Doing Business 'In', or 'With' Cuba?

Tuesday, December 1, 2015
By Dr. Jose Azel for Global Risk Insights:

Doing Business in, or with Cuba?

First, let’s get the preposition right.

All commentary regarding entering the Cuban market makes reference to investing “in” Cuba. But, when used as a preposition, “in” innocently indicates inclusion within a space or place.

However, “in” is an insufficient and misleading preposition with reference to Cuban investments. Investing “in” Cuba is a naive expression that closes the eyes to the “with” character of those investments.

Cuba is not like other foreign markets where the investor’s due diligence requires mostly investigating demographics, local market information, and maybe some political risks. Cuba is a totalitarian state.

Investing in Cuba necessarily requires investing in a partnership with the Cuban government, and more specifically with the Cuban military. It is thus much more precise to use the preposition “with”’ to denote “accompanied by.”

Investing with Cuba, in association with the Cuban military, requires a much more rigorous due diligence.

Investing “in” Cuba requires the investor to contend ‘only’ with factors such as median income of $20.00 per month, outdated internet, communications and information systems, an unfriendly business environment, violation of worker’s rights, widespread corruption, unreliable energy, outdated water and sewer systems, a crumbling infrastructure, a bankrupt economy, an awkward dual currency system, and much more.

In addition, investing “with” Cuba requires foreign firms to accept being minority partners, with the Cuban government representing the controlling shareholder.

Under this arrangement, the Cuban government expects foreign investments to generate revenues for the state on its terms. If the venture fails to meet the expectations of the state, it may arbitrarily terminate the agreement, and there is no independent judicial system to adjudicate any investor claims.

It is also a mischaracterization to speak of a “private sector” in the country with the suggestion that such a sector exists as possible partners for American investors. There is no private sector in Cuba in the sense that we use that term in free market economies.

The so-called self-employed (cuentapropistas) in the country are not equivalent to a private sector.

These are individuals that have been granted permission by the State to operate in one of 201 highly specified domestic trade activities and under very restricted conditions. They do not have legal standing as would a sole proprietorship, partnership or corporation in the United States.

It is therefore very misleading to speak of a private sector in Cuba.

Let’s take just one aspect of doing business “with” Cuba to illustrate how it offends our labor, business laws, and our expectations of corporate behavior.

Foreign investors operating in Cuba cannot hire their own employees.

The foreign firm must negotiate with the Labor Ministry a “contract for the supply of its labor force” indicating the quantity and qualifications of needed employees. The state staffing agency for foreign enterprises then sends its pre-screened personnel to the foreign firm.

The foreign employer pays salaries directly to the staffing agency in foreign currency, or equivalent Cuban convertible pesos (CUC).

Cuban workers are then paid by the staffing agency in non-convertible national Cuban pesos (CUP). Under this arrangement the state pockets over 90 percent of the worker’s purported salaries.

This practice is a form of slavery that violates International Labor Organization conventions. Cuban writer Carlos Alberto Montaner has aptly named it: Cuba the pimp state.

It is a repugnant practice that would expose participating American companies to public scorn and endless litigation.

Corruption is a serious problem in official Cuba with an ethos of unlawfulness, and a state-controlled economy where there is little respect for the rule of law.

American companies, particularly publicly traded firms subject to myriad anti-corruption and disclosure regulations, would find it nearly impossible to operate lawfully in such an environment of systemic and endemic corruption.

Those looking to invest “with” Cuba should therefore include in their due diligence the vetting of their to-be controlling shareholder:  a state owned enterprise such as GAESA, the vast conglomerate run by Brigadier General Luis Alberto Rodriguez Lopez-Callejas; General Raul Castro’s son-in-law.

And we should all begin using the preposition “with” to specify that, is not investing “in” Cuba, but in partnership with the corrupt Cuban military.