March 8, 2015

By Marc Davis   

Investors worldwide, ever alert for opportunities, are now eyeing Cuba as the next emerging market with significant growth and profit potential. Cuba's agricultural sector, including forestry, cattle ranching and the dairy industry, are among the areas expected to receive infusions of foreign investment capital.  

New Cuban legislation, now pending its anticipated approval in March, will open the nation's inefficient state-managed economy to foreign investments without its current restrictions. 

Cuba's current law regulating foreign investment was passed in 2014, but experts say the law is inadequate and imposes too many limitations.  

Among the old government rules expected to be eliminated is the requirement of all foreign funded enterprises to employ only domestic personnel and that they be paid in hard currency.

Foreign Companies Do Invest In Cuba

Despite these restrictions, "Foreign companies can and do invest in Cuba," said Raul J. Valdes-Fauli. 

Valdes-Fauli is an attorney of Cuban descent based in Miami, former mayor of Coral Gables, Fl., and has extensive experience in taxation, banking and corporate matters both domestically and in Latin America.

"A Spanish company has a chain of hotels," he said. "There's a French fishing company.  The Brits are there. The Israeli's have one of the biggest citrus companies. It's only the United States that doesn't invest in Cuba."

The only legal obstacle to U.S. investment in Cuba is the U.S.Helms-Burton Act of 1996, said Valdes-Fauli. The Helms-Burton Act is an American federal law that extended and ramped up the embargo against Cuba first imposed in 1960. 

No Embargo On U.S. Sales of Food and Medicine to Cuba

Exempted from the embargo, is the U.S. sale of food and medicine to Cuba for humanitarian purposes. Sales of other U.S. products or services are still illegal under Helms-Burton.

But the Helms-Burton law may be repealed if relations between the U.S. and Cuba continue in its current warming trend. If the embargo is eventually lifted, as many analysts expect, the U.S. will be able to sell the full spectrum of goods and services to the Cuban market

And when the new Cuban legislation takes effect, U.S. companies and investors can invest in the Cuban economy, now undergoing profound changes.

After more than fifty years under an economy patterned on the failed Soviet model, Cuba's economy is moving in a different direction. Foreign investment "would [when the new law is passed] occupy a major role," said Pedro San Jorge, head of the economic policy office of the country's Ministry of Foreign Trade and Foreign Investment in an official policy statement to Cuban media. San Jorge's comments reflect the new Cuban

interest in growing its economy through foreign investment.

Cuban Economy Evolves Along Chinese Lines

"Since the fall of the Soviet Union [a Cuban ally and trading partner] Cuba's economy has been evolving along Chinese lines," said Santiago Fittipaldi.

Fittipaldi is a managing director of Burson-Marsteller, Miami and director of its Public Affairs practice; a former journalist covering Latin American business and finance; author of Developing Business Strategies for Cuba; and a frequent visitor to Cuba.

China has moved step by step from a managed economy to a free market economy, but with certain government restrictions – based on Communist-era regulations — still in place. Cuba has begun a similar transition, which is still in its earliest stages.

"There are already some elements of a freer economy," said Fittipaldi. "Small businesses are permitted, the tourism sector has grown, and partnerships are permitted between Cuban and foreign investors." 

Under a re-engineered Cuban economy ready for what some analysts see as exponential growth, Cuba will attract capital, said President Raul Castro, according to a report in a government-controlled weekly newspaper. 

The result will be more jobs, an increase in production and profits across many economic sectors, and a reduction of Cuba's reliance on imported goods, said Castro.

In another significant move away from a Soviet communist economy, the Cuban dual currency system will also be gradually abolished.

Under Cuba's two currency system a majority of workers are paid in the Cuban peso (CUC), valued at about four cents. Domestic purchases, however, must be made in the hard currency convertible peso (CUP), pegged to the U.S. dollar. Foreign governments and enterprises do not accept either currency for payment. 

Cuba's Major Foreign Buyers

Cuba's major foreign buyers of its agricultural products include Brazil, Canada, China, Europe, and Vietnam. Cuba's main agricultural crops include sugar, tobacco, coffee, cocoa, cotton, rice, potato, bananas, avocado, cassava and a variety of other tropical fruits. 

"Even if the Cuban economy lifts its restrictions on foreign investment, there's likely not to be a lot of new [foreign] players," said Fittipaldo. "Cuba will be tweaking what they already have to be more in line with its competitors. Current players will probably increase their [stakes] in Cuban [enterprises].

Cuba's agricultural sector could benefit significantly from an infusion of foreign cash.

Agriculture contributes about 10 percent to Cuba's GDP, according to a report prepared by the Center for Democracy in the Americas and others.*

Some 30 percent of the land is now devoted to agriculture.* But acreage devoted to agriculture could increase as demand and profits heat up, thus making previously unproductive sections of the island new revenue sources.  Employment in the agricultural sector*, currently at about 20 percent of the labor force, could increase, expanding consumer buying power if profits increase with more efficient farming and if wages rise in accord with rising profitability.

U.S. Embargo Hasn't Worked

"More than fifty years of the U.S. embargo on Cuba hasn't worked," said Valdes-Fauli.  "The Obama administration wants to try something different."

The Castro-era will soon fade away as the brothers Fidel and Raul pass into history.

Relations between the U.S. and Cuba are thawing after decades of Cold War hostility.

If and when embargoes, travel restrictions and various sanctions imposed on Cuba by the U.S. are lifted, trade, travel, tourism, and diplomatic relations will be resumed by the two countries. 

Valdes-Fauli said investing in Cuba presents a great opportunity. "It's virgin territory."

Fittipaldo is also optimistic about Cuba's economic future, but he says growth will be slow, at least for the remainder of 2015.

Nevertheless, Cuba's new message to global investors is loud and clear: The welcome mat is out for you and our door is wide open.

* According to a report prepared by the Center for Democracy in the Americas, www.democracyinamericas.org, the Latin America Working Group, www.lawg.org, the Lexington Institute, www.lexingtoninstitute.org, and the New America Foundation, www.newamerica.net, and Washington Office on Latin America www.wola.org