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