Foreign investment to revive Cuban trade: is it really the case now?
Given the shortage of supply in the wholesale and retail trade, the Cuban government resorted – also belatedly – to foreign investment in this area, after having categorically stated that this would not be allowed. The pragmatic thing is that they realized they weren’t “damaged weapons”. It is therefore a positive step. It is one more stage in the necessary structural transformation which must be the end of all these “wishes” or measures.
In March 2020 I wrote“Another possibility is to grant licenses to international chain stores (such as Carrefour, Auchan/Alcampo, Mercadona, etc.) to establish stores in Cuba, with the obligation that a percentage of sales go to the state in the form of a road tax. For example, when today a product that costs 100 units is sold for 240, multiplying the purchase cost by a factor of 2.4 (140% of the cost; or 58.3% of the margin on sales : 140/240*100), one percent would cover the operating costs of the stores (salaries, supplies for marketing, depreciation, transport, storage, losses/reductions, etc.) and another part would cover the cost of the product. The rest would remain as the net profit, which is ultimately what the state could get as the owner of the store.
In a hypothetical exercise, I then proposed that “the net profit on the total sales of the state-owned chain stores CIMEX and TRD could be 40% (or more) greater than the cost of the products. In this scenario, if an international retail chain sells a product for $100 and it is determined that it owes the state a 40% sales tax, the state would receive almost the same as it receives today as the owner of CIMEX, TRD or other chains. Logically, the sales could not be in Cuban Convertible Pesos (CUC) because it would face the same current difficulties in obtaining the convertibility into freely convertible currency of the CUC obtained during the sales and in maintaining the replenishment of the stores.
“Sales should be made by cards in freely convertible currencies, national or international, but the experience and scale of these international chains would also be added to market their products online. This would allow the State to get rid of the logistical, administrative and other complications that it would have to face as a manager and administrator of the stores. I say this without mentioning the additional income that could be obtained from renting the stores already in operation or from the right to use the land if these international chains decide to build their own premises. Or the possibility that the State retains a percentage of the shares of joint ventures that could be created in Cuba with international chain stores.
Cuba allows foreign investment in wholesale and retail trade
Despite these ideas, rigidity was maintained when it came to not accepting foreign capital in wholesale and retail trade. But what is happening now in Cuba’s retail foreign exchange market could not have been imagined even in the worst forecasts of months ago. Internal and external factors are the cause: from the intensification of blockade on Cuba to low national production, which includes productive and institutional inefficiencies, among other organizational aspects, and even ideological and political factors.
It is interesting to see how the Minister of Economy Alejandro Gil, during the Foreign Investment Business Forum held at the beginning of September this year, said: “One of the ways in which we must move forward more quickly is the increase in offers from wholesalers. The goal is for foreign investors to put products in the country and benefit from its experience, its financial facilities, its technology.1
The opinions of the First Deputy Minister of Foreign Trade and Investment were also interesting when he mentioned a new vision of support for new investors: a new differentiated financial scheme had been considered for these new types of foreign investment, that is to say that the companies would operate in foreign currencies – this is why all their receipts and payments would be made entirely backed by liquidities in foreign currencies and their accounts would be recorded in foreign currencies. She also said they would operate with real foreign currency accounts, from which they would freely order payments abroad.
If carried out as expressed, these measures could pave the way for the arrival of the foreign capital necessary for the Cuban economy. But the reality is that when you interact with foreign executives of companies created with foreign investment in Cuba, you hear the same reasoning over and over again about the problems the country is suffering from. It must be taken into account that a potential investor will always approach his compatriots or colleagues in the industry to exchange experiences and gather opinions before making the decision whether or not to invest in a new market, unknown until then by that entrepreneur or business.
If many of the obstacles faced by already established companies remain in place or show up on a recurring basis, they will undoubtedly hamper the pace of attracting new foreign investment.
What difficulties do foreign entrepreneurs continually mention?
Article 9.1 of Law No. 118 on Foreign Investment stipulates that the free transfer abroad of dividends or profits derived from the operation of the investment is guaranteed. However, in recent years, due to the economic crisis, the country has not granted enough external liquidity for foreign partners to expatriate their profits, thus accumulating several million dollars awaiting transfer abroad.
In another sense, foreign entrepreneurs have a habit of creating companies that only disappear if they go bankrupt or if unforeseen events occur. But foreign investment laws in Cuba require licenses to operate a business with foreign investment to have an expiration date.
There is no international custom of setting up a business, preparing staff, opening markets, establishing brands, etc., so all this effort is only used to amortize the investment after a few years and to receive dividends for a few more years. Subsequently, the investor must get rid of and forget about the company created. This is where another percentage of potential investors slips away. According to these rules of the game, they would not want to participate.
By law, companies with foreign capital must hire Cuban labor through employers’ entities. Although the existence of these entities is necessary for the selection of personnel and for other purposes, foreign businessmen cannot understand, nor accept, that the major part of the salary to be paid for the company in free currency convertible goes to the entity that employs them and that the workers then receive an equivalent remuneration in national currency at an exchange rate fixed by the State.
For entrepreneurs, the treatment of the workforce, its preparation and its commitment to the entity are very important aspects, according to the criterion that workers are the main asset of any company. In companies approved under the Foreign Investment Law, foreign partners were not allowed to pay bonuses to Cuban workers outside of what the joint venture pays to the employing entity.
Economists have expressed some doubts about the viability of these new modalities that are planned to be put in place. One is the following question: will there be companies ready to invest in the Cuban commercial sector? There will always be investors and there are many opportunities in the Cuban market because it lacks everything. I imagine there will be proposals. For this reason, what was commented on by the first deputy minister is vital to attracting the necessary capital.
It cannot be ignored that today the Cuban state has a high level of insolvency. It owes several billion dollars to its suppliers. It is precisely for this reason that they have stopped supplying products and there is a lack of basic necessities on the store shelves.
No less important is the serious monetary problem that Cuba is experiencing today: high hyperinflation, an increasingly dollarized economy, its local currency (the peso) has no international value and has lost its value against the USD over the past year and a half. The peso-dollar exchange rate is approaching 1990s levels of 160 Cuban pesos to the dollar.
The success or failure of the measure cannot be determined in the short term. Over the next few months, there will not be many results because these are measures that take time. We have to wait a few months to see how many companies will arrive. And that’s when time passes. It is not the same thing to wait for the purchase of an electrical appliance as to buy the food necessary to live, not only to survive.
But there is the will of the government to remove the barriers that hinder the arrival of long-awaited foreign capital to supply the empty shelves of commerce. We will have to believe that it might be so. The figures of the approved companies will be able to deduce if what is done bears fruit or if it will be necessary to dig into new factors to value them.
1 “Accelerate with the extranjera inversion the recovery of national trade”, Grandmother newspaper, Havana, September 5, 2022, p. 3.