Government backsco-operative thinkingLeadership promotes‘a more social form’ ofnon-state productionPage 4

Investing in CubaFT SPECIAL REPORT

www.ft.com/reports | @ftreportsTuesday June 16 2015

Inside

Obama’s overturesdivide opinion at homeThaw in relationship hasplayed better thanexpected — with somePage 2

Glimmers of glasnostThe Communist partyretains a tight grip butthere are signs of a shiftPage 2

The Miami connection‘Blood always trumpspolitics’ — Florida’sCuban-American linkPage 3

Island is poised to calltime on dual currencyCuba looks likely todrop its parallelsystem by the end ofthe yearPage 4

T here is a new entry amongCuba’s roll of importantdates. Alongside Fidel Cas-tro’s 26th of July movementand the January 1 1959 “tri-

umph of the revolution”, there is nowDecember172014.

ThatwasthedaywhenBarackObamaand Raúl Castro, the US and Cuban pres-idents, announced that they wanted tonormalise bilateral relations and endmorethan50yearsofcoldwarenmity.

To be sure, communist Cuba wasalready changing. After formallybecoming president in 2008, Mr Castrobegan a tentative economic liberalisa-tion process to boost the country’s flag-

ging economy — especially urgent nowthat Venezuela’s growing crisis jeopard-ises the$1.5bnofaid it sendseveryyear.

But the December 17 announcementlit a bonfire of expectations among USbusinesses — even if Cuba’s $80bn econ-omy, for all its exotic allure, is much thesamesizeas theDominicanRepublic’s.

“There is a new sense of excitement,of US companies coming to look andthinking of starting seed businesses,”says one long-established Europeaninvestor in Havana. “It makes sense.Start small, learn how the system worksandthenseehowitallgoes.”

So, how might it all go? US and Cubanofficials have warned that expectations

aretoohigh.“Prospects[inWashington]for lifting the embargo in the short termare dim,” cautions Michael Shifter of theInter-AmericanDialoguethink-tank.

The notion that US businesses andtourists might soon turn Cuba into aDisney-style communist theme parkwith McDonald’s outlets spread alongHavana’s seafront is also unlikely;Havana has run its own government for56yearsandisproudof itssovereignty.

Furthermore, even if the US embargowere to end overnight, the island stillfaces an “internal embargo” — thethicket of Soviet-style bureaucracy andcentralising socialist attitudes thatmakesdoingbusinessdifficult.

“All of Raúl’s economic reforms

involved decentralisation, which isgood, as Cuba needs that,” says RafaelHernández, editor of Temas, a state-published cultural magazine. “Theproblemis this . . . hasnothappened.”

Still, change is coming to Cuba, how-ever slowly, and one way to mark thechanges is to travel back to Pope JohnPaul II’s 1998 visit. “Do not be afraid,” hesaid. “May Cuba, with all its magnificentpotential, open itself to the world, andmaytheworldopenitself toCuba.”

Today, Cubans appear less afraid.Activists are still hounded, but there is awillingness among many to speak their

Continuedonpage2

Renewal ofrelations withUS heightensexpectations

Tentative signs of openness raise hopes, but is theisland ready todobusiness?By JohnPaulRathbone

Diplomatic flurry: (top to bottom)Raúl Castro meets President Obama,Pope Francis and President Putin;Fidel Castro with François Hollandein MayReuters; Getty

Even if theUS embargoends, an ‘internal embargo’remains—a thicket ofSoviet-style bureaucracy

2 ★ FINANCIAL TIMES Tuesday 16 June 2015

Investing in Cuba

minds, and some official tolerance too.One sign of this is the continued exist-

ence of news website 14ymedio.com, setup by dissident journalist Yoani Sánchez— even if limited internet access meansfewofCuba’s11mpeoplecanreadit.

TheworldhasalsobeguntoopenuptoCuba. Before December 17, there wereonly 35 enquiries from foreign investorsabout Mariel — the $800m port and freetrade zone on Cuba’s northern coast (seepage 3), built by Odebrecht, a Brazilianconstruction company, and operated bySingapore’s PSA. “After December 17,there is talk of 300 enquiries,” notesEmilio Morales of the Miami-basedHavana Consulting Group — althoughhow many of these enquiries turn intoactual investmentisanothermatter.

The embargo, whose removalrequires settling tricky issues such as$7bn of US nationalisation claims, puts abrake on US businesses. It can also put abrakeonthird-countrybusinesses, too.

“We have to be entirely self-financed,”comments one European resort opera-tor. “The new US approach has been‘that may be no longer illegal, but it isnot necessarily legal either’ — whichmakes financingproblematic.”

Lastly, Cuba is opening to the world,albeit slowly. The Communist party istorn between letting reforms rip and

maintaining control. Little surprise thatresults are disappointing — as was tacitlyrecognised by Mr Castro, who wants todeepen reforms, increasing the chancesof an economic “soft landing” in 2018,whenhesayshewillretireaspresident.

“Dealing with the internal embargo isone of Cuba’s biggest challenges,” saysPedro Freyre of US law firm Akerman.“The state might want to let small busi-nesses grow . . . but then it often taxes,regulates and clobbers them.” One signof ambivalence is the emphasis on state-sanctioned co-operatives, rather thanthe500,000self-employedworkers.

Cuba also suffers from limited band-width to deal with foreign interest. Thatis as true of Havana’s stretched touristcapacity as it is of Cuban officials withsufficient authority to make decisions.Mariel’s sixapprovedprojects, forexam-ple, required approval from the CouncilofMinisters, thehighestauthority.

Even so, there is strong business inter-est in Cuba’s so-called “knowledge econ-omy”, especially biotechnology. A hand-ful of large foreign corporates — such asCanadian miner Sherritt International,and France’s drinks maker PernodRicard and telecom’s group Bouygues —set up profitable businesses years ago. Sotoo, more recently, have émigré mom-and-popentrepreneursfromMiami.

At Miami discount store Ñooo! QueBarato!(or“Wow!Howcheap!”)Cuban-Americans can buy school uniforms forrelatives’ children. The island’s recentflowering of private restaurants andhotels — mostly refurbished privatehomes — is also largely financed byCuban-Americans, who remit up to$2bnannually torelatives.

The message from foreign businessesin Cuba is that the island is a potentiallyexciting market for anyone content towait for uncertain and long-termreturns. In the meantime, a word of cau-tion about the surge of private foreigninterest in Havana property, where pur-chases are possible only via a residentCubanpartner,whothenhas legal title.

“The outsider takes all the risk,” saysone European businessman. “I’ve heardasmanyunhappyashappystories.”

Continued frompage1

Renewal ofrelations withUS heightensexpectations

Foreign direct investment

Sources: Unctad, Peterson Institutefor International Economics

$m (’000)

0

5

10

15

2005 06 07 08 09 10 11

CubaDominican RepublicJamaica

GDP growth

Source: UN ECLAC

*2014 data: Cuba = EIU estimate;Latin America = IMF estimate

Annual % change

-2

0

2

4

6

8

2006 08 10 12 14*

Cuba Latin America& Caribbean

Shortly after the US and Cubaannounced talks about normalisingrelations, a neighbourhood watch com-mittee — often a bastion of communistprying — held its regular Committee forthe Defence of the Revolution meetingnot far fromHavana’s InteriorMinistry.

According to witnesses, many of thegovernment stalwarts there were waryof the new US approach. “You can’t trustthe Yankees. Their opening is a Trojanhorse,” was the general tone. Others sawtheprospectasanopportunity for them-selves, their families and their country.Yet they muffled their opinions out ofhabitand,perhaps,of fear. In latermeet-ings, theyslowlyvoicedtheirviews.

The anecdote is emblematic of thestate of Cuban political debate. It is cau-tious, often suspicious, and the statekeeps a firm grip. But spaces for politicalargument are slowly opening up, thanksinparttoPresidentRaúlCastro’sencour-agementofeconomiccriticism.

The process is relevant particularly toforeign investors, who will encounterwildly contrasting attitudes dependingonwhichbureaucrats theydealwith.

“TheTourismMinistry isbusinesslikeand open-minded. They are mostlypragmatists drawn from the militarywho have long dealt with foreign busi-nessmen,” notes a European diplomat.“The agriculture ministry, by contrast,is still Soviet — closed, suspicious andhardtodealwith.”

In the press, there are dull organs suchasGranma,theofficialCommunistpartynewspaper, which even Mr Castro hascalled an “insult to the intelligence”. Buttheir main alternative is a fledgling inde-pendentmedia—suchasHavanaTimes,a bilingual website, and 14ymedio.com,set up by dissident journalist YoaniSánchez — where coverage is lively, wellreportedandoftenpolemical.

Only 5 per cent of Cubans have unfet-tered internet access, but the news sitessuggest growing tolerance of dissent.This can be seen on officially sanctionedonline forums. In one sponsored by theUnion of Young Communists, an anony-mousposterasked:“Iwouldliketoknowif direct elections for the principal lead-ershippositionsof thecountryareunderconsideration . . . the current system is[inmyview]highlyunpopular.”

Glimmerings of glasnost can be seenin debating groups such as that hostedby Temas, a state-sponsored culturalmagazine, or independent groups suchas “Cuba Posible”, whose website carriesa range of opinion pieces from diehardcommunistsandexileddissenters.

Such shifts do not portend imminentpolitical change. Dissidents can travelabroad but extreme views are punishedin Cuba. Last year, there were almost9,000 short-term arrests of pro-democ-racy activists, dissidents say. However, therehasbeena5percentdropindeten-tionsinthefirst fourmonthsofthisyear.

“That drop is a potentially positivesign of the effects of the December 17announcement of the US-Cuba talks,”anotherEuropeandiplomatsaid.

The US wants to press the issue ofhumanrightsbut theprocess isdifficult.Talks about re-establishing embassiesalmost bogged down over the US desireto promote human rights from Havana.US political rhetoric can also colour thedomesticeconomicconversation.

Rafael Hernández, editor of Temas,notes: “Raúl Castro has said the privatesector is not an agent of capitalism, andhas spoken of the need to end old habitsof thinking. But for the US, the privatesector is an agent of capitalism. So thereisaproblemofrhetoriconbothsides.”

Many analysts argue that the fasterthe US embargo ends, the fasterreforms will happen — and vice versa.(Critics hold diametrically opposedviews). Either way, next April’s partycongress will be a barometer of the gov-ernment mood.

Mr Castro, 83, says he wants to deepeneconomic reforms, and so boost theprobability of a soft landing for 2018,when he says he will retire. Retirementneed not, however, preclude him fromremaining head of the party, wherepower ultimately resides, or fromappointing someone from his inner cir-cletobecomethenextpresident.

“Cuba is a long game,” notes one USofficial of the island’s transition.“Patience, much patience,” is required,asMrCastrohimselfhassaid.

Glimmers of glasnostbegin to warm islandPolitics

The government retains atight grip, but there aresigns it is loosening a little,writes John Paul Rathbone

The journalistYoani Sánchez ispart of a fledglingindependentmedia tolerated bythe government

B arack Obama surprised theworld in late December withthe announcement that heplanned to normalise rela-tions with Cuba, bringing to

an end more than five decades of diplo-matic estrangement from the islandnation90milessouthofFlorida.

In April, he held his first proper meet-ing with Cuba’s President Raúl Castro atasummit inPanama.“TheUnitedStateswill not be imprisoned by the past; weare looking to the future,” PresidentObama said. “I’m not interested in bat-tlesthatstartedbeforeIwasborn.”

But six months after the originalannouncement, what has emerged is amuch more patient and cautious open-ingbetweentheformeradversaries.

The Obama administration is work-ing on two fronts. It is trying to use a modest relaxation in business and tradewith Cuba to press the government intomore political reform. At the same time,it hopes to wear down resistance inthe US Congress to a broader relaxa-tion of the nearly 55-year embargo.For US companies keen to jump intoa new market, it is likely to be aslowprocess.

Sofar, theadministration’spol-icy changes towards Cuba have

been limited to what is possible throughexecutiveorders issuedbythepresident.

The White House has made it some-what easier for Americans to visit Cubaand has issued a licence for a ferry serv-ice from Florida. Restrictions remain,but tourists report there is little attemptby US authorities to check whether theyqualify for one of the 12 categories of

approved travel. Another order made iteasier for US companies to sell telecom-municationsequipmenttoCuba.

In late May, the administration for-mallytookCubaoff the listofstatespon-sors of terrorism. While largely sym-bolic in terms of helping US companiesdo business in the country, it is animportantstep in legitimisingrelations.

US officials say an agreement is closeon opening formal embassies — at themoment, the US has an “interests sec-tion” inHavana.

Despite the hype, most restrictions onUS companies remain. More substantialchanges will require Congress to startpeeling back the web of laws that makeuptheeconomicembargo.

“This is only the door cracking open,”says Peter Kucik, a sanctions specialistat the Inle Advisory Group in Washing-ton.“It is thebeginningof theprocess.”

How will Congress respond? One ofthe most surprising aspects of MrObama’s policy is how popular it hasbeen. Not only have polls shown broadpublic support for the push to normal-ise relations with Havana, but somehave shown a majority of Cuban-Americans infavourof themove.

In Congress, there has beenbipartisan support. On board the

plane to Havana in December thatbrought home Alan Gross — a US con-tractor whose release from a Cuban jailafter five years was an effective prereq-uisite for the Obama announcement —wasRepublicansenator JeffFlake.

But there is also a bipartisan group ofmembers of Congress and other seniorfigures who are bitterly opposed to anyfurther rapprochement with Cuba,including three potential candidates forthe Republican presidential nomination— senators Marco Rubio and Ted CruzandformerFloridagovernor JebBush.

In early June, the Floridian Mr Rubiosaid he would block efforts to appoint anambassador to Cuba if the administra-tion did not first introduce far-reachingpolitical reforms and settle billions ofdollars of legal claims over propertynationalisedbythegovernment.

Given such a climate over the idea ofsending an ambassador to Havana, fewanalystsareexpectingCongress tomakeany significant changes to Cuba sanc-tions legislation inthenear future.

As a result, the administration isdeveloping a longer-term strategy ofusing modest changes to build a case forrelaxing more restrictions. The changesto date have been designed to encouragethe sorts of private entrepreneurship

that escape the controls of the state —an oblique way of putting pressure onthe Cuban government but also ofshowing critics at home the potentialfor further engagement.

By making it easier for US companiesto export telecoms equipment to Cuba,the administration is clearly trying toboost the sort of internet access andother communications that might sub-tlyunderminepoliticalcontrol.

Last month, US-based IDT Corpora-tion announced that it had signed a con-tract with the Cuban telecom companyto provide direct phone links betweenthetwocountries.

After Mr Rubio used a recent Senatehearing to claim the Cuban governmentwould be the main beneficiary of moreUS tourists, Mr Flake brought out histablet to show off the new operation inCuba of Airbnb, the holiday home rentalsite. “If you just scroll down, they havenow more than 2,000 listings in Cuba,”he said. “Virtually all these listings arepeople intheirhomes.”

Ted Piccone, an expert on LatinAmerica at the Brookings Institution inWashington, says that Airbnb’s Cubanbusiness is a good example of “how UScompanies can do business in Cuba inwaysthatempowerCubanpeople”.

Reconnectedafter 55 yearsbut overturesdivide opinion

Diplomacy Renewed relations playwell in theUS— although notwith everyone, writesGeoff Dyer

Difficult call: President Obama(top) talks to President Castro inDecember; (below) US senatorMarco Rubio is a critic— Getty

Tuesday 16 June 2015 ★ FINANCIAL TIMES 3

Investing in Cuba

Contributors

Geoff DyerUS diplomatic correspondent

Richard FeinbergProfessor, UCLA San Diego

Marc FrankJournalist based in Cuba

Cardiff GarciaFT Alphaville reporter

John Paul RathboneLatin America editor

Jerry AndrewsCommissioning editor

Steven BirdDesigner

Andy MearsPicture editor

For commercial opportunities in print,digital and events, contact John Moncurejohn.moncure@ft.com or XimenaMartinez ximena.martinez@ft.com

Editorial content in this report isproduced by the FT. Advertisers have noinfluence over or prior sight of articles.

Reports are available at: ft.com/reportsFollow us on Twitter: @ftreports

Waves of foreign businessmen havewashed up on Cuba’s shores since thethawing of US-Cuba diplomatic rela-tions. They are following such promi-nent figures as the president of France,foreign ministers of Japan, the Nether-lands and Norway, the commerce secre-tary of Spain and the EU’s foreign policychief,FedericaMogherini.

Invariably, the delegations want to seethe new Mariel port and container ter-minalwestofHavana,andthesurround-ing Chinese-style special developmentzone.Theterminal ismeant to lureshipsfromarenovatedPanamaCanal,andthefree-trade zone is a would-be capitalistenclaveinastaunchlysocialistcountry.

But like waves receding from theisland’s beaches, the visitors have leftlittle in the sand. While some are look-ing to set up shop in the next few years,most await further evidence of a newCuban attitude, and that the change inUS policy will lead to more progress inthecontentiousrelationship.

The Mariel special development zoneis a metaphor for Cuba, a work inprogress whose future appears bothbright and clouded by risk. The termi-nal, built with Brazilian credit and man-aged by Singapore’s PSA, is poised toboom if the US embargo is lifted. Itanchors thezone,withacompetitive taxand customs regime. But this vast areastill lacks basic infrastructure, develop-ment and a competitive edge in terms ofproperty ownership, labour policy andthe legalenvironment.

In Mariel, as elsewhere in Cuba, inves-tors must go through a government hir-ing hall for labour, ostensibly designed

to protect Cubans from capitalist labourpractices. Investors pay the state inexchangeable currency, while the work-ersarepaid inpesos.

“Our companies’ business model is tohave total control of their employees,”said one Japanese diplomat after a visitby 30 companies. “They all adopted await-and-seeattitude.”

Eighteen months after the zoneopened, just six projects have beenapproved, all but one involving just afew million dollars, employing only doz-ens of workers and authorised by theCouncil of Ministers. That is in partbecause while the zone has a 60-dayapprovalprocess,onemust firstdevelopa joint plan with one or more ministries,whichcantakemonthsorevenyears.

Spanish hotel food supplier HotelsaAlimentación announced in April that itwould build a €6m factory at Marielemploying 50 workers. And CMA CGMof France is set to operate a 17 hectarelogistics centre on site. Both have beenactive inCubaformorethanadecade.

President Castro has reduced imports,cut payrolls and subsidies, and called onthe government to get its bureaucraticandfinancialhouseinorder.

Cuba is jugglingvarious initiativesandtrying to play by established interna-tional rules as it seeks billions of dollarsin investments. The initiatives include:

improving relations with the US; negoti-ations to normalise relations with theEU; restructuring debt; Mariel; taxincentives for investors; and expansionofaprivatesectorandmarketforces.

TheCommunistpartyadoptedacom-prehensive reform plan in 2011 thatpledged to “enhance Cuba’s credibilityin its international economic relationsby strictly observing all the commit-ments thathavebeenentered into”.

While companies inspect Mariel, thedignitaries leading the delegations haveheld talks with Cuban leaders, where re-engagement with the global economyanddebthavebeenhighontheagenda.

The reform plan calls for hastenedrescheduling of Cuba’s foreign debts andimplementation of “flexible restructur-ing strategies for debt repayment” soon.Inrecentyears,Cubahasrestructureditsdebts with Russia, China, Japanese com-mercial creditors and Mexico as a prel-ude to more investment, and has madepaymentsontimetosuppliersandcredi-tors. The Economist Intelligence Unitputs the debt at $25.8bn, some $8bn ofwhichrepresentsdefaulteddebt.

When François Hollande, the Frenchpresident, visited Cuba last month, hetold companies in his delegation thatHavana and the Cuba Working Group ofthe Paris Club of western creditornations had reached agreement on theamountowedfroma1980sdefault.

“The first phase is over,” Mr Hollandesaid, referringtotheworkneededbeforeformal negotiations start. Cuba owesParis Club members about $15bn indefaulted debt, interest and servicecharges. France, Japan, Spain and Italyholdmuchof it.

The Paris Club negotiations areexpected to begin before the end of theyear and will be the first multinationalattempt at restructuring in 15 years.Success would open the way to settlingold commercial debt held by the Lon-donClubandeventuallyaccess tomulti-lateral lending organisations if the USliftsoppositiontoCuba’smembership.

Newport zone harbours big ambitionsDevelopment

A would-be capitalist enclavein a socialist state, Marielis emblematic of change inCuba, writesMarc Frank

Eye to the future: the cranes of Mariel

“There was a kind of euphoria afterlast December,” says Pedro Freyre, whochairs the international practice at lawfirm Ackerman and advises UScompanies on Cuban issues. “But now,companies are realising that it makessense to kick the tyres first beforeinvesting in Cuba.”

Despite improved relations sincePresident Obama’s announcement lastyear, US companies seeking to investin Cuba still see more roadblocks thanwelcome signs. The US embargo ontrade and travel remains and requiresan act of Congress to overturn. Butthis is not the only impediment.

Most of Cuba’s 11m citizens arevery poor, which limits marketopportunity, and infrastructure iscorroded. Gary Hufbauer, fellow at thePeterson Institute for InternationalEconomics and co-author of EconomicNormalization with Cuba, emphasisesthe flawed incentive structure of thestatist model. Investment is inefficientbecause of bad data and a workforcewith little experience of big projects.

The distorting effects of theembargo and communism have alsoproduced idiosyncratic obstacles forUS companies.

Taking Cuba off the government’slist of terrorism sponsors makes iteasier for financial institutions to offerservices there. Yet doing so wouldcontinue to pose a regulatory risk forUS banks, which might worry abouttheir liability if they process acustomer transaction that runs foul ofthe embargo or laws that governmoney laundering.

MasterCard removed its block onthe use of its US-issued credit cards inMarch, but the banks that issue thecards decide whether they will work.They have declined so far, as the riskmay be small but is still hard to justify.

It is a balancing act, says YosbelIbarra, co-chair of the Latin Americapractice at Greenberg Traurig, the lawfirm. “What are the bank’s compliancecosts? How much money can bemade? It’s complicated. Though I alsothink that it’s just a matter of time.”

Telecommunications companiescould try to capitalise sooner. IDT Corpbecame the first US company to offerdirect, long-distance telephone calls toCuba after a deal in March withETECSA, the state telecoms company.

But ETECSA will not allow IDT tooffer other services, such as sendingtop-up mobile minutes to relatives inCuba, and fees imposed by the Cubangovernment for calls from the US aresome of the highest in Latin America.

To the rest of the world, tourism isCuba’s most appealing economicsector, and it is growing. The numberof tourists climbed by 36 per cent inthe first quarter from the 2014 figure,and available bedrooms at hotels orprivately run casas particulares havebeen hard to find lately, according toeconomist Omar Everleny of theUniversity of Havana.

Arnold Donald, chief executive ofcruise line Carnival, cites “pent-updemand” and the country’s proximityto the company’s main port in Miami.Yet cruises to Cuba almost certainlycannot begin until the embargo, whichprohibits American tourism to Cuba, islifted. Certain categories of travel arepermitted — for journalistic activity,cultural exchange, to visit family —but it is unrealistic to fill a cruise shipwith people who satisfy these criteria.

A different set of challenges awaitsUS hotel groups, should they try to setup in Cuba, says Mr Hufbauer: “AnyUS company [considering future

investment] must do its own strategicanalysis about whether it willeventually want to compete withstate-owned enterprises or partnerwith them.”

The state typically insists on havinga majority stake in partnerships withforeign companies. And for now,Cuba’s dual-currency systemeffectively functions as a tax on thissector (see page 4).

Similar obstacles arise in othersectors, and they all point to the sameconclusion.

The promise of closer diplomaticties is exciting, but without an endto the embargo and a furtherliberalisation of the Cuban economy,US corporates can only wait, watchand prepare.Cardiff Garcia

US companies Still facing investment hurdles

S erafín Blanco has beendescribed as the FloridaCuban émigré community’sequivalentofSamWalton, thefounder of Walmart. But the

merchandise he sells mostly ends upback in Cuba, which he has not visitedsince he left nearly 50 years ago as ateenager,andwherehehasnostores.

“People in Cuba still need a lot ofthings they can’t find,” he says, “andtheydeserveagoodlife.”

Mr Blanco owns Ñooo! Que Barato!(whichroughlytranslatesto“Wow!Howcheap!” though some suggest a coarserinterpretation), a store spanning 40,000sq ft in the working-class city of Hialeah,nearMiami,wherethree-quartersofres-identsareCubanorCuban-American.

He is among a group of local vendorswho are famous to visitors from Cubaand their Florida relatives, selling cheapitems that are in short supply on thecommunist island and expensive for theaverage Cuban. These retailers, like theCuban-Americans who send more than$2bn in cash remittances annually, haveprovided a source of capital for familiesand a growing number of privately runsmallbusinesses inCubaforyears.

“Hialeah is the blue-collar underbellyofavibranteconomy,”says JoeScarpaci,executive director of the Center for theStudyofCubanCultureandEconomy.

Mr Scarpaci, who recently wrote anarticle about the economic ties betweenHialeah and Cuba in the journal Focuson Geography, sees a day when thesevendors can use their existing brandrecognition to open franchises inHavanaifCubaliberalisesenough.

For now, the items sold by these out-lets reflect the oddities of the Cubaneconomy and highlight the importanceof thiseconomic lifeline.OwingtotheUSembargo on trade and historic ties withRussia, for instance, the modern carsused as taxis are Russian, not American.

Often the spare parts are scarce. FabiánZakharov, whose father is Russian andmother is Cuban, imports the parts fromRussia to his shop in Hialeah and sellsthemtoCubancustomers.

“It’s very common for people to asktwo questions when they come to me,”he says in Spanish. “First, how muchdoes the part weigh? And second, howmuch are the taxes on it?” He refers toarbitrary charges imposed by Cuba forimporting certain parts and the rulesgoverning the amount of cargo that canbecarried intothecountry.

Internet access in Cuba is unavailableinthehomeandprohibitivelyexpensiveoutside it. Yoel Juarez therefore sells oldGateway laptops for $150 along withdial-up modems that Cubans can use togoonline illicitlyat theirworkplaces.

Mr Blanco sells reusable diaper pins,which appeal to Cubans who cannotafford or find disposable diapers. Schooluniforms for Cuban children are alwaysin demand and easy to find in Hialeah,where students wear burgundy outfits that closely resemble those of theircounterparts inHavana.

These stores often pack items tightlyintoaneasilycarriedbundle.Directmailbetween the US and Cuba remainsbanned, and the packages are normallytaken to Cuba in person on charterflights that shuttle between Florida andCuba. When families and businessmencannot make the trip and prefer to avoidthecommissiontakenbytheCubangov-ernment on the shipment of goods, theysometimes hire a mula (mule) as aninformalmessengertodeliverthem.

The commerce that connects Hialeahand Havana is in contrast to the frac-tiousness — perceived and real — thatlong defined the relationship betweenCubans and their former compatriotsnow in Florida, the exiles whose busi-nesses and homes were expropriated bythe Castro regime soon after its revolu-tion in1959.

Those tensions remain but are noweasing. Hardline Cuban-Americans,who advocate a policy of isolating Cubaand the continuance of the US embargoon trade and travel, are ageing and los-ing political influence. Meanwhile theirchildren and grandchildren prefer a

better diplomatic relationship withCuba, as do the Cuban immigrants whoarrived more recently.

Such attitudes are increasingly visibleon both sides of the Florida Straits. InCuba, 97 per cent of citizens believe thata normalised relationship with the USwould be good for them, according to arecent, secretive poll conducted by theconsultantsBendixenandAmandi.

“I’m not going back to Cuba unless theCastros are gone,” says Angél Elías, wholeft three decades ago and considersFlorida home. But on a Thursday after-noon, he is happily escorting his elderlymother through the aisles of Ñooo! QueBarato! She lives in Matanzas, Cuba, andwill return with clothes and toys thatAngél buys for her to give to his siblings,niecesandnephews.

Such scenes are typical here, withfamilial ties and economic needs bridg-ing the gaps imposed by politics andgeographicseparation.

“It’sabeautiful story thatmostpeopledon’t have a clue about,” Mr Scarpacisays. “And the moral is simple: bloodalwaystrumpspolitics.”

Straits dealing bridges many gapsDiaspora Retailers inFlorida cash in on itemsneeded by customersacross thewater,writes Cardiff Garcia

Primary colours: Serafin Blanco, founder of the Ñooo! Que Barato! store, with school uniforms in Cuban hues — AP

Gone, not forgottenWhat now for legal claims byCubans and Americans whohad property expropriated?ft.com/investing-in-cuba

4 ★ FINANCIAL TIMES Tuesday 16 June 2015

Investing in Cuba

E arly on a sunny Sundaymorning in Havana, fewpassers-by or police arearound to witness the twomen at work. They emerge

from the back of a state-run restaurantwith cases of beer that they carry to aprivaterestaurant twodoorsaway.

They return for a second load ofcrates, soft drinks this time, and thenbackagainforsomebottledwater.

Withinayear this scene,at leastat thisrestaurant, may not be repeated. That isbecauseit isoneof300state-runHavanarestaurantsslatedtobecomeaco-opera-tive, run and owned by its workers — amove that, in theory, will mean staff willnotsteal fromthemselves.

But the move also means that the pri-vate restaurant the two men were sup-plying will have to look elsewhere for itsstolen beverages, or purchase themfrom state retail outlets at a minimum240 per cent mark-up — a potentiallycrushingblowfor itsbusinessmodel.

Both of these changes capture theessence of the Cuban government’s lat-estattitudetonon-statebusinesses.

In May, for example, tourism ministerManuel Marrero publicly praised theprivate sector for its “authentic Cubancuisine and hospitality” and said theministrywas linkingupwithrestaurantsandcaterers, landscapersandfarmers.

The statement would have beenunthinkable a few years ago and is astrong indication that the governmentwillnotbacktrackoneconomicreforms.

But, while the Communist party hascreated more space for non-state busi-ness, it is clear that it also wants state-sanctioned co-operatives to dominatethe secondary economy rather than

private sector entrepreneurs. Almost500,000 Cubans are registered as self-employed workers, although the vastmajority simply ply their skills as small-scale freelancers.

It is a key difference between Cubaand Asian communist societies, such asChina or Vietnam, that have undergoneeconomic transition by prioritisingmarket forcesandprivateenterprise.

Co-ops are preferable to other non-state solutions, says economy ministerand politburo member Marino Murillo,who is in charge of the economicreforms.“Theyareamoresocial formofproduction.”

Some of the co-ops form spontane-ously, although most are fashioned fromsmall or medium state businesses thatrent state premises. Examples includeconstruction co-operatives, contractorsand tradesmen who are winning statecontracts for everything from hospitalrepairs topublichousingconstruction.

“The construction co-operative LaConcordia . . . has become one of thosepreferred to carry out repairs and main-tenance in the public health sec-tor . . . winning contracts to work onhospitals, clinics and homes for the eld-erly,” a National Information Agencydispatchrecentlystated.

State-run Radio Reloj also recentlyreported that Holguin University ineastern Cuba was contracting out to “90actors in the non-state sector”. The Uni-versity’sdeanjustifiedthemove, saying:“when a pipe breaks, I can’t wait aroundtoget it fixed”.

His statement was a thinly veiled crit-icism of the inefficient state sector. Butthe change does not signify a whole-hearted embrace of the private sector,

as co-operatives will be favoured overprivate businesses with tax breaks,access to wholesale supplies and subsi-dies inexchangefor lowprices.

A transport co-operative in Havananow has more than 50 minibuses and100 members. It charges 5 pesos a ride;overcrowded public buses charge 20centavos, while private taxis from 10 to20pesos.

Then there are Havana’s restaurantco-ops. A handful were ordered tobecome co-operatives a year ago in apilot now set to become generalised,according to a mid-level Havana officialwho asked not to be identified. He saysthey discovered the co-ops could notsurvive without access to wholesale sup-plies,eventhoughprivaterestaurantsdo(oftenbyresortingtotheblackmarket).

“We are setting up six wholesale loca-tions in Havana for the new co-opera-tives,” he says, adding they were not

open to private restaurants. “If the man-ager [often the current state administra-tor] is ambitious, creative and energeticthe co-operative can work. But if he orshe is stuck in their old state ways, theydon’tandwehavetointervene.”

About 500 non-farm co-ops operate inCuba,fromrestaurantsandcaféstowhole-sale and retail produce markets, clothingand furniture manufacturers, a shrimpfarm, body shops, recycling operations,computing services, beauty salons, night-clubsandevendealersinexoticbirds.

They generally perform better thanstate firms and members earn more,despite heavy taxes, a state monopolyon foreign trade and a generally dys-functionalsoviet-styleeconomy.

But economists point out that in aland where politics often trumps eco-nomics, the co-ops’ relative successposes a question: would private busi-nessesperformbetterstill?

Running repairs:state experimentswith co-operativebusiness modelReforms From garages and restaurants to dealersin exotic birds, co-ops are growing. ByMarc Frank

Smoothed over:fixing a soviet-made Lada ata Havana garageco-operativeReuters

What might Cuba look like a decade or two from now, whenits ageing revolutionary leadership has faded from view?Consider the remarkable economic success of Vietnam, oncea highly centralised planned economy as Cuba is today.

Vietnam has evolved into a hybrid system with a dynamicinterplay between a hefty public sector of state-ownedenterprises, a vibrant and expanding private entrepreneurialclass and an influx of global brands: the likes of Nike, Honda,Canon and Samsung employ millions of Vietnamese.

Vietnam’s surging economy is also well diversified,exporting rice, fish and minerals, hosting tourists andparticipating in cross-border manufacturing supply chains.Domestically, the construction and real estate businesses —driven by foreign and domestic investors — are booming,and efficient telecommunications empower the ambitiousVietnamese middle classes to fixate on Facebook.

By the standards of developing countries, Vietnam’s bigcities are refreshingly people-friendly. Hanoi is proud of itsgreenery while Ho Chi Minh City is attractively remodellingthe banks of its winding canals. Abundant affordable publichousing prevents the shocking slums that surround so manyAsian and Latin American population centres. Vietnameseeateries offer a healthy local diet of vegetables, fresh fish andrice noodles, and locals drive fuel-efficient motorbikes.

But Vietnam has weaknesses. Corruption is rife. Inequalityis glaring and widening. People complain about poor-qualitysocial services. And many deeply resent the lack of politicalfreedoms and the monopoly of the Communist party.

So what can Cuba learn from Vietnam?The government could relax the constraints it puts on

entrepreneurs. President Raúl Castro could transform hiswords of welcome to foreign investment into rapidauthorisations of tangible capital projects. State-owned firmscould partner with domestic and international businesses.

As Vietnam did, Cuba could quickly shift from being alarge net importer to a net exporter of agriculture andfisheries. It must allow farmers to earn healthy profits, whilecreating distribution networks that supply essential inputsand that market foodstuffs at home and abroad.

Cuba has the requisite resources — natural and human —and the location to create a balanced economy. It has fertilesoil. Capable scientists have begun building a biotech clusterand the many computer engineers await opportunities thatwill come with global interconnectedness. The island couldagain become a shipping and logistics hub. And exotic Cubacould draw a variety of tourists, offering urban culture, eco-resorts, maritime sports, as well as traditional sun and surf.

If Cuban cities are to preserve their charm and liveability,urban planners must be empowered to preserve publicspaces and ensure plentiful affordable housing and attractivepublic transport. Already, the brilliant if slow-paced renewalof Havana’s Old City is apromising precedent.

Avoiding the pitfalls ofcorruption and inequalitywill be difficult. But Cuba hasadvantages: a well-educatedand politically aware middleclass will probably demandbetter governance once it hasinternet connections andsocial media. With a westernlegal tradition, Cuba may bemore open to monitoring bycorporate auditors and non-profit watchdogs.

As Cuba enlarges its narrow socialist wage differentials,inequalities will grow. But socialist mores run deep and racialand gender divides have narrowed. Debates about marketefficiency and equality can be heard in seminar rooms and oncity streets. With its superior social services, Cuba hasanother edge. But its universal education and healthcarefacilities have deteriorated and only a more vibrant economycan generate the resources that high-quality services require.

Vietnam’s Communist party can survive in anauthoritarian Asia, but can a one-party state endure in thedemocratic Caribbean? Only time will tell, but even inVietnam, economic pluralism has opened space for a moretolerant and evolving political system.

As it evolves into a more open and market-driven economy,Cuba can improve upon Vietnam’s experience. Cubans canstudy Vietnam’s mixed and diversified economy, whileeschewing rampant corruption and offensive inequalities andconserving impressive social achievements.

Richard E. Feinberg is professor of international political economyat the University of California, San Diego, non-resident seniorfellow at the Brookings Institution and author of “Soft Landing inCuba? Emerging Entrepreneurs andMiddle Classes”.

Could communistisle beVietnamin theCaribbean?

As it evolvesintoamoreopenandmarket-driveneconomy,Cubacan improveuponVietnam’sexperience.

Cuba is likely to eliminate its dualcurrency system by the end of this yearin a first step to simplifying a multipleexchange system that investors view asaseriousobstacle tobusiness.

Cuba currently operates two curren-cies: thepeso(CUP),whichlargelycircu-lates in the domestic economy, and theso-called convertible peso (CUC). Resi-dents and tourists can purchase CUCs atgovernment exchange offices at a rate ofonefor25CUP($0.04).Stateandforeigncompanies must exchange CUCs at theofficial one-to-one rate. Neither cur-rencyisconvertibleoutsidetheisland.

“It is my understanding that the CUCwill be removed from circulation beforethe next Communist party congress inApril,” says a Cuban economist withknowledgeofreformefforts.

The move would continue PresidentRaúlCastro’sefforts to introducemarketelements and remove price distortions,and improve accounting transparencyandtheefficiencyofstatecompanies.

The economist adds that the cur-rency reform was one of more than 300reforms adopted at the last party con-gress, “and Raúl wants them all done bythen [April]”.

In a country where the state controlsmore than 75 per cent of the economyand most wages and local goods arepriced in CUP, the CUC is used in tour-ism, to price imports such as gasoline,andalso inupscaleeateriesandstores.

Until recently, the currencies oper-ated separately, with CUC used by those

with access to foreign exchange, or whochanged CUP for CUC to shop in better-stocked stores. But there are signs ofconvergence. Many previously CUC-only outlets now accept either. At thesame time, a new system of CUP pricingand accounting is being rolled out.

BiggerCUPnotes, rangingfrom200to

1,000 pesos, went into circulation thisyear, and anyone can go to state-runCUC stores and buy a fridge for 1,000CUCSortheequivalent25,000CUPs.

The prospect of reform has unsettledCubans since the announcement inOctober 2013 of plans to do away withthe dual system. Better-off Cubans haveturnedtoothercurrencies.

“It is all funny money, only the dollaror euro are safe,” says the owner of a pri-vate Havana restaurant. “I change whatIcanandsenditoutof thecountry.”

There has been talk of return to a sin-gle currency since Cuba legalised thedollar in 1994 and let the CUC circulatealongside the peso. At the time, the dol-lar traded at 150 pesos on the black mar-ket,comparedwithsevenin1989.

Whileunifyingthecurrency—dubbed“day zero” — is a step forward, it is afar cry from full convertibility, whichtypically requires the backing of large

hard currency reserves, often supportedbyInternationalMonetaryFundloans.

Cuba is not a member of the IMF. Nordoes it report its holdings of foreign cur-rency, but the Economist IntelligenceUnit estimates it has $11bn of reservesagainst a forecast 2015 current accountdeficit of £524m as of May 20.

Economists say currency unification,by itself, ignores the real issue: a devalu-ation of the official exchange rate of oneCUPtothedollar, ineffectsince1959andusedbymanystatecompanies.

“A real monetary reform implies asignificant devaluation of the CUPexchange rate,” says Cuban economistand monetary specialist Pavel Vidal, ofJaveriana de Cali University in Colom-bia. “This would change the financialsituation of state companies — some ofwhich would fold — improve competi-tiveness of the sectors operating withinthe global economy and promote more

transparency in financial accounts.”Mr Castro says there will be no shock

therapy. Central bank officials have toldforeign businesspeople that devaluationwill proceed cautiously and only in tan-demwithastrengtheningeconomy.

For now, the government will con-tinue to tinker in the hope of improvingthe trade balance, stimulating local pro-ductionandpayingworkersmore.

For example, the state-run sugarmonopoly receives 1,000 CUP, insteadof 100 CUP, for every $100 of sugarexports, letting it invest and pay work-ers more. In the Mariel special zone (seepage 3), the state will pay workers 10CUP for each $1 foreign businesses paytheiremployees, insteadof1CUP.

The state-run tourism industry alsobegan buying food direct from farmersin 2013, instead of via state distributorsor imports. Hotels now change one CUCper10CUPtobuylocalproduce.

Government likely to bring an end to dual currency systemMoney

The change would be partof reforms to remove pricedistortions, says Marc Frank

Technically, it is called a skills mis-match, and Cuba has it in abundance.Take the Havana taxi driver who tellsyou he is in fact a surgeon, or the wait-resswhois, in fact,aphysicist.

Skill mismatching represents the costof misinvested human capital, and thuseconomic inefficiency. But the state andsome foreign investors want to turn itinto a boon, and the ground source of afuture“knowledgeeconomy”.

“Cuba’s knowledge economy isstronger than people often credit,” saysFaquiryDiazCala,aCubanentrepreneurnow living in the US. “It has one of thehemisphere’s highest literacy rates, oneof thehighestcollegegraduaterates,andPhDs in hard sciences . . . One shouldthink of Cuba as a start-up nation, withsomesimilaritiestoIsrael.”

Even if the comparison is a big stretch,Cuba’s health sector holds immediate

promise and other sectors, such as com-puting,havealsodrawnforeigninterest.

The government has made medicalservices a money spinner: some 12,000Cuban doctors work abroad in Africa,30,000inVenezuelaandabout12,000inBrazilandelsewhereinLatinAmerica.

Their services are sold by Cuba, whichpays the doctors a smaller fraction. Thisbrings inbillionsofdollarsayear—asys-temcriticscalla tacit formof indenturedlabour, although medics earn moreabroad than at home and enjoy perks ontheir return. Some reportedly bribe offi-cialstobumpthemupwaitingliststogo.

Now, foreignhealthgroupswant togetin on Cuba’s commercially untappedpharmaceutical expertise. In May, USresearch centre Roswell Park agreed tobegin clinical trials on a Cuban-devel-opedlungcancervaccine,Cimavax.

“We know [the drug] is not an easyone to develop clinically,” said PhilippePouletty, chairman of French biotechcompany Abivax. “But it is good newsthat a US cancer institute evaluates itand that the FDA [US Food and DrugAdministration] builds confidence inCubanproducts.”

Abivax has operated in Cuba for fiveyears, building relationships withresearch institutes, using investments

and agreements to trial and commer-cialise Cuban drugs — such as a vaccineto help chronic hepatitis B sufferers —and also to develop new drugs.

Mr Pouletty, a venture capitalist andqualified doctor, says that if Cuba’s bio-tech capability was floated into a listedcompany, it might be worth $20bn. Buthe stresses: “We don’t think it is the big-gest cheque that persuades the Cubans.Theyare lookingforsustainablegrowth;short-term, medium-term and particu-larly long-termsolutions.”

HesaysCubansareslowlyfeelingtheirway into new language such as “spin-offs”, and are still getting used to notionssuch as foreign joint ventures requiringthemtosurrenderfullcontrol.

But he adds that he is “pathologicallyoptimistic” and points to a new “SiliCu-ban” advisory board, designed to helpCubans develop their drug industry and“where all things can be said withoutcensorship”. Another positive sign is theseparation three years ago of the threemain research institutes into a holdinggroup,BioCubaFarma,amovethat freedthem from the Ministry of Health’sheavybureaucratichand.

Computer programming is also prom-ising. Local computers are so old andslow that Cubans have become adept at

writing lean software programs thatrequire little memory to run —a skillideal for writing mobile apps. The statehas commercialised some of this exper-tise through Datis, which sells comput-ing and internal security expertise toallies such as Venezuela that use it foradministration,suchasidentitycards.

Privately harnessing such knowledgeis another matter. Difficulties are com-pounded by poor internet availability, abarometer of Cuba’s willingness toembracethe“knowledgeeconomy”.

The government says it wants half thepopulation wired by 2020, to boost pro-ductivity. Yet it is reluctant to permitsuch a powerful tool as it would meanceding control. There have been smalltrials of public WiFi, but most Cubanscan only get online for $4.50 an hour atinternet cafés in hotels, a quarter of theaveragemonthlystatewage.

On a recent visit to Miami, organisedby the Cuba Study Group, a US organisa-tion that promotes US-Cuban engage-ment, island entrepreneurs were agog atthe possibilities of online retail and ruedCuba’s poor connectivity. Airbnb’sCubanoperations, forexample,areoftenrun by a relative abroad, who communi-cates internet bookings with the guest-houseoperatorviatelephoneorSMS.

Moves to unlock the nation’s wealth of knowledgeSpecialist skills

With strengths in scienceand computing, Cubans havemoney-spinning expertise,writes John Paul Rathbone

‘One shouldthink ofCuba as astart-upnation,similarto Israel’FaquiryDiaz Cala,entrepreneur

OPINION

Richard EFeinberg

Ending? A Cuban holds CUP and CUC