Remarks of The Hon. Otto J. Reich
President, US-Cuba Business Council
Before the American Chamber of Commerce of Cuba in the United States
Washington, D.C.

November 13, 2000

Is Cuba a commercial opportunity or a risk? The answer is yes. To both questions.

As you can see from the table prepared by Tom Cox, US-Cuba Business Council Vice President, a free-market Cuba would once again be a great opportunity for US business, as it was once. By the way, I am indebted to Tom Cox for the research and drafting of this presentation.

We can review this table later, but the bottom line is that the US Cuba Business Council believes that the foreign economic potential of a free-market Cuba represents over $15 and a half billion within five years after a democratic transition. Even in the first year, we estimate that economic activity will double from today's. If anyone thinks this is an exaggeration, keep in mind that using Cuba's 1958 trade and investment figures and projecting only population growth and average GDP growth rates for Latin America, Cuba would have foreign exchange receipts of $16 billion, almost exactly our five year projection. Or, as an example, in 1958 Cuba's exports were roughly equal to Argentina's. And you know where Argentina is today.

Those of you who know me know my position on doing business with Castro. I believe it is not only a commercial mistake, but it is a moral error. While I have been told by a Canadian executive doing business in Cuba that morality is not a factor in his decisions, I would like to think that most business executives avoid immoral ways of making money. Doing business with a regime which does not respect any human right is immoral, as well as commercially short-sighted. Nevertheless, since this is a Chamber of Commerce, I will concentrate my remarks today on commercial topics, including:

• Measuring trade opportunities in Cuba.

• Measuring Foreign Investment in Cuba.

• What are US Corporate Perspectives on Cuba.

• Perils of US Government-Sponsored trade with Cuba.

• How would lifting the US trade embargo on Cuba under current conditions alter Cuba’s bleak commercial environment?

• Potential Costs of US-Cuba Trade Normalization Preceding Reform in Cuba.

First, let me say that while popular in some circles, blaming US policy for Cuba's ills is simply wrong. US policy does not determine whether US commercial interests can benefit Cuban citizens or foster economic development in Castro’s Cuba. The Castro regime controls and directs the nature and scale of all foreign interaction with Cuban citizens.

And more than any other regime in the world, with the possible exception of North Korea, the Cuban government has sought to destroy the purchasing power of its citizens and to obstruct their efforts to produce goods and services for the domestic economy.

It is the policy of the Cuban government to curtail the development of Cuba’s domestic economy in both production and consumption, and to limit the scope of joint venture involvement in the Cuban economy.

It is not difficult to observe how pervasive and effective the Castro regime has been in implementing its policy of deliberate economic implosion. Let me give you some examples:

Article 10 to the Cuban constitution authorizes the Cuban government to compromise confidential business information on all joint venture and association contracts. Cuba’s government-run registry of foreign joint ventures is not the only means available to the Cuban government to steal business information. One example is Canada’s FirstKey Project Technologies, which envisioned building a $350 million electric power plant in Cuba. The Canadian government provided FirstKey with seed money for the project. FirstKey chairman Clarence Boudreau notes that once extensive plans were completed, the Cuban government "suck[ed] out all the information and drawings" from the project and shopped the deal elsewhere.

This venture also illustrates how government-sponsored trade with Cuba generates perverse incentives to implement deals with Cuba that are not based on commercial merit.

Furthermore, the Cuban government’s war against its own domestic economy is about to heat up as the Castro regime has indicated that measures to further alienate foreign investors and to siphon off cash held by Cuban citizens are on the way.

Cuba’s National Bank president warns of a rollback of "dollarization" of the economy. Cuba scholar Carlos Alberto Montaner notes that the Cuban government has been trumpeting plans to exchange incoming dollars for a "convertible peso" for use on the island which would be exchanged at an absurdly overvalued rate of 1 peso to 1 US dollar. Of course, widespread usage of this currency would require elimination of the current peso, which is exchanged on the street at some 22 pesos to one US dollar. Once again, Cuban citizens forced to exchange US dollars (obtained through remittances from US relatives) for the "convertible peso" at a 1-1 exchange rate would in effect suffer a confiscation of some 95 percent of their real wealth.

Meanwhile, foreign investors are getting the news that international law offices are being booted out of Havana, the pilot sale of some real estate to foreign interests has been suspended, and the Cuban government is warming to the exercise of its "preferential right of redemption" on foreign contracts.

These components of Cuba’s deliberate economic implosion policy have prompted the sudden sobriety among prospective investors on the island. One Canadian-German investor, Arnold Guettler, citing Cuban government theft of $1 million worth of his firm’s machinery in Havana asserts "people only start telling the truth about [business in] Cuba when they get screwed." But now such expressions are more readily volunteered.

No foreign firm has been as relentlessly euphoric about trade with Cuba as the Canadian firm Sherritt International. In 1996 Sherritt raised $675 million for speculative investments in Cuba and other ventures.

With investment cash safely in tow, Sherritt CEO Ian Delaney has suddenly discovered that "there is a limit to the rate that you can invest in Cuba." A full $625 million of the $675 raised remain outstanding and investments in Cuba have ground to a halt.

Similarly, Beta Gran Caribe Ltd. a London-based fund focusing on Cuba has been searching since February 1995 for Cuba investment opportunities but has been unable to commit more than one-fourth of its small $39 million portfolio to investments on the island.

Prospective US investors entering Cuba under current conditions would learn the same lesson. As long as the Cuban government adheres to its current policy, no US trade policy initiative toward Cuba will have any significant prospect for increasing commercial opportunity or economic development on the island.

Do you still think Cuba today is an opportunity? There's more. From a strictly bottom-line business perspective, Cuba has no peer as a hostile environment for commerce. Institutional Investor ranks Cuba at the bottom of the heap below Haiti as an investment risk. Euromoney has pegged Cuba as the world’s worst investment option, bar none. The Heritage Foundation/Wall Street Journal Index of Economic Freedom also cites Cuba as an unparalleled commercial disaster area. It’s not hard to ascertain the reason for this ranking.

Virtually every official and commercial credit window has been closed to Cuba. Cuba has refused to meet interest payments to commercial creditors since 1986. Cuba’s total outstanding debt exceeds $11 billion. Net capital inflows to Cuba have evaporated. By 1997 long and short-term financing totaled $15 million. Capital inflows have increased to some $200 million in 1998, yet, as banking and diplomatic sources note, they were provided largely by official creditors free to waive lending standards for commercial risk.

Given that Cuba must pony up 15-20 percent interest to attract such loans at a time when its trade balance is mushrooming and its export earnings have cratered, it is clear that debt service remains a serious problem for Havana. Cuba’s 1999 trade deficit, according to Cuban official data, was an eye-popping $2.8 billion, nearly double the amount of Cuba’s total export revenues. Cuba’s cumulative 1996-1999 trade deficit totals $10.75 billion. Debt service on that amount at current rates available to Cuba would require more than Cuba’s total annual export revenues.

As a sovereign risk, particularly from the US perspective, Cuba knows no equal. The sum total of Cuban government confiscations of some 5,911 certified US properties worth $1.8 billion in 1972 dollars outstrips the value of confiscations for the rest of the world combined. Government authority to confiscate assets is entrenched in the constitution, particularly Articles 16, 17 and 18. Unlike China and many other repressive command economies, Cuba offers no viable option for third-party arbitration on contract disputes and prospective US investors would have no protection through a Bilateral Investment Treaty, or intellectual property rights agreements with Cuba.

So it is clearly Cuban policy, not US policy, which is responsible for the economic implosion on the island.

In fact, most international trade and investment activity with Cuba is not driven by strictly commercial considerations or requirements. Rather it frequently involves transactions that distort or eclipse normal commercial trade and investment calculations. Such transactions include:

Foreign Investment in Cuba.

Each of the above mechanisms facilitating commerce in Cuba leads to distorted estimates of the actual amount of foreign investment in Cuba and provides a misleading picture of commercial opportunity on the island. Cuban estimates of cumulative foreign investment in Cuba since 1992 envision totals as high as $6 billion by including announcements of non-cash equity investments that failed to materialize, such as the Grupo Domos telecommunications "investment" in Ectesa.

Estimates citing a more sober total of $1.7 billion include foreign venture "commitments" that have yet to be placed on the island. It is difficult to discern how much of that total represents actual foreign direct investment, as the term is understood in developed, free market economies.

Yet, even if one were to take at face value the Cuban government estimate of 1999 direct net investment of $205 million, for example, it must be recognized that little of that investment total is based on strictly commercial criteria. The bulk of such investment is tied to government-sponsored trade and investment, official foreign lending and debt-equity swaps unrelated to commercial risk criteria.

Measuring trade opportunities in Cuba.

Excluding "trade" propped up by government subsidies or debt-swap schemes, Cuba must have hard currency to implement legitimate trade deals.

After all, who would trade with Cuba if payment had to be accepted in Cuban pesos?

Cuba’s export earnings are the primary source of cash for transactions with foreign firms.

And unlike Cuban government estimates of Cuba’s gross domestic product, national income, tourism earnings and other data using artificially inflated and largely meaningless peso valuations --- export revenue is largely derived from hard currency transactions with nations utilizing more reliable trade data. In short, it is harder for the Cuban government to cook the books regarding export earnings.

By contrast, official estimates of revenue from tourism are particularly misleading. Estimated 1999 gross revenues of some $1.9 billion include inputs from foreign supplier, management, and transportation firms. Because this is enclave "apartheid" tourism, there are no domestic retail businesses to pull effect tourist dollars. Service account revenue from this kind of tourism yields real net revenues of barely 25 percent of the gross (see research by tourism experts Francois Simon and Nicholas Crespo) yielding only $475 million – about half the roughly 40 percent net cited by in official figures.

Similarly, Cuban government capital account figures are very hazy. Official figures on hard currency debt do not tie in to capital account flows and the "Other" category for capital flows leaves ample room for cash derived from off-the-books or illicit activity and vague measurement. Cuba remittance and hard currency reserve data are wrapped in an impenetrable cloud of secrecy.

Not surprisingly, Cuba’s export revenue data provide an exceedingly bleak outlook for international trade (export and hard currency import) opportunities.

In 1989 Cuba’s export revenues totaled some $5.3 billion, according to Cuban government figures. By 1999 export revenues evaporated to a microscopic $1.46 billion. By comparison, that is barely one-quarter of Florida Power and Light Company revenues last year. And since 1996, when the Cuban government said the economy was finally on the rebound, export revenues totaling $1.9 billion in that year have actually suffered a 23 percent decline.

Cuban Purchasing Power. Due to the success of the Cuban government in blocking the creation of small businesses, independent agricultural employment, and legal impediments on commerce, the Cuban economy offers a virtually non-existent consumer market. Even by Cuban government estimates of employment, which include underutilized state labor, only 45 percent of Cuban citizens over 20 years old are employed. In 1999, according to labor analyst Efren Cordova, state sector employees in Cuba earn a mean average of 200 pesos per month – or some US $10 per month at current real exchange rates. A monthly wage in Cuba would not be enough to cover a typical family dinner at Burger King. The total payroll income of all 3.6 million Cuban workers, in US dollars is a paltry $392 million [22 pesos = 1US$]. By comparison Cuba’s national payroll total equals the payroll for the baseball teams in the Eastern Division of the American League.

By contrast, the small outpost of 150,000 self-employed workers in Cuba, (based on a recent estimate from a survey in Cuba by Benjamin Smith), earns a less microscopic $135 per month. Yet these potential leaders in a growing Cuban economy are precisely the ranks targeted for reduction by the Cuban government.

What are US Corporate Perspectives on Cuba?

Contrary to conventional wisdom "inside the Beltway", US firms are aware that Cuba under current conditions is a bad commercial and political risk.

The US-Cuba Business Council commissioned a 1999 survey of US Corporate 1000 views on Cuba conducted by the independent nationwide market research firm Consumer Pulse, Inc. Only 31 percent of corporate respondents indicated a high probability of involvement with a transitional Cuba under a "mixed economy" maintaining many of Cuba’s current economic and political controls.

However, with the advent of a democratic political system and free market economy on the island, some 75 percent of US firms surveyed would have a "very high" probability of commercial involvement in Cuba. Key structural reforms needed to prompt trade and investment in Cuba, according to the firms surveyed, include removal of government regulations and legal controls over the economy, removal of restrictions on capital flows. and establishment and protection of private property rights.

The prospect of US government subsidies or multilateral financing mitigating commercial risk is a significant priority for US firms surveyed. The taxpayer-funded programs subsidizing US-Cuba commerce cited by more than 60 percent of US firms surveyed as "very important to facilitate trade and investment in Cuba" included": the Export-Import Bank, the World Bank, and the Inter-American Development Bank.

The skepticism regarding trade and investment opportunities in Cuba today exhibited by these US Corporate 1000 firms reaffirms the view that -- absent dramatic structural and economic reform on the island – Cuba will remain a less than inviting commercial opportunity. It also suggest that little significant US involvement in Cuba would be prompted by the lifting of US embargo measures unless accompanied by structural change on the island. Only by subjecting US taxpayers to the cost of transactions through US bilateral trade assistance and subsidy programs could US policy marginally influence US-Cuba trade and investment flows.

How would lifting the US trade embargo on Cuba under current conditions alter Cuba’s bleak commercial environment?

Cuba’s trade activity with all other countries in the world has done little to improve the purchasing power of Cuban citizens, increase Cuba’s hard currency earnings or create commercially viable investment opportunities. There is no reason that US trade, would fare any better than the rest of the world in this regard.

Given the Cuban government’s pervasive and effective policy of destroying the most productive elements of the domestic economy, its lack of hard currency, and its effective barrier on Cuban participation in the benefits of limited foreign joint ventures, the lifting of US trade sanctions on Cuba would not provide US firms with access to significant trade and investment opportunities.

As noted above, Cuban citizens earning the equivalent of $10 per month have no meaningful purchasing power. Similarly, an isolated tourist industry walled off from Cuban society and bereft of supporting retail operations in Cuba that garners only $187 per visitor is a shabby investment candidate compared to Caribbean operations where sovereign risk is low, profit margins are higher and income of $1,500 -$2,000 per visitor is commonplace. The US Cuba Business Council’s estimate of the tourism potential in a free market, democratic Cuba [see Appendix] offers potential gross revenues in the range of $7.5 billion within five years after a transition. In this context, the Cuban government is willfully forfeiting some $6 billion in annual gross income to serve its tourist "apartheid," and domestic economic implosion policies.

Cuba’s reinvigorated campaign to shrink the ranks of independent producers and entrepreneurs and its rollback of joint venture activity ensure that Cuba’s decline in hard currency export earnings from $5.4 billion in 1989, $1.9 billion in 1996 and $1.46 billion last year will continue apace. Correspondingly, Cuba’s available hard currency resources to purchase foreign goods will continue to decline.

To understand the ability of the Castro regime to nullify the potentially beneficial impact of renewed US trade relations for Cuban citizens it is instructive to look at the recent experience of US business concerns attempting to provide humanitarian donations of clothes, medicines, foodstuffs and books to independent entrepreneurs and civic groups on the island. Confiscations of food, medicines and other goods by Cuban government officials are commonplace. Recently, Chicago businessman Douglas Schimmel was briefly jailed in a Cuban security police cell for delivering donated books to independent journalists on the island. The US-Cuba Business Council’s humanitarian donations program - through licensed deliveries of corporate donations and as part of the USAID Cuba project - has attempted to assist independent entrepreneurs on the island with agricultural work clothes, medicines and other goods. Cuban government harassment of recipient groups confiscated or lost deliveries, cost barriers and other obstacles have made all but a handful of small shipments impossible to implement.

Similarly, renewed US-Cuba trade would not result in a "trickle-down" economic effect of rising wages and commercial opportunity on the island because the ability of the Castro regime to confiscate wages from Cuban workers or block domestic participation in foreign ventures is infinitely elastic.

Potential Costs of US-Cuba Trade Normalization Preceding Reform in Cuba.

In return for the limited trade opportunities on the island afforded by renewed trade ties what would we be giving up by lifting the US embargo in the absence of fundamental economic and political reform in Cuba?

In strictly commercial terms, the potentially damaging affects of a unilateral removal of trade restrictions on Cuba include:

The bottom line is that good corporate citizenship is good business for US firms preparing for entry into the Cuban market. Businesses are an integral part of the community in which they operate. US businesses trading with, or operating in, a transitional Cuba will be a vital source of support for Cuba’s domestic economy and society as it embarks on an arduous process of economic recovery.

Perils of US Government-Sponsored trade with Cuba

The ultimate nightmare scenario for long-term US commercial interests in Cuba as well as for US taxpayers would be to create perverse, commercially unsound incentives to trade with Cuba before fundamental reforms have been implemented on the island. The damage to US companies, US taxpayers and to the prospects for economic recovery in Cuba would be immense and perhaps irreparable.

Providing capital and official trade guarantees through bilateral and multilateral agencies supporting trade with the Castro regime - or to a transitional government resisting fundamental reform -would simply represent a transfer payment from US taxpayers to communist party elites in Havana.

Former Soviet bloc nations offer countless examples of multilateral trade and US and assistance programs which squandered US taxpayer resources on commercially unsound investments involving communist party elites while undermining prospects for political and economic reform. Examples of misallocated US resources and counterproductive results in targeted countries include: billions of dollars channeled through the Commodity Credit Corp. and other bilateral mechanisms financing deals in communist Poland in the 1970s, credits facilitating grain sales to the USSR preceding the 1979 invasion of Afghanistan, recent IMF aid to Russia devoid of strict conditionality, and the MFN trade experiment with Romania in beginning in the mid-1960s.

The US government has a fiduciary responsibility to US taxpayers to adhere to strict commercial and country risk criteria for considering use of official trade credits or assistance, particularly if it involves command economies in a transition.