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Cuba: big fuss, small market.

Since the Obama administration made its diplomatic overture on December 17,2014, the pace of change in U.S.-Cuban relations has been exhilarating. The U.S. embargo of Cuba, which has stood as a thorn in U.S.-Latin American relations for over five decades, may soon be dismantled. For the two million Americans of Cuban descent, the surreal developments conjure great depths of emotion, a combination of hope and angst about where this new path might lead. The likely end of Americas last cold war conflict has captured the world's imagination. Infectious curiosity has even crept into boardrooms of American and international companies who have been kept out of Cuba or resisted engagement because of the Helms-Burton Act. But Cuba is neither a new commercial opportunity, nor a large one. Pioneering spirits may yet get the better of American business as viable opportunities elsewhere in Latin American are neglected in pursuit of a prize that is grand in complexity, but financially limited.


Cuba is one of Latin Americas aging populations, thanks to a low birth rate and a history of emigration. At 11 million people, Cuba's population has stopped growing. If more Cubans gain the freedom to travel abroad, many will leave for good. With close to three million Cubans residing outside of the country, every Cuban family has a relative abroad to sponsor their emigration. If East Germany is any guide to what may happen next in Cuba, an additional two million Cubans would leave the island within five years of an end to travel restrictions. Most of those anxious to leave will be the best educated working age adults who can pursue higher wages and better opportunities abroad. Cuba will become a nation of elderly, with limited growth prospects.


In 2013, Cuba imported approximately $13 billion in goods from over 50 countries. In 2014, the U.S. sold $291 million of agrifood and medical supplies to Cuba, 60 percent less than 2008, because unlike their competitors, U.S. exporters are forbidden from financing their exports to Cuba. A shortage of working capital means that most suppliers in (Canada, Spain, Brazil, etc.) are paid three to 12 months after shipment to Cuba, thus requiring costly trade finance. As one frustrated Canadian banker once remarked: "Doing business in Cuba is a pain in the--. If we analyzed our trade finance business with Cuba on commercial merits alone, we would be obliged to shut it down."


One cannot help but marvel at how the Castro brothers manipulated Venezuela into propping up Cuba's economy. For the service of 40,000 Cuban professionals working in Venezuela, the Cuban government receives $5.4 billion USD each year or $135,000 per Cuban, of which Havana keeps $130,000. In 2012, Cuba received 104,000 barrels of oil per day, paying only 50 percent upon delivery, while the rest was converted to 25-year debt. Cuba purportedly re-exported 25 percent of their subsidized Venezuelan oil imports in 2013, earning about $1 billion in hard currency. Venezuela contributes to over 100 joint ventures in Cuba, including a fuel refinery in Cienfuegos. In 2012, Cuba's economic reliance in Venezuelan trade and support equaled roughly 20 percent of GDP versus 31 percent at the peak of their reliance on the Soviet Union.

Venezuela's economic lifeline to Cuba could dissolve even more quickly than Russia's once did. Collapsed oil prices have brought Venezuela's economy to its knees --in 2015, its import financing needs will fall short by $30 billion. No amount of Cuban diplomatic finesse can rescue its economy from Venezuelan cutbacks, which helps explain Raul Castro's sudden warming to Washington.


American exporters may not find Cuba a hospitable market, but Yankee tourists, once permitted, will arrive in droves. In the 1950s, as many as three million Americans visited Cuba each year. The U.S. population has since doubled, and American fascination with Cuba has not waned. Cuba offers something for everyone: beaches, history, culture, nature, and safety. It is the most compelling destination in the Caribbean.

The tangible new commercial opportunities in Cuba will come from an explosion in tourism. The Cuban government already has a working model in place to facilitate private foreign investment in tourism infrastructure. Massive new construction projects will be needed to absorb a potential doubling of the tourist footprint. International banks will gladly finance an industry paid for in hard currency.

Smart money will follow the dollars: tourist spending, internationally funded infrastructure, and Cuba's resource exports. That is the strategy behind a new fund launched by a veteran closed fund manager based in Miami, Thomas J. Herzfeld Advisors, which has quietly invested in Cuba-facing businesses for over 20 years. They size the coming investment opportunity in Cuba at over $10 billion USD. By betting first on companies that do business with Cuba, then those conducting dollarized business in Cuba, their cautiously optimistic approach seems the right balance. U.S. corporations would be wise to exercise similar restraint and pragmatism in their own Cuba plans.

John Price is the managing director of Americas Market Intelligence and a 23-year veteran of Latin American competitive intelligence and strategy consulting.
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Title Annotation:THE CONTRARIAN
Author:Price, John
Publication:Latin Trade
Geographic Code:5CUBA
Date:Mar 1, 2015
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