couple rather than hundreds of state buyers.
Under the proposed reforms, state-run businesses are to be granted more autonomy to make day to day decisions, including on imports and reinvesting their profits - though still under government-imposed guidelines. Overseas businesses cannot at present directly hire Cuban staff and must instead employ them through a Cuban state employment agency. Greater autonomy might in the future enable joint venture companies to hire staff directly. No subsidies will be provided to bankrupt or loss-making state enterprises, which will be liquidated. This is also likely to affect joint ventures, as the government might take advantage of new rules to end existing joint ventures. The President has stressed the need to make senior appointments in the state sector on merit – not membership of the Party.
How soon the reforms will kick in remains unclear: implementation is underway but tough decisions, such as laying off public sector workers, have already faced severe delays.
Perhaps the greatest hurdle to doing business in Cuba is painfully slow decision-making which results from all investment decisions being referred to the highest levels of government. It is to be hoped that the process will speed up in the future, given Raúl Castro’s emphasis on the need to push down decision making. But it would be unrealistic to expect significant change in the immediate future.
Getting paid can be an issue – though delays are generally more common than non-payment and the government has a made a commitment to “increase the country’s credibility in its international economic relations through strict compliance with contractual obligations”.
A further problem experienced by some foreign companies doing business in Cuba is delays in the Cuban Central Bank processing overseas bank transfers from accounts in Cuba. This was of particular concern in 2009 as a result of serious liquidity problems. It tends to affect joint venture partners rather than exporters. Although the situation has eased, there are inherent risks from the steep rise in the cost of food imports, the possibility of President Chavez’s illness making it necessary for Cuba to buy oil at market prices at some future date, and damages caused by major hurricanes.
Cuba’s lack of access to medium and long-term finance through the IFIs means that only short term finance at premium rates may be available to fund imports. It is standard practice for Cuban state enterprises to expect to buy on credit terms of 1-2 years. Some competitor companies are able to benefit from export credit guarantee schemes covering Cuba not available to UK exporters. The UKTI team in Havana can advise on possible options for exporters on a case by case basis.
US extra-territorial sanctions are applied by the US Government against companies in third countries that do business in the US if they breach the US economic embargo against Cuba. The Cuba sanctions programme is contained in the Cuba Assets Control regulations (CACR), issued in by the US Office of Foreign Asset Control (OFAC) in 1963 under the authority of the Trading with the Enemy Act, and more recent legislation. This includes the 1992 Cuba Democracy Act and 1996 Cuban Liberty and Democracy (Libertad) Act (popularly known as ‘Helms Burton’ after its sponsors).
The UK Protection of Trading Interests Act makes it illegal for UK-based companies to comply with extraterritorial legislation (like Helms-Burton) and there is provision for fines to be levied against offending companies and individuals. In parallel an EU Blocking Statute also makes it illegal to comply. The risk of US sanctions can create uncertainty and businesses, especially banks, sometimes find themselves caught between conflicting legal requirements. UK companies, SMEs in particular, have for example encountered problems in payments to/from Cuba being blocked by UK banks, and a cross-government group is now working with the banks to better understand why payments are being blocked and to find a solution. We recommend that companies interested in doing business with Cuba take legal advice, particularly if your company has extensive US interests. If UK companies are already experiencing problems (eg. with bank transfers), you are advised to notify BIS and the European Commission as soon as possible. Companies should avoid making international transactions involving Cuba in US$, and instead use euros or pounds sterling. But these challenges have not stopped major UK companies with interests in the US doing business successfully with Cuba.
The UK has a bilateral Investment Protection Agreement with Cuba which includes basic provisions for foreign investors, compensation in cases of expropriation and dispute settlement mechanisms. Companies are advised to include arbitration clauses in their contracts.
Human rights and business in Cuba
Over the last three months implementation of the economic reforms agreed in April 2011 continued, contributing to increased economic opportunities for ordinary Cubans, particularly in relation to private employment and access to credit.
Cuba has signed and ratified the majority of the core International Labour Organisation (ILO) conventions. However, the ILO has repeatedly criticised the Cuban government for failing to meet ILO standards and conventions. Freedom of expression and assembly remained severely restricted in 2011. There is no legal right to strike and while there are numerous “official” trade unions actively promoted by the Cuban authorities, independent trade union activity is prohibited. More broadly there have been reports of activists facing low-level harassment and short-term detentions..
Foreign businesses are required to pay a fee to a centralised agency to employ Cuban staff who in turn only receive a fraction of this payment. Cuba has a positive track record on child and, women’s rights, while women and ethnic minorities are well represented in politics and the civil service. The government recognised for the first time, in a public consultation document preceding the Communist Party National Conference in January 2012, a need to address discrimination on the basis of sexual orientation.
Bribery and Corruption
Man looking at laptop
In 2011 Cuba was ranked 61 out of 180 countries in . The government has appointed Vice President Gladys Bejerano to the new post of Comptroller General to oversee a crackdown on corruption and tighten auditing of state enterprises. There have been some recent high profile cases of ministers and senior officials being brought to trial and given lengthy prison sentences for corruption. Some of these cases have involved foreign businessmen who have also been tried in Cuba and given long custodial sentences, including in absentia. There have also been cases where companies have had their licence to trade revoked and there is conjecture that some of these companies might have been paying ‘commissions’ - which to all intents and purposes amounts to bribery. Some foreigners caught up in corruption inquiries have been held for extended periods in detention centres in very bad conditions pending the outcome of investigations.
The Cuban authorities monitor the movements of foreign business visitors and those working in diplomatic missions. Business visitors can expect to have their phones calls and emails monitored, but so long as visitors operate in an appropriate manner, this should not present barriers to doing business in Cuba. Low level corruption in the form of theft from state institutions and companies is pervasive and popularly condoned as a ‘survival strategy’ given chronically low wages in the state sector. This includes theft from hotels, restaurants, retail outlets and factories.
Read the information provided on our Bribery and corruption page.
There is a low threat of terrorism in Cuba, but visitors should be aware of the global risk of indiscriminate attacks which could be in public areas, including those frequented by expatriates and foreign travellers
Read the information provided on our Terrorism threat page
Protective Security Advice
Cuba is generally a safe country. It is however a poor country (despite its middle income ranking), where wages are low, state employees are facing redundancies and petty theft from foreign tourists is on the increase. Visitors should take sensible precautions (e.g. avoid unlit streets at night, keep bags about your person, lock car doors, never flag down a cab - only use taxis with blue number plates stationed at official taxi points - usually outside hotels.
Read the information provided on our Protective security advice page
Cuba is a signatory to most international agreements, including TRIPS, WIPO, Paris Convention, Lisbon Agreement and Madrid Protocol. There is a central office (OCPI) that deals with most intellectual property issues and applications. Infringement of copyright and intellectual property is commonplace in the creative industries, but there is little local manufacturing and a lack of resources locally to carry out organised copyright and intellectual property fraud.
Read the information provided on our Intellectual Property page.
This is not considered to be a serious threat in Cuba. The UK has long standing cooperation with Cuban authorities on countering drug trafficking and organised crime is one of the priority areas included in the UK/Cuba Declaration on Bilateral Cooperation (signed July 2011).
Read the information provided on our Organised crime page.