An Information Service of the Cuba Transition Project Institute for Cuban and Cuban-American Studies University of Miami

 

Hans de Salas del Valle*

 

 I. Foreign Investment in Cuba: Political, Economic, and Legal Considerations

The communist regime of Cuba exercises absolute control over all aspects of individual as well as corporate economic life within its jurisdiction, including the transactions of foreign companies operating in the island and of Cuba-based joint ventures (JV) with Cuban state-owned enterprises (SOE). Within the regime all decision-making authority ultimately proceeds from Fidel Castro, who historically presided over all civil and military power structures. Castro heads the state, the government, the armed forces, and the communist party in his multiple roles as President of the Council of State, President of the Council of Ministers, Commander-in-Chief of the Revolutionary Armed Forces (FAR), and First Secretary of the Communist Party of Cuba (PCC), respectively. (1)

With his health collapsing in July 2006, Fidel Castro delegated his decision-making powers to his brother and interim successor Gen. Raúl Castro, who also guards over the regime through direct control of the military, the paramilitary internal security apparatus, and the economy. Raúl, in addition to his most visible official role as Defense Minister, occupies the seats of First Vice President of the Council of State, First Vice President of the Council of Ministers, and Second Secretary of the PCC. Historically second only to Fidel in terms of real as well as ‘constitutional’ power, Raúl Castro is today effectively ruling the country on a day-to-day basis. (2)

After the collapse of the Soviet Union in the early 1990s, the Castro regime restructured the island’s economy by allowing limited foreign investment through joint ventures and other economic associations with SOE, circulation of the U.S. dollar, and other so-called liberalization measures. Many foreign investors misinterpreted these emergency measures as signaling the beginning of a genuine and irreversible transition to a free market system in Cuba as in the case of former communist states in Central and Eastern Europe. However, since the late 1990s and particularly in the past three years, the Castro regime has reversed all such measures in an ongoing process aimed at recentralizing and consolidating economic power. (3)

In the mid-to-late 1990s, Cuban SOE and their joint ventures with foreign investors enjoyed limited autonomy to conduct business. For example, many SOE and JV in Cuba handled their own hard-currency transactions with domestic and foreign clients and suppliers, directly imported and exported merchandise, and were allowed other discretionary decision-making powers. However, a series of arbitrary decree-laws by the Councils of State and Ministers (both of which are headed by Fidel Castro) culminating in Law 92 of 2004, have stripped all discretionary freedoms from JV and SOE, which had been tolerated in practice, but never in principle, in order to attract foreign direct investment (FDI). (4) Furthermore, under the aforementioned Law 92 of 2004, all financial transactions (including those in U.S. dollars, other foreign currencies, and equivalent Cuban convertible pesos), which had been previously conducted semi-autonomously by SOE and JV, must now go through, and be authorized by, the state-controlled central bank, Banco Central de Cuba (BCC). BCC personnel approve expenditures in hard currency by SOE/JV and collect all revenue, including “dividends, royalties, and other incomes arising from Cuban entities’ participation in Joint Ventures and other international economic associations” (Law 92).

Foreign investors are not allowed to directly compete with SOE; they must partner with the Cuban government if they wish to have access to the Cuban market. Moreover, the Cuban government has of late begun to arbitrarily dissolve, without compensation and in breach of contract, many small- and medium-size JV with entrepreneurs who had entered Cuba in the 1990s. In many cases concessions have been taken from the typically smaller ‘pioneering’ investor/entrepreneur and transferred to large multinational corporations willing to play by the regime’s monopolistic rules. As the Foreign Investment Minister announced, “Cuba is now interested in partnering only with well-known companies in strategic sectors of the economy.” (5)

Promulgated in 1976, the Constitution of the Republic of Cuba (6) enshrined the current centrally-planned “system of economy based on the socialist means of production by all the people” (Article 14), which does not recognize inalienable commercial property rights, places sovereignty in “the State,” and in which:

• “The State organizes, directs, and controls the national economy” (Article 16)

• “The State directly administers the assets comprising socialist property” (Article 17), including “all enterprises, banks, and installations that have been nationalized and expropriated…as well as factories, economic installations, and scientific, social cultural, and sports centers… [which the State] may construct, promote, or acquire in the future” (Article 15b).

• “Assets may not be transferred to natural or juridical persons, except in special cases…intended for purposes of the country’s development and [which] do not affect the political, social, and economic foundations of the State, [and] with prior approval from the Council of Ministers or its Executive Committee (Article 15)

• “The State directs and controls foreign commerce” (Article 18)

• “The National Assembly of People’s Power [unicameral, rubber-stamp parliament] is the supreme organ of State Power” (Article 69) and “the only organ invested in the Republic invested with constituent and legislative authority” (Article 70). [NB: The Cuban Constitution’s claim that all power emanates from the will of the ‘people’ does not negate the reality that all ultimate power in Cuba actually resides in Fidel Castro. Members of the National Assembly are nominally ‘elected’ from a pre-qualified pool of loyalists of the regime. The National Assembly convenes for only a few days twice each year. In the long periods between sessions, the Council of State, headed by Fidel Castro, rules by decree (Article 90).]

• “The tribunals constitute a system of State organs…subordinate hierarchically to the National Assembly of People’s Power and the Council of State,” (Article 121) and “the power to recall judges is incumbent on the organ that elects them [i.e., the National Assembly]” (Article 126).

The legal structure in Cuba thus both bolsters and legitimates the rule of the Castro regime. While there is evidently a parodied ‘rule by law,’ the prerequisites for a genuine ‘rule of law’ are entirely absent (e.g., an independent judiciary, separation of legislative and executive powers, and multiple political parties). (7) Consequently, “the foreign business in a dispute with its [Cuban] partner is always opposing a branch of the Cuban government.” (8) As a result of the lack of an impartial legal system, foreign investors have been left with virtually no recourse when stripped of their property and/or other contractual rights. Since the current Foreign Investment Law went into effect in 1995, no lawsuits have been settled by a Cuban court. (9) Instead, the standard practice by foreign investors has been to seek arbitration by international courts. However, there is now a sense that those foreign investors who have fallen out of favor with the regime would be “wasting time and money because the [Cuban] government would ignore the rulings anyway.” As expressed by one dispossessed foreign investor, “Castro does not blink at bucking the United States and Europe, so what chance do I have?” (10)

As previously noted, the Cuban government recently took away the limited financial autonomy that select SOE and JV had enjoyed during the 1990s. Decreed by the Council of State in December 2004, Law 92/2004 (11) created a “unique account for foreign exchange receipts of the State” at the government-controlled central bank (BCC), into which all U.S. dollar and other hard currency revenues from SOE and JV must be deposited. Moreover, the new law established a Foreign Exchange Approval Committee which has sole responsibility to authorize foreign (in U.S. dollars or other hard currencies) as well as domestic expenditures (in Cuban convertible pesos) above set limits at SOE and JV alike. The net effect of this measure has been to recentralize economic power in the island back in the hands of the regime and its strongest institution, the armed forces (FAR), and away from previously quasi-autonomous civilian functionaries who had “copied capitalist methods so well that they have become capitalists themselves,” according to José Ramón Machado Ventura, a senior communist party leader close to Gen. Raúl Castro. (12)

II. ‘Franchising’ in Cuba: A Brief Case Study

Corporación Habanos S.A. (CHSA) was established in 1999 by Cuban SOE TabaCuba S.A. and the Spanish-French firm, Altadis S.A., to market Cuban cigars and tobacco products internationally as well as to the domestic foreign currency (mainly tourist) market. The JV is headed on the Cuban side by Col. Oscar Basulto Torres, who serves as CHSA’s Co-President. CHSA is a paradigmatic example of the Cuban military’s management of one of the most important sectors of the Cuban economy. (13) TabaCuba controls all tobacco cultivation and cigar production in the island. Through its joint venture with Altadis, it commercializes premium Cuban cigars to the hard-currency, state-run domestic market as well as diverse global markets. While TabaCuba – the Cuban parent company of CHSA -- is technically a holding of the Agriculture Ministry, Colonel Basulto Torres answers, in both his executive and military capacities, directly to Gen. Raúl Castro rather than to the Agriculture Minister.

As it is the policy of the Cuban government to aggressively substitute nationally produced goods for imports and to reserve as much as possible of the lucrative domestic market (encompassing Cuban citizens as well as tourists and other foreigners resident in the island) for SOE, the retail sector is entirely controlled by the regime through parastatal conglomerates (the largest being CIMEX and CUBALSE) and subsidiaries of the Cuban armed forces’ own commercial holdings company, GAESA. Consequently, foreign firms interested in selling directly to consumers must form joint ventures with SOE.

For example, in the case of Altadis/Habanos S.A., the joint venture in turn ‘franchises’ several of its “Casa del Habano” retail outlets within Cuba to CUBALSE S.A., the second-largest of Cuba’s parastatal conglomerates, with diversified subsidiary holdings in the domestic retail, real estate, tourism, and financial sectors. (In 2002 CUBALSE had an estimated turnover of US$365 million. CUBALSE generates hard-currency income for the state and, along with CIMEX and GAESA, it operates independently of the ministerial structure.) CUBALSE’s chief executive officer, Mr. Reidal Roncourt Font, reports directly to the Council of State, headed by Fidel Castro. (14)

The state exerts control over both SOE and Cuba-based JV with foreign investors. In the case of Corporación Habanos S.A. (CHSA), a Cuban armed forces (FAR) colonel, Oscar Basulto Torres, shares a ‘co-presidency’ with a representative of CHSA’s foreign partner, Altadis S.A. Moreover, considering that the tobacco industry generated some US$300 million in gross revenues (primarily through CHSA’s exports and domestic sales to visitors) for the Cuban state in 2004, no operational decision of any consequence (i.e., financial transactions), including relations with customers and suppliers, is taken without the explicit approval of the Cuban management team. Any tensions or disputes are negotiated privately and resolved internally, as the foreign partner is virtually never in a position of strength vis-à-vis the Cuban government. For example, CHSA depends on SOE TabaCuba S.A. for its skilled labor force and supply of tobacco. Col. Basulto Torres, as a senior FAR officer, forms part of the managerial elite within the Cuban armed forces assigned to head and run various state ministries and JV of strategic economic importance to the Castro regime. He answers to Defense Minister Gen. Raúl Castro and, of course, to his Commander-in-Chief, Fidel Castro, rather than to the foreign investor, regardless of the size of the firm or its share of the venture. Moreover, all Cubans employed in JV are carefully screened for their ideological rectitude and political loyalty to the regime. This is particularly true of sectors, ministries, and companies directly headed by the FAR’s managerial elite.

“Casa del Habano” establishments are ‘franchised’ by CHSA within the island to Cuban parastatal conglomerates such as CUBALSE and CIMEX. ‘Franchising’ in the Cuban context constitutes a joint venture/economic association and each Casa del Habano constitutes a jointly owned business. However, the physical plant (e.g., the building) is owned and operated by CUBALSE or other Cuban SOE retailers, while CHSA licenses the Casa del Habano concept and supplies its product line to CUBALSE, CIMEX, etc. CUBALSE operates the establishment since CUBALSE, along with CIMEX, the FAR’s GAESA holdings, and a few other state-owned companies, enjoy a complete monopoly over the island’s retail sector. Again, the Cuba government does not allow foreign investors direct access to its consumer market. Instead, as in the case of Altadis, the JV enterprise (e.g., CHSA) must in turn partner with one of the state-owned retail chains in order to commercialize its products within the island. Lucrative sales to tourists and other foreigners are strictly controlled, as tourism generates by far the largest revenues (US$2.3 billion in 2006) for the Cuban government and has become the so-called engine of the Cuban economy overall.

‘Franchising’ the “Casa del Habano” to CUBALSE and other parastatal corporations that control all retail in Cuba allows Altadis/CHSA to enter the lucrative hard-currency domestic market (catering to 2.2 million foreigners who visited Cuba in 2006) while also maximizing profits for the Cuban government, since retail profits are entirely pocketed by CUBALSE, which in turn channels its earnings to the Council of State (headed by Fidel Castro). It is a standard form of collusion, typical of Cuba’s state-controlled monopolistic economy, whereby the state controls the market at all levels (production, wholesale, retail) by operating through two or more state-backed companies that are nominally separate but in fact work closely together (e.g., CUBALSE and CHSA) to maximize profits and impede competition.

III. Commercial Concerns

Only Cuban citizens may possess real estate, legally limited to one’s place of physical residence (including agricultural land held in usufruct if worked by the resident and his family). However, the state prohibits Cuban citizens from buying or selling real property unless authorized to do so on a case-by-case basis, and never to a foreign person or entity. Places of residence may be exchanged through so-called permutas, or trading one’s apartment or house for another of equal value as assessed by the state. Ultimately, all real rights proceed from and revert to the state. For example, emigrants must legally surrender residences, motor vehicles, and other assets to the government before they are allowed to depart from the island.

Neither foreign citizens nor corporations may own property in Cuba. The Foreign Investment Law of 1995 theoretically allowed for temporary 100-percent ownership by foreign investors (in cases of build-own-transfer projects), but in practice foreign ownership is limited to 50-percent or less of jointly-held ventures. Currently, only Venezuelan state enterprises (not individual investors) may legally establish 100-percent-owned ventures in Cuba.

The Foreign Investment Law of 1995 (Law 77) regulates the formation of joint ventures and other modalities of foreign investment. (15) Law 77 allows the state to expropriate foreign-invested assets for reasons of “public utility” or “social interest,” as determined by the Cuban government. Moreover, a joint venture with foreign capital never actually owns any real property; rather, it receives a ten-year lease (renewable) from the Cuban government. Ultimately, all assets revert to the state if and when the venture is dissolved. (16)

The Cuban government expects foreign investments to generate revenue for the state. If the venture fails to meet expectations, the government will arbitrarily terminate the agreement and typically offer the property or project to another investor. All foreign investment proposals are considered and negotiated on a case-by-case basis. Hence, the exact terms and conditions will vary from one company or investor to another. However, all are subject to the Cuban governments’ regulatory and fiscal impositions such as:

• 30-percent tax on profits
• 25-percent payroll tax
• No contractual relations with labor (see below)
• Authorization from the Central Bank of Cuba (BCC) for all major import/export/financial transactions
• Revenues must be deposited in BCC accounts

IV. Labor

Foreign investors/joint ventures operating in Cuba may not establish contractual relations with Cuban workers. As stipulated by the Labor Ministry’s Resolution 3 of 1996, the foreign firm/joint venture negotiates a “Contrato de Suministro de Fuerza de Trabajo” with the state indicating the quantity and qualifications of needed employees. The generic state staffing agency for foreign enterprises, Agencia de Contratación a Representaciones Comerciales (ACOREC), then sends pre-screened (for loyalty to the regime as well as overall professional/technical qualifications) to the foreign-invested firm until all positions are filled. All employees must be hired on a full-time basis -- no part-time contracts are possible with the state’s staffing agency.

Once hired, the foreign employer pays all salaries in foreign currency, or equivalent Cuban convertible pesos (CUC), directly to the state staffing agency. Cuban workers are then paid in non-convertible Cuban pesos. The state thus pockets about 98-percent of workers’ salaries (1.00 US$/CUC equates to about 25 non-convertible Cuban pesos). In certain joint ventures productivity bonuses may be negotiated with the state. However, the bonuses tend to be limited to no more than 10-percent of monthly base salary (in Cuban pesos, not hard currency or CUC) and become a necessary supplement rather than a real financial stimulus. (17) Such labor practices -- along with the outlawing of independent labor unions and the absence of the right to strike or to collective bargaining of any sort -- are not only in violation of International Labor Organization (ILO) conventions, but have also artificially elevated labor costs in the island.

V. Intellectual Property Issues

While the Cuban government formally grants and recognizes patents, trademarks, and copyrights, the inventor/author/holder has a binding “social obligation” to license or otherwise transfer his rights to the state for the benefit of society. Individual intellectual property rights are thus no more secure than those pertaining to real property. (18)

Patents and trademarks owned by multinational corporations operating in Cuba are recognized and respected on a case-by-case basis, typically as long as they remain on good terms with the regime and/or the country of origin maintains acceptable relations with Cuba. The Cuban government has publicly stated that it retains the right to usurp international patents and trademarks if it deems that its own rights have been violated.

U.S. intellectual property rights are particularly vulnerable to infringement. In the context of the ongoing conflict with Bacardí over the Havana Club trademark, the Cuban government has asserted that it has “the right to produce Bacardi rum here [in Cuba], given that it is registered here and is a Cuban trademark.” (19) The same could easily be said of Coca-Cola, McDonald’s, and other iconic American trademarks. In fact, Fidel Castro has gone so far as to declare: “I hope no one complains if we start producing Coca-Cola…Someone might say: Let’s try Cuban-Coca-Cola! Or it might be toiletries with brand names or other articles to sell in duty-free shops. [The U.S. government] could not complain if we start using American trademarks to produce and sell products. It goes without saying that we are not going to watch idly by.” (20)

Notes
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• This report describes existing conditions for investments in Cuba under current laws and regulations. These must be substantially modified in the future to attract foreign investors and to jump start the Cuban economy.

1. Cf. “Organizational Charts,” Cuba Transition Project, http://ctp.iccas.miami.edu/main.htm/.

2. Cuba Transition Project, “Succession Sí, Transition No,” Cuba Focus, May 31, 2005, http://ctp.iccas.miami.edu/FOCUS_Web/Issue64.htm; Marc Frank, “Anti-corruption drive signals change in Cuba,” Financial Times, July 6, 2004.

3. “Tourists, by the left, march: Cuba returns to the command and control economy,” The Economist, July 31, 2004; Nancy San Martín, “Cuba reinstating economic controls,” The Miami Herald, March 7, 2005.

4. Cuba Transition Project, “Less Dollars, More Control,” Cuba Focus, November 12, 2004, http://ctp.iccas.miami.edu/FOCUS_Web/Issue60.htm; Banco Central de Cuba (BCC), “Law 92/2004,” http://www.bc.gov.cu/English/Laws/Resolution_92_2004.pdf.

5. Marc Frank, “Investors shown door after Cuban crackdown,” Financial Times, June 7, 2005; Marc Frank, “Western businessmen bitter as Cuba closes doors,” Reuters, Havana, May 31, 2005.

6. All citations are from an unofficial English translation of the Cuban Constitution prepared by Cuba Transition Project. The Constitution and other Cuban laws may be read in the original Spanish and, in many cases, accompanying English translations, at CTP “Legal Issues” database, http://ctp.iccas.miami.edu/main.htm.

7. Cf. Laura Patallo Sánchez, Esq., Establishing the Rule of Law in Cuba (CTP/University of Miami, 2003), esp. i-6, and The Role of the Judiciary in a Post-Castro Cuba (CTP/University of Miami, 2003), pp. i-13. Both monographs may be consulted at http://ctp.iccas.miami.edu/main.htm, under ‘Research Studies.”

8. Melissa Johns, “Foreign Investment in Cuba: Assessing the Legal Landscape,” Boletín Mexicano de Derecho Comparado, http://www.juridicas.unam.mx/publica/rev/boletin/cont/106/art/art2.htm.

9. Melissa Johns, Ibid.

10. Quoted in Marc Frank, “Western businessmen bitter as Cuba closes doors,” Reuters, Havana, May 31, 2005.

11. Cf. Banco Central de Cuba, http://www.bc.gov.cu/English/Laws/Resolution_92_2004.pdf

12. Quoted in Marc Frank, “Anti-corruption drive signals change in Cuba,” Financial Times, July 6, 2004.

13. Cf. Jose de Cordoba, “Cuba's Military Puts Business on Front Lines,” The Wall Street Journal, Nov. 15, 2006; Cuba Transition Project, “Military Involvement in the Cuban Economy,” Cuba Facts, March 2005, http://ctp.iccas.miami.edu/FACTS_Web/Cuba%20Facts%20Issue%209%20March%202005.htm; Cuba Transition Project, “The Cuban Military in the Economy,” Cuba Focus, August 11, 2003, http://ctp.iccas.miami.edu/FOCUS_Web/Issue46.htm; Nancy San Martín, “Cuba’s tourism chief replaced by army colonel,” The Miami Herald, http://www.miami.com/mld/miamiherald/7934569.htm; Marc Frank, “Anti-corruption drive signals change in Cuba,” Financial Times, July 6, 2004; “Tourists: by the left, march,” The Economist, July 31, 2004.

14. Cf. Juan Luis Gimeno Chocarro, “Corporaciones cubanas,” Oficina Económica y Comercial de España en La Habana/Instituto Español de Comercio Exterior, August 2003, especially pp. 9-11, http://emarketservices.icex.es/staticFiles/ESTUDIO%20CORPORACIONES_3855_.pdf.

15. For a complete text in English see Cuba Transition Project Legal Database, “Foreign Investment Act”, http://ctp.iccas.miami.edu/LawDocs/ldl00132.pdf. The official Spanish text is available at http://www.cubagob.cu/otras_info/cpi/ley.htm.

16. Cf. Melissa Johns, “Foreign Investment in Cuba: Assessing the Legal Landscape,” esp. part IV on “Investor Risk in Cuba,” http://www.juridicas.unam.mx/publica/rev/boletin/cont/106/art/art2.htm.

17. Embajada de España en Cuba, Gregorio Dávila Díaz, “El mercado laboral cubano par alas empresas extranjeras,” http://www.icex.es/servicios/documentacion/documentoselaborados/icex/pdfs/cuba%20mercado%20laboral.pdf; French Economic Mission in Cuba, “La législation du travail à Cuba,” http://www.missioneco.org/cuba/documents_new.asp?V=5_PDF_100042.

18. Cf. Oficina Cubana de la Propiedad Industrial, http://www.ocpi.cu/legislacion00.html/.

19. Cf. “Vampires,” Granma Internacional, March 26, 2001, http://www.granma.cu/ingles/marzo4/13patent-i.html/.

20. Fidel Castro, speech at the Univ. of Havana, May 4, 1999.

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* Hans de Salas del Valle is a Research Associate, Cuba Transition Project, Institute for Cuban and Cuban-American Studies, University of Miami.