Communist Cuba is in a bind, a really expensive one. And because the overseers have failed to implement political reforms, or reforms of any kind, foreign investors need to carefully weigh the risks. Cuba needs oil, a lot of it. That is why it helped take over Venezuela in the late 1990s- cheap and free oil. But that jig is coming to an end. Cuba is in survival mode as well. The Obama administration tossed them a few lifelines, economic and political. But it is not enough to pump oil into the Cuban economy.
According to Bloomberg Markets news, as well as other sources, Communist Cuba is running low on subsidized oil from Venezuela. Why? Because the political regime that Cuba helped create in Caracas sits atop a failed state. Venezuela is about to explode and it is going to get ugly of the Venezuelan people as well as Cuba. According to Bloomberg Markets:
A new goal to add 2.1 gigawatts of capacity from biomass plants, wind farms, solar projects and hydroelectric generators will cost about $3.5 billion, according to government estimates. To get there, Cuba recently said it will allow foreign companies in some circumstances to own projects rather than requiring them to form joint ventures with state-owned companies. The Obama administration has also carved out exemptions from a U.S. economic embargo to allow companies to export products and technology to the island (emphasis added).
Allowing foreign companies to own projects is somewhat of a big deal in Cuba. To my knowledge, there are few, if any, 100% foreign-owned foreign investment projects on the island. Yet why would any sane business want to engage in such a risky venture? For example, as many bar associations have learned first-hand the past two years, there is no rule of law in Cuba. Independent lawyers? Forget about it. Lawyers practice for the state or not at all.
Then there are the labor issues. 80% of all salaries paid for, not to a Cuban worker go to the state. The Cuban worker sees very little return for their work. It is modern-day slavery. It is one of the reasons why hundreds of thousands of young Cubans have been leaving Cuba since President Barack Obama made his December 17, 2014 change speech about US-Cuba policy. The only free market is the illegal black market. There is no hope in Cuba, just misery.
Corruption is also a huge problem. Just ask Cy Tokmakjian – a Canadian businessman who spent years in prison for alleged corruption. Mr. Tokmakjian pretty much admits that there is no other way to do business in Cuba without greasing bureaucracy. In most cases, and under U.S. law, most of this activity falls under the Foreign Corrupt Practices Act. Here again, no surprise. In a majority of emerging markets corruption is a major concern. Cuba, by the way, is below an emerging market – it is an economic basket case.
Another big issue is stolen property. First of all private property is illegal. Co-ops are really just legal fictions that are state-run enterprises, again, at the expense of the Cuban worker. So why would any reputable company do business on lands — in the case of this proposed energy project, large sugar cane fields — that were likely stolen from other Cubans or American citizens? Cuba owes at least $8 billion to American families and businesses whose homes, lands, and businesses were stolen and never compensated.
Communist Cuba also owes billions more to Cuban families who were kicked out of the island and lost everything that they owned. How can Cuba guarantee investors that their money and investments will be safe when they have refused to settle old expropriations, other unlawful property takings as well as other crimes? Why would any reputable financial services business or private investor lend money under these conditions?
According to U.S. officials who support the engagement with Cuba, as well as the legions in Washington, DC and the small group in the Cuban Diaspora who support them, the property issue will take time to resolve but, hey, at least we are talking about it. Baloney. U.S.-Cuba property talks are window dressing that the Cubans are using to secure other embargo-easing concessions from the administration and the Congress. The Cubans are not interested in paying American certified claims or find a long-term solution to other claims, they are only interested in survival at any cost.
Foreign investment in Cuba is a very high risk proposition for any company that also has a U.S. presence. These companies are legally and politically exposed. The Obama administration’s wrong-headed and at time unlawful approach toward Cuba that, in part, has allowed Starwood Hotels to manage hotels in Cuba, has already lead to the creation of a Divest Cuba initiative. I expect lawsuits and public relations battles in the offing as more companies try to enter a market that remains subject to a comprehensive economic embargo.
Cuba’s biofuels initiative is just one more pie in the sky scheme to inject much-need hard currency into the coffers of a failed political and economic system. What the Congress and a future administration must do is put the brakes on the regulatory overreach of the Obama administration, enforce sanctions, and impose new ones that will not be eased until, at least, Cuba pays American taxpayers the $8 billion they are owed.