The path to investing in Cuba is as colorful as the island nation’s history. For Americans, in particular, one needs to sort through all the various US sanctions before evaluating Cuba’s own complex rules and restrictions. And for non-Americans, the US Helms-Burton Act provides for severe penalties for tripping up this law – in fact, this controversial law essentially forces non-US entities (persons and companies) to choose between the US and Cuba as a trading and investment partner.[Here in a more up to date article on investing in Cuba]
In this article I attempt to give the reader a comprehensive overview of the rules and regulations concerning investing in Cuba from the perspective of a US entity. To keep the length of the article manageable, I will use links to content that should be considered integral to forming a complete picture of the opportunities and risks in Cuba.
Here is a list of some recent examples of deals the Cuban government has concluded with foreign partners/investors:
· Cuba Contracts with Australian Firm for Hydrocarbon Production Sharing
· Sony Music in Licensing Deal with Cuban Government
· Verizon is the first U.S.-based wireless company to offer roaming in Cuba
· Cuba, China to Partner on $462 Million Golf Project Near Havana
In almost all circumstances, a foreign investor will need to partner with some element of the Cuban government. And the track record so far has been for local entities to be majority owned by the government. The current outlook for Cuba’s transition suggests it will morph into military state capitalism where the government reserves control over key sectors and companies.
During the communist revolution in 1959, Castro seized all property in Cuba in the name of the government. Today, there has been no resolution to the complex problem of US claims. Also, there are no impartial courts in Cuba.
The good news is that Cuba needs massive investments in its infrastructure, has fertile soil, has 3,000 miles of coastline (1.5x Florida), has significant natural resources (petroleum, nickel), has an educated workforce at competitive wages, wants economic growth through expansion of the private sector and has little corruption. In many ways, it’s a paradise.
As of October 2015, US President Obama’s use of executive authority to loosen some US sanctions has focused attention on the practical aspect of investing in Cuba. And the momentum behind these moves, which enjoy overwhelming popular support in the US, is likely to continue as political opposition to the embargo diminishes.
Anthony Bourdain artfully sums up what’s happening in Cuba by saying, “The toothpaste is out of the tube and there’s no putting it back.”
The reason Obama cannot unilaterally dissolve US sanctions against Cuba is because Congress passed special laws that only Congress can remove. This article explains the apparent contradiction over Obama’s re-certification of Cuba under the “Trading with the Enemy Act” in September 2015.
Recent events in international relations and domestic rule making demonstrate that Cuba is changing – but the statist, centrally-controlled island nation has very limited bandwidth to develop and execute on what is a genuine desire to make the private sector a much larger part of the economy.
Another important factor is the legal complexity surrounding US rules for trade and investment in Cuba. I have heard numerous complaints about how some US laws seem to contradict one another. Therefore, adding legal risk on top of political and business risk makes Cuban opportunities a tall order. Unfortunately, the rules on both sides of the table still have roots to a time characterized by mistrust and hostility.
According to Raúl J. Valdés-Fauli, partner in the law firm of Fox-Rothchild LLP, “The most important attribute to have in thinking about doing business in Cuba, an unusual one, is PATIENCE. Cuban authorities move slowly, they want to be certain that the shower of real and ‘out of left field’ opportunities coming down on them are real, feasible and good for the country.”
For Americans waiting for Cuba to feel and act like the US, you are not likely to find success in Cuba anytime soon. Cuba’s history and national identity don’t translate into accepting US investors for the sake of being American.
While the Cuban people tend to love Americans, the political reality means Americans will be included – but likely unfavored – in most investment considerations. From Castro’s perspective, taking money from American tourists is a better outcome if Cuba can find sufficient investment from non-US sources to meet its growth projections.
In 2008, Fidel Castro’s brother, Raul, took over as the President of Cuba. Widely considered to be less ideological than his brother, Raul immediately set Cuba on a course towards greater economic flexibility. His stated intention is to retire in 2018, so the current pace of change is likely not to quicken until the new guard takes over. Miguel Diaz-Canel Bermudez, 55, is first vice-president and is widely seen as Raul Castro’s successor.
As of September 2015, Americans are permitted to open bank accounts in Cuba under some circumstances. Essentially, if you are engaged in economic activity approved under US rules, then a bank account for that purpose is permitted. The practical problem is that there is only one US bank with a correspondent relationship in Cuba – and it is uncertain when cross-border transactions will be active.
Stonegate Bank received media attention for being the first US bank since the 1960 embargo to conclude a correspondent relationship with Cuba’s Banco Internacional de Comercio S.A. (BISCA). Stonegate also took over domestic banking functions for the Cuban embassy after M&T Bank decided to exit the relationship. Read the Cuba Journal’s exclusive interview with the CEO of Stonegate Bank.
Don’t let the thrill of Cuba’s resurgence blind you to the risks of owning Cuban real estate because, if you are American, the options are narrow and risky. For starters, US citizens who buy property in Cuba would be violating the Trading With the Enemy Act passed by the U.S. Congress in 1961.
And the Cuban government does not allow foreign ownership of real estate except in the case of narrowly defined developments that cater to foreigners.
An American buyer could consider funding a purchase through a Cuban resident friend – but the property would remain in the friend’s name – and be would subject to the whims of the friendship with no legal recourse in the event of a dispute.
The same legal risk applies when using a relative as a proxy. Alternatively, an American could marry a Cuban and own real estate in her name. But in the case of divorce, she would retain ownership of the house.
It is only recently that the Cuban government has allowed Cubans to buy and sell their homes. Presently, Cuban citizens are not permitted to own more than two houses.
Exchange-Traded Investment Fund
One investment company that offers both direct, private equity investments and a publicly-traded closed end fund is Thomas J. Herzfeld Advisors, Inc., a Miami-based boutique investment management firm founded in 1984. Private equity investments are made through individual accounts and may be subject to restrictions, but the Herzfeld Caribbean Basin Fund (NASDAQ: CUBA) is available to any investor.
Started in 1994, the CUBA fund benefits from an investment team that has perhaps the longest track record of any professional investor with a focus on Cuba. The fund’s strategy is to invests in stocks and bonds likely to benefit from US-Cuba trade and growth in the wider Caribbean region.
Today, these stocks are mostly in the US and Mexico. The fund is also a long time owner of Cuba’s sovereign bonds, which have enjoyed a resurgence in the past year. The fund was up 18.1% in 2014.
The following applies to companies considering foreign direct investment (FDI) in Cuba:
US Rules & Regulations
The best place to start is with what you can do in Cuba based on US law.
- This article details the most recent changes to US sanctions – start here.
- This article summarizes the history and rancor of the Helm-Burton Act of 1996.
- This article offers a summary of the current state of affairs with Cuba’s sovereign debt (Paris and London Club creditors) and the pathway for Cuba to join the international financial institutions (ie. World Bank).
- This website by the US State Department is a central resource center for all things involving Cuba sanctions.
Cuban Rules and Regulations
Where US laws are complex and potentially contradictory, Cuba’s foreign investment laws are clearer and also offer insight into the way Cuba’s government thinks about the future.
Cuba has cycled through several past initiatives to attract foreign investment with limited or no success. One problem has been the challenge to attract profit seekers in a country whose ideological leaders disdain profits. Also, fears over tripping up US sanctions – even for non-US entities – makes investing in Cuba very difficult. Both of these issues are being resolved.
Raul Castro appears to be committed to market-based reforms. New foreign investment laws that address previous inadequacies in scope and commitment are yielding results today. Here are some elements of Cuba’s new rules:
· 2015, $1 billion Mariel special development zone and port
· 2014, Cuba approves law aimed at attracting foreign investment
· 2012, Cubans open their doors to small business
Features of Cuba’s new foreign investment law (Foreign Investment Act 118) include tax cuts, investor protection, and arbitration. Here are the main features of the law:
· The law sets out three vehicles for making investment in Cuba — commercial contracts with Cuban entities, joint ventures with Cuban partners or 100% foreign-owned companies;
· Dispute resolution with ultimate appeal to the arbitration tribunals of the International Chamber of Commerce in Paris;
· Clear conditions under which Cuba could expropriate foreign-owned assets – Cuba has multilateral treaties with 71 countries except with the US (this is a major concern with US claims still unresolved);
· No taxes for the first eight years – 15% profit tax on most entities thereafter;
· Mariel special trade zone will provide investors with even better tax breaks and other benefits than those under the new investment law;
· Labor rules remain a big challenge: Cubans are hired via a state employment agency approved by the Ministry of Labour and Social Security that pays locals in a devalued local currency (Cuba peso) while employers pay the agency a much higher rate in Cuba’s convertible currency (CUC).
What’s different with Cuba this time is that the private sector is growing as a percentage of the total economy, and investors have responded by doing some deals. Entrepreneurs now make up 11% of the Cuban labor force, compared to 3% in 2010, according to Philip Peters, president of the Cuba Research Center.
To address concerns over claims filed in other countries involving investments in Cuba (presumably related to U.S. laws sanctioning Cuba), the Foreign Investment Act 118 provides that “foreign investments are protected in the country in accordance with Cuban law and the decisions of Cuban courts against claims of third parties based on rights or the application of the extraterritorial laws of other states.”
You will have to make an independent judgment on the strength of this protection claim.
Portfolio of Foreign Investment Opportunities
To publicize Cuba’s foreign investment priorities, the Cuban government periodically prepares a Portfolio of Foreign Investment Opportunities (Investment Portfolio). The Investment Portfolio lists desired and pre-approved sectors for foreign investment. Consistent with the investment portfolio and the new Foreign Investment Act 118, FDI will be allowed in all sectors except those in health, education and the armed forces.
The 168-page portfolio of opportunities contains a lot of detail and analysis but feels like a document prepared by a centrally-planned committee. The government identifies 264 projects needing $8 billion in an epic pitch book that reads like a whole country acting like a startup.
Here is Cuba’s assessment of its renewables sector:
The Brookings Institute published an insightful summary of the current Portfolio of Foreign Investment Opportunities. According to Brookings, “The government publication provides remarkably frank, data-rich surveys, sector by sector, of current production capabilities and shortfalls – must reading for specialists in the Cuban economy.”
“The growth rates of Cuba’s GDP [gross domestic product] have been moderate and low, lower than the average for the region. In order to turn this trend around, accumulation rates higher than 20 percent are required to permit a GDP growth rhythm increase of 5 to 7 percent.” In that current national investment rates hover around 10 percent, to fill the gap annual foreign investment inflows must exceed by a large margin the $2.0 to 2.5 billion publicly proposed by Minister of Foreign Trade and Investment Rodrigo Malmierca.
Who will invest in Cuba? The Europeans are favored due to a history of investment and a desire for Cuba to counterbalance American influence. “No one wants to miss the train,” said Herman Portocarero, the European Union’s ambassador to Cuba, as reported by Reuters. In July 2015, Cuba hosted more than 75 Spanish companies including a delegation headed by Jose Manuel Soria, Spain’s minister of industry, energy and tourism; also attending were 140 Italian firms, joined by Italy’s deputy minister for economic development, Carlo Calenda.
Here is Cuba’s 2014 Portfolio of Foreign Investment Opportunities.