Discovering Havana: what is waiting for American investors in Cuba

Discovering Havana: what is waiting for American investors in Cuba


U.S. President Barack Obama on Sunday arrived in Cuba, becoming the first American leader to visit the island for the last 88 years. In addition to negotiations and meetings on Monday in the program of the visit includes the President’s address to the Cuban people, which will be broadcast on national television.

The speech Obama uses to call for the improvement of the situation of human rights in Cuba, but the economic impact of the historic visit for ordinary Cubans will be much more important. Last week Cuban authorities have already announced the cancellation of 10% taxes on the use of US dollars in its territory, and the American Ministry of Finance has provided Cuban citizens with the opportunity to formally receive a salary in the United States and to open accounts in American banks. It was then decided to allow “individual educational tourism” to the island — access to Cuba for Americans is still unavailable, as in 1963, when Washington imposed a ban on travel as the continuation of sanctions.

Cuban thaw

Obama’s visit is the final part of the process of thaw in relations between the two countries. In December 2014 Obama announced a “new approach” in relations with Cuba, though, as said the Deputy Director of Institute of Latin America of Russian Academy of Sciences, Nikolai Kalashnikov, the preparatory work to restore relations began in early 2013.

American and Cuban leaders spent the first 50 years of the negotiations in April last year, in July, the country regained interrupted in 1961 diplomatic relations. The main limitation that has not yet been withdrawn, there remains a ban on the export of goods from Cuba to the U.S., to withdraw the measure can only be the U.S. Congress.

Progress in relations between the US and Cuba was made possible by the reforms of Raul Castro. Having at the beginning of 2008 the powers of the head of state, he went on to liberalization: in April allowed residents of the island to buy a personal computer, in summer you can rent land for a period of ten years. In the subsequent years was allowed to “self-employment” for 178 different types of work, which meant the legalisation of small businesses (including self-employed now amounts to 496 thousand, or 4.5% of the population). Cubans allowed to buy and sell used cars, sell real estate, banks began to give loans to private persons to freely leave the country.

Liberalization is concerned and attracting foreign investment. In the spring of 2014 the Cuban authorities have adopted new legislation to attract foreign investors. In particular, the law twice reduced the income tax (to 15%) and provided for joint venture projects eight-year tax holidays. Havana has announced that it expects to attract $2-2. 5 bn of foreign investment to increase GDP growth from 1.8% to 7%. For all 1990-e years the country attracted only about $4-5 billion foreign investment. According to the latest data for 2013, for example, from the EU to the island country attracted only $100 million.

The head of the Cuban Ministry of trade Rodrigo Malmierca claimed in November 2015: since the adoption of the law on the investors half of the year concluded 36 deals. New goal of the Cuban authorities — attracting $8.2 billion in 326 projects, from making rum to create a television pay-per-view (“pay per view”) high resolution. According to Kalashnikov, Obama’s visit reinforces the previous achievements of the thaw, thus creating the psychological basis for investors willing to invest in Cuba.

Restitution

In December 2015, in Havana, representatives of the U.S. government and Cuba have held initial talks regarding mutual compensation policy during the cold war. Havana requires about $120 billion for the damage from 50 years of economic blockade. Washington, in turn, requires Cuba $8 billion in compensation for the property expropriated in 1959.

By the beginning of the Cuban revolution, the United States invested in the Cuban economy more than any in Latin America except Venezuela. The island was located, in particular power companies, Firestone, IBM, and ExxonMobil present. Since the arrival of Castro to power, according to U.S. authorities, were nationalized property more than 6 thousand American companies and citizens a total of $1.9 billion at that time, and in terms of December 2015 — $8 billion.

As noted by the Washington Post, last year the U.S. and Cuba held a number of meetings devoted to the normalization of relations, but in December they first attempted to talk about one of the most complex problems. According to the state Department, reaching agreement on this issue is “top priority” for the U.S. the negotiations were successful and will continue in 2016.

Golden sand

In 2015, Cuba was visited by a record 3.5 million foreigners (+17.4 per cent by 2014). 161 thousand of them citizens of the U.S., growth over the year was 77% (even given that he still cannot visit Cuba as independent travellers). To legally get on the island, the purpose of their visit must meet one of 12 approved by the US authorities of categories. According to polls the American travel company Travel Leaders Group, as of may 2015 the number of Americans wishing to go to Cuba in the event of withdrawal restrictions has increased over the year from 51% to 59%. Overall, Cuba’s income from tourism increased for 2015 by 10.7%, to $1.94 billion a year. In 2016, the Cuban Ministry of tourism expects 3.7 million foreign tourists.

The authorities recognize: hotel business in its current form cannot cope with the influx of tourists. In a country of only 63 thousand hotel rooms, most of which are concentrated in the capital. In October last year the Guardian wrote that the rooms in Havana hotels are booked up to April 2016.

Cuban authorities expect to increase the hotel room capacity by 13.6 thousand only in 2016. Commercial Director at the Cuban Ministry josé Daniel reported that the Agency executed 94 projects with foreign participation, 27 of them are related to hotel infrastructure. Havana is working on contracts with international hotel operators 58 objects — both new and existing. It is, for example, on establishing cooperation with the Swiss operator Kempinski and Banyan Tree Singapore, explained Daniel. Since 2014 working in Cuba Colombian Excelencias operator and the French branch of an American chain Warwick International Hotels.

The tourism industry in Cuba is nationalized, investors can get real estate in the office, but not to possess it.

On the eve of the March Obama’s visit it became known about entering the Cuban market of the three major American companies related to tourism: Starwood Hotels & Resorts Worldwide, Marriott and Airbnb. Starwood signed the instruments of accession to its network three famous Havana hotels: Inglaterra, Quinta Avenida and Santa Isabel, becoming the first in 60 years, American hotel operator, having invested in Cuba. How to write Fortune, head of Starwood’s operations in Latin America George W. Giannattasio refused to comment on the deal size, but said that it involves “a multimillion-dollar investment in bringing the hotel to company standards”.

Airbnb, which operates on the island since April last year, March 20, has received the license of us Department of state to complete the work in Cuba. According to CEO Brian chesky, in our data there are 4 thousand homes throughout Cuba, half of them outside of Havana. According to him, only last week, found through Airbnb accommodations over 1.7 thousand tourists.

American companies that require US government authorization for participation in the Cuban project, faces competition from several Asian and European companies. In particular, in may China Beijing Enterprises Holdings signed with the Cuban authorities a contract for $462 million on the construction of a resort complex in Bello-Monte. The Chinese Suntime company plans to invest $150 million in joint ventures with the Cuban government Agency Cubanacan construction at the Hemingway in Havana at 600-650 rooms. British developer London & Regional has entered into a contract for $500 million to build the complex in Varadero, includes a luxury hotel, the harbour, Golf courses and more than 1 thousand villas and condominiums. Overall, said the expert scientific society “Department of Jose Marti” at MSU Lomonosov Anastasia Filippova, major investments in Cuba are now from Spain, Canada, Germany, Brazil, Mexico and China.

Weak signal

Now Cuba and eight other countries are on the list of “Internet enemies”, compiled by “Reporters without borders”. The level of media freedom in 2015, the country ranked 169 th place (12th from the end). According to the International telecommunication Union (ITU), in 2014, the Internet was available only 30% of the population compared to 28% in 2013 and only 14% in 2009. At the same time, the White house says the U.S. about 5% for December 2014.

In 2011, the telecommunications market of Cuba was estimated by Pyramid Research to be potentially the largest in the Caribbean. Despite the closed nature of the market, its annual revenue, which in 2011 to $80 million, could grow in two years, five times.

Until recently the Internet in Cuba was only available in public Internet cafe for us $4.5 per hour (with an average wage of $20-25 per month). The first wireless access point to the Internet in Havana was opened in January 2015: popular Cuban artist KCHO began to hand out free personal online held to his computer with the permission of the authorities for $900. Subsequently, the telecommunications state monopoly called etecsa opened another 35 points Wi-Fi in the major cities of Cuba and reduced the cost of Internet access from $4.5 to $2 per hour.

On the Internet market in February came out of the Chinese Huawei (launched a pilot project to conduct home Internet in two areas of Havana), in March access to it Google announced President Obama himself. “Google reached an agreement on ensuring the island free Wi-Fi and broadband Internet,” he said March 21 in an interview with ABC News. Cubans became available to the American video service Netflix, but to only those who have access and free high-speed Internet and international payment systems.

Tablet Paradise

Other beneficial for the investors along the way is the medical sector. State pharmaceutical group Biocubafarma produces more than 500 types of drugs, including 33 against cancer and 7 against diabetes. The company exports its products to more than 50 countries around the world. Currently in Cuba there are 30 registered and recognized by the U.S. patents for the creation of drugs, but States can’t get the rights to their production because of trade sanctions. The lifting of the embargo, according to the head of the Center of molecular immunology in Havana Agustin Lage, will allow Cuba to establish cooperation with the USA in the field of production of medicines.

According to the American University Wharton, from the beginning of 1960-ies in Cuba were opened 16 medical schools or internship students from around the world, including the United States. As of January 2015 37 thousand Cuban doctors were working in 77 countries around the world that brought the government $8 billion a year, says the University. In 2000, in particular, Venezuela has signed with Fidel Castro’s agreement to Finance 43 medical centers in Cuba in exchange for free treatment of Venezuelan patients. Cuba, in turn, sent to Venezuela 31 thousand of its doctors in exchange for oil.

For the buoys not to swim

The normalization of relations with the United States fits into the concept of gradual improvement of the socialist model — but not care of her, Filippova explains. Official organ of the Cuban Communist party newspaper Granma on March 16 emphasized that the government is not going to change their policies in exchange for normalization of relations with the United States.

Professor of the German Institute of global and area studies Bert Hoffmann comes to the conclusion that the Castro government is ready to make certain concessions negotiated with the United States. But outside of these “buoys” the process of change in Cuba is moving very poorly, or slow down due to the local specifics, for example, walking in the country two parallel currencies.

Along with the “regular” peso in Cuba is walking the convertible peso is the currency for tourists and diplomats attached to the US dollar at 1:1, 25 times more expensive than “regular” chart. Parallel circulation of two currencies, and the requirement for accountants of state-owned companies to equal one peso to another has led to confusion in the trade and financial sectors.

In October 2013, the Castro government announced plans for a phased unification of currencies. Source Financial Times reported that the unification of currencies must take place before the next Congress of the Communist party in April of 2016. Experts of the Brookings Institution suggest that unification will be made at the level of 1:10 to the US dollar, which means a ten-fold devaluation of the official rate and lead to instability in the financial market, “paralyzing investment in the nascent non-state sector of the economy”. According to Philippi from MSU, circulation of two currencies “may not be a serious obstacle” for investors in Cuba.

The money issue

The government still makes good on all foreign investments and owns all banks — this means that in Cuba there is no capital market as such. The stalling of the same currency reform reflects, according to the economist Andrew Adare, the fundamental problem of Cuba: a missed opportunity for structural reforms. The country, he said, is aware of the need for foreign capital, but wants to get it without major changes in politics and the economy that is certainly doomed to failure. For example, the University of Michigan assesses the rating of Cuba’s level D — the highest political and economic risks.

At the moment of the “big three” rating agencies, only Moody’s is working with the Cuban bonds. According to the company, their rating is Caa2, which means the obligations are of poor quality with extremely high risks. In December 2015, the Agency raised the rating Outlook from “stable” to “positive”, attributing this to two factors: reduced financial dependence on Venezuela, and active rapprochement with the United States.

The President of the consulting firm Eurasia Group Ian Bremmer is sure opening himself to American businesses, Cuban Communist government is doomed to defeat. “When you start to play baseball with the American team or let us go to the house of aliens (which will contribute to Airbnb), it becomes pretty hard to stop the weakening of the authoritarian regime — said Bremmer. — Definitely in the early stages of investing Americans will experience some obstacles. But to say that within five years Cuba will remain the same government, I would not have become”.