THE HARSH REALITY OF TRYING TO DO BUSINESS IN CUBA
BY KEN FIREMAN ON 6/19/16 AT 6:30 AM
This article first appeared on the London School of Economics site.
The car was a Detroit classic on a Havana street, a pink and white 1956
Chevy Bel Air with a nickname out of a rock 'n' roll song: "Lola."
And parked behind the wheel was a distinguished American guest, New York
Governor Andrew Cuomo, come to Cuba in April 2015 on an official trip.
But Lola carried a surprise under the hood. The original Chevrolet power
plant had long since died. In its place was a four-cylinder Toyota
The mash-up is typical in a Cuba where vintage cars that would make a
collector salivate are kept running through agile, creative cannibalization.
And it could serve as a metaphor for a Cuban economy that entices
American businesses with the lure of an untapped market, but contains
disguised obstacles that can frustrate all but the hardiest
entrepreneur, writes freelance journalist Christina Hoag in her report
for SAGE Business Researcher.
"The attraction of Cuba is kind of an amusement park in decay," John S.
Kavulich III, president of the U.S.-Cuba Trade and Economic Council,
told Hoag. With the re-establishment of Cuban-U.S. diplomatic relations
after a half-century freeze-out and President Obama's recent visit, U.S.
business executives are dreaming big dreams.
Trade fairs in Havana draw scores of top-drawer American companies
ranging from PepsiCo to Caterpillar to Boeing. The Cuban government is
opening the state-run economy to foreign direct investment with a goal
of attracting $8.2 billion in FDI.
Obama has carved out ever-wider exceptions to the 54-year-old U.S.
embargo on trade with Cuba that enables expanded activity in fields such
as telecommunications and travel.
"Everyone is interested in Cuba right now," Alana Tummino, head of the
Council of the Americas' Cuba Working Group, told SAGE Business
Researcher. "The Cubans are totally inundated with business groups
traveling down and wanting to meet with ministry officials."
But then come the hard realities of trying to do business in an economy
that is tightly controlled by a one-party state, an infrastructure that
is dilapidated and outdated and a populace whose purchasing power is
limited by a monthly median wage equivalent to $20.
Add to that a legal system that lacks transparency and is heavily tilted
in favor of the state; court proceedings are conducted in secret, and
those at the top of the law school classes are recruited as prosecutors,
while judges often are chosen from the bottom.
"There's been a lot of irrational exuberance about Cuba," says James
Cason, who served as principal officer of the U.S. Interests Section in
Havana, which functioned in lieu of an embassy, from 2002 to 2005. "It's
a very risky business."
British business executive Stephen Purvis found out just how risky. The
head of a company called Coral Capital that invested in Cuban tourism
and other businesses, Purvis was accused of espionage in 2011.
After spending 16 months in jail awaiting trial, he was convicted of
illegal foreign currency transactions and then released. He lost $15
million in assets.
"The central bank had authorized all our transactions for 12 years,"
Purvis said. "Then, all of a sudden, they were saying they weren't
authorized, and that we didn't have specific permission. It was a very
arbitrary application of the law."
Other companies, however, report utterly benign experiences. "We've been
in Cuba for over 20 years, and it's a remarkably stable place to do
business," said David Pathe, CEO of Canada's Sherritt International,
which operates a nickel mine and is one of Cuba's largest foreign investors.
And, risks or not, the Americans are coming. Airbnb, the internet-based
home rental service, expanded to Cuba last year with 1,000 listings.
Sprint and Verizon have started offering cell phone roaming services
after signing agreements with the state-run telecommunications company.
Netflix heralded the arrival of its streaming video service in 2015 with
an exuberant tweet of "Bienvenida Cuba!"—even though its $7.99 monthly
charge represents more than one-third of the median wage.
If the promise is to be fulfilled, a way must be found to bridge the
differing economic goals of the two governments, according to analysts.
Washington's main objective is to stimulate greater private investment,
while Cuban leaders want deals that will shore up the state-owned
enterprises that control three-quarters of the economy.
"There's a disconnect between what U.S. companies can do [under the
embargo] and what Cubans want," says Tummino of the Council of the Americas.
This post is based on the report, Doing Business in Cuba, SAGE Business
Researcher, by Christina Hoag and originally appeared at LSE Business
Ken Fireman is managing editor for SAGE Business Researcher, which
delivers deep dives on contemporary business issues to students and
faculty twice a month. He was previously a senior editor for economics
and politics at Bloomberg News and a White House correspondent, national
political reporter and Moscow bureau chief for Newsday.
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