Buying Into The Myth Of Cuba’s Economic Liberalization ... A Bad Idea

Rumors that Raúl Castro intended to implement significant economic reforms in 2008 sparked a renewed curiosity in U.S. business opportunities in Cuba. Many U.S. firms are even seeking legal advice to help them navigate U.S. sanctions against Cuba’s totalitarian regime in hopes of getting a “head start” on these rumored opportunities.

Foreign investors are only allowed to do business with the Cuban government which takes at least a 50 percent stake in the company as a condition of doing business on the island.  

— Rudy Mayor

The most hopeful (or naive) observers predicted that Castro (the second) would adopt the China model with the Communist Party overseeing major economic liberalization. Yet, Cuba remains one of the most hostile and dangerous countries to do business in. Since the implementation of these so-called reforms, more foreign investors have left the island than flocked to Cuba. In 2000, there were 400 foreign companies operating in Cuba through minority joint ventures with the Castro regime. Since then, over half of all foreign companies have pulled out with only 190 remaining.

In the last few years, foreign investors have seen over $1 billion in assets arbitrarily frozen in banks by the Cuban government. During this time, CEOs of various foreign companies have also been arrested with little if any due process. Cy Tokmakjian of Canada’s Tokmakjian Group, for example, was arrested in September 2011 after his firm was raided and his assets confiscated in the typical communist fashion. Two years after the raid, Tokmakjian still sits in a Cuban cell and has yet to be charged with any crime.

Similarly, Amado Fahkre and Stephen Purvis of Britain’s Coral Capital, both of whom had played a leading role in financing Cuba’s tourist industry, were accused of what the Cuban government called spying and revealing state secrets. After enduring a secret trial and serving 16 months in a Cuban jail, Purvis was allowed to return to London, but not before his business offices were shut down by the Cuban government. The multimillion dollar projects he invested in were similarly confiscated and transferred to a Chinese firm. Purvis admits that he was surprised his company was targeted, despite being financed by wealthy European investors and having a reputation as one of the best-established foreign companies on the island.

The desire of U.S. businesses seeking to invest in a country with a track record as hostile to foreign investment as Cuba is not only bad business sense — it’s absurd. It was in fact Cuba’s 1960 expropriation of U.S.-owned property valued at $9 billion (worth more than $50 billion today) that initially led to the U.S. embargo. They’ve done it before and they have clearly never stopped doing it.

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Of course, even more troubling than the financial risks associated with investing in Cuba is the way these investments are structured. Many law firms boast to prospective clients that Cuba is an untapped market of 12 million inhabitants with no mention that foreign investors are prohibited from doing business with private citizens. In fact, foreign investors are only allowed to do business with the Cuban government which takes at least a 50 percent stake in the company as a condition of doing business on the island.

Equally troubling is that foreign investors cannot hire or pay workers directly. They must go through the Cuban government employment agency, which hand picks the workers. The investors then pay the Cuban government in hard currency for the workers, and the Cuban government pays the workers a fraction of their salary in worthless pesos while pocketing the difference in dollars.

Buying into the myth of Cuba’s economic liberalization shows a profound lack of knowledge and a deep naiveté about Cuba’s intentions. When asked whether he would invest in Cuba again, Purvis said Cubans “just don’t understand business yet.” Perhaps it is this lack of understanding that leads to the blatant lack of respect for private enterprise, labor standards and norms displayed by the Cuban government.