by Larry Luxner

For years, US multinationals ranging from Burger King to Boeing have gazed longingly at Cuba, waiting for Fidel Castro to quit or die so they could flood the island with their products and services. Banks, eager to finance trade and major infrastructure projects, see Cuba as a virgin market waiting to be exploited.

But with the one-time Maximum Leader now writing essays from his sickbed and younger brother Raúl running Cuba, it looks like the waiting game will go on. “The critical factor here is what is the process the Cuban government will use to open up the economy,” says Carlos Saladrigas, vice-chairman of Miami-based Premier American Bank and founder of the Cuba Study Group. “Rumors are abundant that significant economic reforms are about to be undertaken,” said Saladrigas, who fled the island in 1961.

Veteran Cuba analyst Phil Peters of the Lexington Institute says a key sector to watch is ethanol, because even though Fidel rallied against biofuels, Cuba’s official position favors the development of sugarcane-based ethanol. “Raúl says he wants more foreign investment, but he hasn’t said whether that means they’ll try to market Cuba harder or change the rules,” Peters says. “They could push ministries like agriculture and sugar that have been traditionally closed to foreign investment to liberalize so that more companies will be attracted to invest.”

Observers hoping for a sign that Raúl would enact far-reaching economic or political reforms were disheartened by the elevation of 77-year-old hardliner José Ramón Machado Ventura to Raúl’s old job as first vice-president. The alternative was reform-minded economic czar Carlos Lage, aged 56.

Even so, interest in Cuba has picked up. “We’ve been getting a lot of calls from potential investors looking to buy some paper, but because it’s very tightly held, it’s been difficult to secure,” says Stuart Culverhouse, chief economist at London-based Exotix, which specializes in illiquid and distressed EM bonds, loans and equity.

“We’re still in the early stages of the transition. As a result, prices have not really moved that much over the last few weeks,” Culverhouse adds. “Maybe holders of the paper are looking to see if the price will get bid up a little more before they’re willing to sell. The question is how long people are happy to sit on this paper.”

Unrealistic Expectations
Cuba-watchers were encouraged by a March decree authorizing the unrestricted sale of computers, DVD players and video players to consumers immediately, with air-conditioners and other appliances to be made freely available over the next two years. An agreement with Mexico to restructure $400 million in Cuban debt and reopen credit lines with Havana after a six-year hiatus were also heartening. But Cuba bulls should not get their hopes up.

“There will be modest changes in agriculture and some social restrictions,” says a Havana-based foreign banker, warning against over-optimism. “We have neither seen nor do we expect any substantial change over the next 12 months,” said the banker, who asked not to be identified. “Generally, the expectations that are circulating outside of this island are way, way ahead of anything that’s happening on this island.”

About a dozen foreign banks operate in Cuba, including BNP Paribas, BBVA, Santander, Bancomext, ING, Netherlands Caribbean Bank B.V. and the National Bank of Canada. There used to be more, but several European banks pulled out under pressure from the US government. In November 2005, Zurich-based UBS and Credit Suisse both said they would no longer do business with the Castro regime.

Even if Raúl does away with the dual-currency system – under which Cubans are paid state salaries in the weak national peso, while the much stronger “convertible peso” circulates in the tourist sector and hard-currency shops — little will change for the banking sector, says Robert Muse, a Washington lawyer with extensive experience in laws relating to Cuba. All transactions by foreign banks in Cuba are already done in foreign currency, he adds.

“The banking industry is going to be one of the last to develop in Cuba,” says Saladrigas, adding that the country lacks the regulatory systems and structures required. “Initial banking opportunities will be more for banks like Santander which already have branches in Cuba. They will be well-positioned from the start.”

“I don’t see any indication the Cuban government is actively looking for foreign investment from the private sector,” says Muse. “Its orientation is clearly on sovereign-to-sovereign arrangements, whether it’s with Brazil or Venezuela or Russia.”

Once the US embargo is gone, however, the landscape should change. “I’m not really thinking about Raúl. I’m thinking post-embargo,” says closed-end fund manager Thomas Herzfeld, whose Miami-based Herzfeld Caribbean Basin Fund is worth about $28 million. He anticipates interest from multinationals, private-equity funds, venture capital, and institutional investors. Herzfeld’s fund, established in 1994, has about 3,500 individual investors and is invested in 100 or so companies that stand to benefit from a lifting of the embargo.

Saladrigas is planning a $300 million fund to start small businesses in a post-Castro Cuba. The proposed Cuban Enterprise Fund would be financed by the US government, the EU and private companies hoping to encourage capital growth — in the form of $100 million from each of them. LF