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    For U.S. businesses, road to Cuba fraught with uncertainties

    For U.S. businesses, road to Cuba fraught with uncertainties
    By VICTORIA GUIDA 3/11/15 12:49 PM EDT

    Moves by the Obama administration and members of Congress to make up
    with Havana have had businesses strategizing since mid-December about
    how to break into the Cuban market.

    But even if Congress were to lift the decades-old embargo tomorrow,
    Havana’s trade hurdles won’t just disappear.

    As the White House pushes forward with negotiations to reopen embassies
    at a fast clip, business leaders are struggling to navigate Cuba’s
    challenging business environment — from the communist bureaucracy’s
    tight control over the distribution of imports and its clampdown on
    Internet access to its abysmal credit rating and the country’s dearth of
    hard currency.

    The National Cooperative Business Association is one group that’s trying
    to be proactive about building up the private sector in Cuba. The
    nonprofit trade association’s international arm, the Cooperative League
    of the USA, launched a working group on Tuesday with the goal of helping
    foster the cooperative business model in Cuba, in which farmers, auto
    mechanics or other private entrepreneurs band together in common
    interest, CLUSA communications director John Torres said.

    “It is an exciting time for Cuba, and we also think it’s an exciting
    time for the nascent cooperative community inside Cuba,” Torres said.

    But while the Communist Party of Cuba has promoted cooperatives and more
    self-employment as part of its economic reforms, businesses need to go
    into the country with a long-term strategy in mind, not with the idea of
    getting rich quick, said Mark Entwistle, a former Canadian ambassador to
    Cuba and founder of the merchant bank and advisory firm Acasta Capital.
    “For smaller companies that are living from account receivable to
    account receivable,” he said, “Cuba’s probably not your place.”

    Supply chain problems

    Cuba’s economic stagnation requires that the country import far more
    products than it exports, so Havana could decide to open its arms to the
    bulk of goods and services Washington has approved, including equipment
    and supplies for construction and farming.

    “Somebody described Havana as a city in need of a billion gallons of
    paint,” said Pedro Freyre, a partner at the law firm Akerman. “I
    suspect, if I were a member of the Cuban government, I would say bring
    it on, because it’s positive. It’s a good thing for the country.”

    But red tape at the ports, including excessive paperwork and other
    bureaucratic delays, remain a major obstacle, including for agricultural
    imports, which supply 60 percent to 70 percent of the country’s food for
    a $2.2 billion market in 2015, according to the U.S.-Cuba Trade and
    Economic Council.

    “If you have perishables and have them stuck on a dock in a loading
    terminal, that can be deadly to the business,” Entwistle said. “That
    kind of logistical stuff can happen.”

    With trains in disrepair, imports move by truck in a vertically
    integrated delivery system in which port facilities, trucking fleets and
    warehouses are controlled by national import agencies. But controlled
    distribution and undeveloped wholesale and retail sectors offer no way
    for Cuba’s emergent crop of entrepreneurs — the target of the expanded
    U.S. exports — to do business directly with foreign markets.

    “[T]he intention is to permit supplies, goods and money to wind up in
    the hands of Cuban entrepreneurs, but [administration officials]
    recognize there will need to be government pass-throughs,” said Jake
    Colvin, vice president of global trade issues at the National Foreign
    Trade Council. “Understanding the logistics of that, who’s able to take
    receipt of goods, … distribution arrangements, what’s acceptable to the
    U.S. government, that is going to be the first challenge.”

    Despite the obstacles, Erick Erickson, vice president of the U.S. Grains
    Council, said Cuba is still a “substantial current market opportunity
    for U.S. agricultural products.” In 2008, for example, the U.S. provided
    100 percent of Cuba’s corn imports. “If we’d been at 100 percent last
    year, it would’ve been our 12th largest market,” he said.

    Telecom blackout

    Cuba faces another big hurdle in its lack of Internet service and
    telecommunications access in general, which play a huge role in
    international business deals. The Obama administration’s new policy
    allows telecommunications companies to build up infrastructure in Cuba
    and exempts computers, cellphones and televisions from licensing
    requirements.

    But if U.S. companies build it, will Internet access come?

    Havana’s track record hasn’t given much reason for optimism. About 25
    percent of Cubans have access to the Internet, according to the
    International Telecommunication Union, but that so-called access is
    heavily censored; the White House puts the number with full access at
    closer to 5 percent. Meanwhile, about 13 percent of Cubans have
    computers in the home — with 3 percent reporting Internet access — and
    18 percent have mobile phone subscriptions, the United Nations agency says.

    While Havana might prove leery of unwittingly importing U.S.
    surveillance along with American telecom services and equipment, the
    White House decision to ease telecom exports at least has the effect of
    taking away Havana’s claim that the reason Cubans don’t have access is
    because the Americans have been standing in the way, Freyre said.

    Cash flow

    Cuba’s longstanding trade deficit has made hard currency scarce. The
    government’s attempts to gain access to private sources of U.S. dollars
    led to a two-tiered monetary system in which services employees with
    access to tourists’ money, as well as other sources, are often better
    off than Cubans in other state jobs who are paid in the nation’s
    less-valuable peso.

    While the “convertible” peso — the currency of tourists, foreign trade
    and upscale stores that stock imported products — is pegged to the value
    of the U.S. dollar, the national peso, used for purchases of food
    staples and other rationed items, is not, and has fallen to about 1/25th
    of the value of the convertible peso.

    The upshot: Not only does the average Cuban not have the money for
    higher-end U.S. goods, but the overall lack of currency drives down
    exports to the island because Cuba’s import agencies sometimes can’t pay
    for shipments from the U.S. with cash in advance, as required by the
    U.S. embargo.

    To help build up Cuba’s currency resources, the Obama administration
    raised the cap on the money Cuban-Americans can send family members on
    the island, quadrupling it to $2,000 a quarter. It also eased travel and
    spending restrictions, a move that is sure to exceed the 600,000
    Americans who visited Cuba in 2013; if travelers each spend $1,200 while
    in the country, Cuba’s gross revenue could go up by tens of millions of
    dollars, U.S.-Cuba Trade and Economic Council President John Kavulich said.

    Credit woes

    Foreign companies, meanwhile, aren’t interested in extending credit to
    Cuba for business transactions — despite Havana’s list of roughly 250
    economic priorities, including energy and agricultural development —
    because Havana has been defaulting on its debts. Just last April,
    Moody’s downgraded Cuba’s credit rating to CAA2, a very high risk.

    “While I think that the business community recognizes Cuba’s potential,
    there’s also the reality that Cuba is bankrupt,” Freyre said. “Cuba is
    grossly in need of investment … but they don’t have a philosophy, don’t
    have the legal infrastructure to support any kind of mid-level to even
    higher-level industry.”

    And when the idea of floating credit came up in the early 2000s, U.S.
    agricultural companies weren’t interested either, Kavulich said.

    “Which one of us wants to have our CEO on CNBC explaining why our stock
    just tanked because we had to report a default from Cuba?” he said of
    the general thinking at the time.

    But Entwistle said companies need to understand the need for patience
    when doing business with Cuba. While they may delay payments, Cuban
    importers generally won’t renege on them, he said.

    “Some of the foreign business guys don’t really understand the … payment
    regime, and don’t have the patience to wait it out and to see it
    through,” he said.

    Congress

    But the embargo itself remains the biggest roadblock — something a
    bipartisan group of senators, including Amy Klobuchar (D-Minn.), Debbie
    Stabenow (D-Mich.), Dick Durbin (D-Ill.), Patrick Leahy (D-Vt.), Jeff
    Flake (R-Ariz.) and Mike Enzi (R-Wyo.), wants to change. They’ve
    introduced a bill to remove the remaining trade and travel restrictions,
    which they say are ineffective, blocking benefits for U.S. companies and
    damaging the nation’s image.

    “If we can get this passed, if we can take away one of the communist
    government’s talking points as to why they shouldn’t be engaging with
    the U.S., that’s a big step forward,” a Senate aide said of the
    legislation, adding that Havana’s concerns over ushering in more
    openness is another reason to pursue the bill.

    “As we build a history, creditworthiness goes up, those things [hurdles
    to trade] can get resolved. Even if it’s only a symbolic move, it is
    still a necessary one. You can’t even begin to address all those other
    issues until we address [the embargo] first.”

    A handful of House Democrats and Republicans have introduced more than a
    half-dozen such bills, although, as in the Senate, the Republican
    leadership is unlikely to take them up.

    Flake, who also introduced a bill to end the travel restrictions, told
    POLITICO that ban would be much easier to scrap in this Congress than
    the entire trade embargo, adding, “There’s just increasing consensus
    that this is the right thing to do.”

    Public opinion polls show increasing support for such a move. A Feb.
    14-15 Gallup poll found that 59 percent of respondents favored lifting
    both the travel and trade embargoes, while 30 percent opposed ending the
    travel restrictions and 29 percent the trade ban.

    But Congress’ Cuban-American contingent is dead set against such moves.
    Longtime House Foreign Affairs member Ileana Ros-Lehtinen (R-Fla.),
    Senate Foreign Relations Committee ranking member Robert Menendez
    (D-N.J.), and potential presidential candidate Sen. Marco Rubio
    (R-Fla.), who is also a panel member, say no olive branches should be
    offered to Cuba until the Castro regime makes human rights reforms.

    “For what are these negotiations?” Ros-Lehtinen said at a recent hearing
    on the administration’s policy shift. “So that more Americans can travel
    to Cuba and see what the regime wants them to see? All the while the
    regime fills its coffers, and we ignore the real truth? Because who owns
    the hotels? The Castro regime. Who runs the hotels? The Castro military.
    The truth about the Cuban regime is that it is a regime that severely
    punishes dissent, forbids reform and will do anything to maintain its
    grip on power.”

    Critics say the administration squandered the chance to force Cuba’s
    hand, with internal pressures mounting on the Castro regime now that its
    major benefactor, Venezuela, is in an economic crisis because of
    slumping oil prices.

    Kavulich said Havana’s troubles likely played into its willingness to
    reopen talks with Washington. But while the Castros might try to show
    they’re serious about economic reforms by allowing more privately owned
    businesses, Freyre said, “I would be astonished if you were to see a
    political opening with dissidents, public space for debate. That would
    be anathema to them because in their mind that would signal weakness.”

    Source: For U.S. businesses, road to Cuba fraught with uncertainties –
    Victoria Guida – POLITICO –
    http://www.politico.com/story/2015/03/us-business-cuba-trade-uncertain-115985.html