Eyes on Cuba: U.S. Business and the Embargo

Pamela S Falk. Foreign Affairs. Volume 75, Issue 2. March/April 1996.

By the end of 1995, the private jet hangar at Jose Marti International Airport in Havana was already booked well into 1996, and most of the reservations belonged to one of Cuba’s rare clienteles: American corporations. Chief executives on familiarization trips and technical analysts on fact-finding missions have been scouting for numerous prominent and curious firms, including General Motors, Sears Roebuck, Avis, Hyatt, ITT Sheraton, Bank of Boston, Gillette, and Radisson Hotels. Increasingly, these firms like what they see of the Cuban economy and grouse openly at what they are being denied by the U.S. embargo. “The embargo is a waste of taxpayer dollars and time,” said James E. Perrella, CEO of construction giant Ingersoll-Rand, after a November meeting with Cuban President Fidel Castro. Perrella, recently named chairman of the 500-corporate-member National Foreign Trade Council, is echoed by a growing number of Fortune 500 companies.

Dwayne O. Andreas, chairman of Archer Daniels Midland, claims not to “know a corporate CEO who thinks excluding U.S. business is a good idea, particularly when all of Western Europe is down there. Corporate leaders are lobbying the president and his advisers, as well as key members of Congress, every chance they get.” The question is whether American business will be able to organize well enough to go beyond the quiet lobbying efforts of individual corporate leaders and loosen or end the embargo.

A Taj Mahal For Havana

Even owners of some of the largest hotels and resorts in Florida, which is home to many fervently anti-Castro Cuban exiles, are calling for change. Peter Blyth, president of the Radisson Hotel chain, which has more than 4,000 travel agencies worldwide including southern Florida, is ready to invest and frustrated at being blocked. “We’ve got three hotel sites chosen, a TGI Friday’s location in Havana picked, and cruise ships waiting for the green light. There is pent-up demand because [Cuba] is a substantial market for American businesses, and most of our colleagues on Wall Street feel the same way.” Perrella, Blyth, and Andreas all agree that a business lobby to lift the embargo is in motion. “It’s like an avalanche in the snow,” says Andreas. “You won’t really know its coming until it’s on top of you and it’s too late. But the lobby is there, and it’s gaining steam.” Real estate and casino mogul Donald Trump says, “The people of Cuba are the greatest in the world. I’d like to help them rebuild the country and return it to its original splendor. And as soon as the law changes, I am ready to build the Taj Mahal in Havana.” At the same time, advocates of a repeal worry that U.S. business may already be too late. Corporate lawyer and veteran Cuba hand Theodore C. Sorenson says, “When all the walls come down, they’ll discover their foreign competitors are already there.”

Despite the improved prospects for investment, several business groups are still adamantly opposed to doing any U.S. business in Cuba. Tom Cox, executive director of the U.S.-Cuba Business Council, takes a hard line: “It’s throwing Castro a lifeline, plain and simple.” But Cox says that although the council has a laundry list of preconditions for endorsing investment-establishment of a free-enterprise economy, enforcement of contracts, and protection for and expansion of private property – “Castro leaving the scene is not required.” Some of Cox’s corporate members are starting to equivocate and break ranks with the council on the embargo issue. One member asked, “Isn’t there something between dancing with a dictator and sitting passively by while the Europeans invest? We’re corporate America. Why aren’t we calling the shots?” President Clinton’s former Treasury secretary, Lloyd Bentsen, recently surprised some observers by voicing strong pro-investment sentiments at a convention in Toronto.

The hard line against doing any business with Cuba under Castro is still orthodoxy for many influential Cuban exiles. Their activism deters some businessmen, who fear domestic retaliation, but less than in the past. Threats of boycotts or worse by the exile community have diminished; indeed, the embargo is broken most often by exile families sending money to relatives. A spokesman for Radisson Hotels says that it has not received any pressure and that Cuban Americans in Dade County are its best customers. Benetton, the Italian multinational clothing company, did face a protest by Cuban exiles but claims it lasted for a day in front of their Dadeland store and ceased once company officials met with the protesters. “It’s a paper tiger,” says John Kavulich, president of the U.S.-Cuban Trade and Economic Council. “Buyer-beware cables and boycott threats have produced no major obstacle to free marketeers.”

From the all-or-nothing shouting match of the last 30 years, the debate on doing business with Cuba appears to be shifting to terms and conditions. The underlying question is how much change can occur before Castro leaves power.

A Changing Scene

Several forces are nudging American business to go public in lobbying against the embargo. Cuba in the last two years has gradually opened its economy to allow the sale of some state-owned companies and eased restrictions on foreign investment. U.S. businesses see European, Mexican, Canadian, and Japanese firms starting to make serious investments there. American business executives worry that non-U.S. firms may box them out, particularly in industrial and telecommunications areas of the economy. Several U.S. corporations with major claims on property expropriated by the Castro government argue that legislation currently before Congress to tighten the embargo endangers their claims. Lastly, the immigration accords between the U.S. and Cuban governments have cooled the political atmosphere by inhibiting migration and underscoring the fact that, as far as U.S. policy is concerned, Cuba’s emigrants are primarily economic refugees.

The initiatives of the Cuban government have raised expectations on Wall Street and in corporate America of shortterm profits once the embargo eases or ends, and that has been reflected in accelerated preparations. Cuban economic officials met with over 1,300 U.S. executives and signed some 40 nonbinding letters of intent to do business, including several million-dollar-plus commitments, in 1995 alone. One such commitment by an investment consortium is valued at $l0 billion, according to Kavulvich. Another proposal, put together by a group of 12 hotels, is valued at $2 billion, according to Cuba’s tourism ministry. Some observers, however, deeply discount or dismiss these initiatives because of their nonbinding status.

Even with the embargo, American business has some presence in Cuba. Current U.S. law allows American businesses with special licenses to operate there in telecommunications, publishing, cultural programs, newsgathering, credit card processing for certain transactions, travel bookings, humanitarian projects, and limited types of medical and pharmaceutical sales. U.S. law also allows American businesses to purchase a noncontrolling minority interest in a foreign company doing business in Cuba, except for cases in which the company has a separate division dedicated solely to Cuban work.

American products can also be found throughout Cuba, particularly in Havana. Coca-Cola is readily available, which was not the case six months ago. California wines have recently appeared at the restaurant of the Hotel Nacional in Havana. These products are for the most part sold through unauthorized distribution networks in Panama and other countries. It is a matter of speculation just how aware of these transactions the parent corporations are. “No one sells that much CocaCola to Panama without knowing where it is going,” says Julio Ignacio, a Cuban spirits distributor. “It is sold with a wink and a nod.”

Meanwhile, the pace of non-U.S. foreign investment in Cuba quickens, despite the country’s political risks. Canada’s Sherritt International last year issued a $500 million stock offering to broaden its Cuban holdings in sugar, transportation, communications, and real estate. In three weeks’ time, it was fully subscribed. In large part, the investment surge is due to a widespread belief that in the not-too-distant future the United States will loosen or lift the embargo. “We are here for three to five years and we expect to be bought out by the Americans,” confided Mario Panunci, whose Italian investment banking firm financed the Fiat dealership in Havana. “We put more money in than we can get out, but who cares? We know you’re going to be here soon. The Cubans want it and American businesses want it. It is just a matter of time.”

A concern that looms large for American businesses is whether opportunities for capital investment and market entry will be arbitrarily curtailed by Cuba’s government, which is still authoritarian and communist. On several occasions Castro has voiced grudging sentiments about the opening of the Cuban economy. In his December speech to the National Assembly, Castro reiterated his belief that “under capitalism, the interests of the people and the interests of the nation do not coincide. It is only under socialism that the nation’s interests and those of the people coincide.” Nevertheless, Castro apparently finds some solace in tax levies that assure the state an ample slice of new business profits.

Countering Castro’s personal reluctance are pressures from key segments of society, including younger public officials and factions within the military. Although the hemorrhaging of the early post-Soviet years is over, Cubans recognize that their economy is still fragile. Thus official nervousness is constant and focuses on the new need to sustain the confidence of foreign investors. Last year’s disastrous sugar harvest the lowest since pre-revolutionary days–frightened investors and sobered Cubans who had started to believe that the economy was looking up. Record low sugar production has been a problem, and the decrease in sugar production resulted in a trade deficit worse than 1994’s.

“Tourism will be our future,” Castro declared in his speech. “Nowadays tourism brings in more gross income than sugar.” Indeed, tourism is attracting much of the attention from foreign investors; hotels are at 90 percent capacity and higher in Havana, Varadero, and Santiago de Cuba. The biggest investors in joint ventures with Cubanacan, one of Cuba’s tourism agencies, are Spain, the Netherlands, Canada, Colombia, Germany, and Jamaica. Cuba’s Ministry of Tourism, while perhaps relying on ventures that could turn Cuba into an overcrowded tourist mecca, projects an increase to 50,000 hotel rooms in the year 2000, from the current 23,000. Whether those goals can be met is debatable, but the island has generated enough interest as a destination to warrant the scheduling of direct flights from Helsinki and Dusseldorf.

Step by Step

The Cuban government is well aware that the Clinton administration’s foreign policy team is predisposed to opening the door slowly, and it has scant expectation that any large steps will occur before the American presidential election of 1996. The Clinton administration is conducting an interagency review, as required by law, of U.S.-Cuba telecommunications policy that will consider allowing U.S. companies to invest in the multibillion-dollar privatization of Cuba’s telephone sytem. A reasonable interpretation of current law could find such a proposal allowable, but the betting is against approval of a sweeping, direct U.S. investment in an election year. Nonetheless, the Mexican company involved in the deal sent lobbyists to Capitol Hill to seek approval for AT&T to become a partner in the venture. Dwayne Andreas, thinks he knows what will happen if Clinton is reelected. “Clinton will certainly move toward lifting the embargo, and the Cubans are counting on it.”

The modest liberalization steps that Clinton has taken conform to the objectives of the 1992 Cuban Democracy Act, which include establishing people-to-people contact to promote democratic reform in Cuba. On October 6, the Clinton administration allowed U.S. news bureaus to set up shop in Cuba; authorized Western Union to open offices in Havana, American companies to register patents of their products (for example, Coca-Cola or Kleenex) in Cuba, and U.S. foundations and nongovernmental organizations to establish exchange programs; and expanded the humanitarian relief and family remittances allowed under U.S. law. U.S. government officials privately concede that under the new regulations particularly those applying to humanitarian donations-American corporations can do a lot to establish a market presence. Last year, for instance, Angel R. Martinez, the president of a Reebok subsidiary and a Cuban-American, delivered 5,000 pairs of donated Reebok sneakers to Cuba through a special license, purchasing some product name recognition along with good will.

Initiatives, even if only preparatory, are bubbling up from other quarters. One such effort is a set of investment guidelines for U.S. corporations, much like the Sullivan principles, which provided a framework for investing in apartheid South Africa. The guidelines were written by two Cuban exiles: Rolando H. Castaneda, an Inter-American Development Bank senior operations officer, and George Plinio Montalvan, the former chief economist of the Organization of American States. The guidelines propose fair labor requirements, such as direct hiring of Cubans rather than through a state agency, a 48-hour limit to the workweek, the organization of independent unions, and equal access for Cubans to beaches and restaurants. The authors also proposed to end the U.S.-led ban on Cuba’s admission to the International Monetary Fund, provided Cuba implements market-based reforms. They call for the United States to unilaterally lift the ban on the commercial sale of food to Cuba; the rest of the trade embargo would be lifted when Cuba releases its political prisoners and agrees to abide by international human rights conventions. Their proposal for the resolution of claims on expropriated properties is compensation rather than restitution.

“The business community is not trying to be insensitive to the heartache of the exile community,” says Radisson Hotel’s Peter Blyth. “There are other voices out there, among them many Cuban Americans, who are asking us to move things forward because there is a generational change, and the grandparents of the exile community are all elderly.” Other executives privately voice similar views, saying that the U.S. business community has been a force for democratic change in other countries in the past. In this case, corporate America will have to work with the exile community to advance its agenda and gain full access to the Cuban market.