Russian Business in Cuba: from Ideology to Pragmatism

The dramatic slump in the Russia-Cuba economic ties in late 1990s was a severe test for Cuba's survival ability. Russia also suffered substantial losses, including reputational damage, as other Latin American countries grew suspicious of its reliability in conducting business. Recent radical economic changes in both states should improve bilateral relations. Moreover, expanded trade and economic links between Russia and Cuba are becoming a major factor for economic growth under globalization.

The dramatic slump in the Russia-Cuba economic ties in late 1990s was a severe test for Cuba's survival ability. Russia also suffered substantial losses, including reputational damage, as other Latin American countries grew suspicious of its reliability in conducting business. Recent radical economic changes in both states should improve bilateral relations. Moreover, expanded trade and economic links between Russia and Cuba are becoming a major factor for economic growth under globalization.

Who Owes Whom?

After Fidel Castro came to power, economic relations between Russia/USSR and Cuba have gone through several stages.

From 1960 to 1987, ties were based on ideology and paternalism, with the Soviet Union, the big brother, assisting junior Cuba. This relationship generated a multibillion Cuban debt that overshadowed the bilateral dialogue for a long period of time, each side being absolutely sure it was in the right. Recognizing the problem, the Cubans insisted that discontinued trade and economic relations with Russia brought on a national crisis. In the 1990s, almost all Russian specialists left the island, while virtually all supplies to facilities built with help of the USSR stopped flowing.

Photo: nevsepic.com.ua

In the 1990s, almost all Russian specialists left the island, while virtually all supplies to facilities built with help of the USSR stopped flowing. Cubans had to shut down operations at the nuclear power plant Huragua, José Marti Steelworks, a thermal power station in Havana and other facilities. From 1989 to 1993, Cuban GDP dropped by 34.7 percent and its budget deficit reached 33 percent of GDP.

Cubans had to shut down operations at the nuclear power plant Huragua, José Marti Steelworks, a thermal power station in Havana and other facilities. From 1989 to 1993, Cuban GDP dropped by 34.7 percent and its budget deficit reached 33 percent of GDP [1]. In order to settle mutual claims, a joint commission on debt was established in an attempt to satisfy both parties, including lost Cuban profits due to stopped deliveries and unfinished projects.

In February 2013, Moscow and Havana initialed an agreement to settle Cuban debts to Russia as the successor of the USSR with respect to the issued credits. The accords provide for a write-down of the debt and restructuring of the remainder for a term of 10 years. Russia hopes to complete all domestic procedures and sign the agreement by the end of 2013.

Some History

USSR-Cuba economic cooperation provided the island with an up-to-date industrial base, developed infrastructure and a pool of skilled personnel.

The Soviet Union used to export over 700 items of goods to Cuba, including oil and oil products, machines, equipment, spares, chemicals and foods, most of them in the export version, i.e. of better quality than their analogues intended for the Soviet domestic market [2]. No wonder then on Cuban streets you can still see Ladas made at Volzhsky Automobile Plant during the 1970s.

Phot: Wikipedia.org
Juragua Nuclear Power Plant

The USSR also took care of Cuban exports by purchasing its raw sugar, the staple export item, at preferential prices above the world market level. Whereas world prices in 1961 and 1962 amounted respectively to 2.70 and 2.78 cents per pound, the Soviet Union bought it at 4.09 cents per pound. At the same time, Soviet machinery, even modeled for export, was not good enough to compete with similar Western pieces, which actually made the Cuban market quite attractive and receptive to the USSR.

By the late 1980s, bilateral economic cooperation and the developed Cuban industrial base appeared ready for a gradual transition to mutually beneficial interaction on universal commercial principles. But Soviet perestroika brought the bilateral trade and economic ties to a virtual freeze and, accordingly, delivered an unexpected and painful blow to Cuba.

A Thaw or a Victory for Common Sense?

Photo: Sports.ru
The USSR has exported to Cuba a lot of
comodities and products. That is why nowadays
one may find a lot of Soviet automobiles on
the streets of Cuba.

Attempting to forestall the approaching economic collapse, Cuban leaders rolled up their sleeves, among other things through by implementing an impressive liberalization program, e.g. widening the private sector and weakening foreign currency restrictions [3].

Havana also did a lot to attract foreign capital on the basis of existing legislation, i.e. Decreto-Ley № 50 adopted back in February 1982 and bilateral agreements on encouragement and protection of investments, which prescribed "equal rights for foreign and national investors in taxation, banking and labor legislation" [4].

Moscow was one of the first countries to enter into such an agreement with Havana. Parallel to opening doors to foreign capital, Cuba improved the legal basis for its operations. In September 1995, Decreto-Ley № 77 was adopted and a specialized body was set up – the Ministry for Foreign Investments and Economic Cooperation. As a result, Cuba now boasts a legal basis for regulating the process and an appropriate government structure to take care of the process.

According to Decreto-Ley № 77, foreign capital is admitted into all sectors except for healthcare, education and national defense, although investments may be made into enterprises belonging to the Cuban military.

Notably, the above restrictions largely meet globally accepted standards.

The new law retains the licensing approach specifying that any foreign-capital project must be authorized by an appropriate government body. The procedure differs from the registration approach existing in most countries, including Russia. However, the practice depends on the efficiency and level of corruption in the bureaucracy, since licensing may be less time-consuming than registration. Decreto-Ley № 77 strictly stipulates a 60-day period for the rejection or approval of a project (Article 23, Section 6). The law guarantees protection from non-compensated expropriation, as well as the rights of a foreign investor to sell his share in joint capital and export the profits and capital. The law also stipulates foreign access to real estate: non-residents are allowed to purchase residential and other buildings (Article 16). Even more, in 2013, the land lease period for foreigners was extended from 49 to 99 years. While stimulating the priority development of joint entrepreneurship through preferences, mostly in taxation, Decreto-Ley № 77 does not rule out the establishment of enterprises with exclusively foreign participation. Foreign and national shares in JVs are not regulated either, since formally the ratio could reach 99:1. Cuban legislation is much more liberal than similar Soviet perestroika-period laws that allowed only a 49-percent foreign share in joint ventures.

Photo: www.nestro.ru
November 15th, 2012 General Director of
«Zarubezhneft» JSC N.Brunich in a delegation
headed by the Chairman of the Accounts
Chamber S.Stepashin took part in the meeting
with the Vice President of the Council of
Ministers of the Republic of Cuba Ricardo
Cabrisas Ruiz.

Havana has not hesitated to immediately give up ungrounded limitations, since serious investors pay attention to the de facto business climate but not to ideological mantras. And the new environment has attracted companies from the EU, Canada and Latin America, with Russian state and private companies also arriving, primarily for oil and gas exploration in the Cuban exclusive economic zone in the Gulf of Mexico. For the first time in 20 years, Russian Zarubezhneft has signed long-term contracts with state company Cubapetroleo for geology surveys in two onshore and two offshore blocks. Based on the Production Sharing Agreement, the contracts cover the period up to late 2034.

Zarubezhneft and Cubapetroleo have also agreed on securing supplies of Russian equipment for the Cuban oil industry.

The restoration of bilateral ties for the development of mineral deposits is of vital importance both for Cuba and Russia because joint projects for the most part ceased in the 1990s and were later revived with help of Canadian, Chinese, Spanish, Norwegian, Swedish, Venezuelan and Brazilian firms. In some projects, U.S. corporations and banks are also participating despite the discriminatory Helms-Burton Act threatening extra sanctions against companies that trade with Havana and prohibiting entry for ships carrying goods to and from Cuba into American ports.

Thanks to the mineral reserves of its shelf and littoral territories, Cuba is a Caribbean leader in deposits of oil, nickel (the world's third largest producer), chrome, copper, vanadium and molybdenum, while Russia is ready to participate in their development.

Cuba is Ready to Buy Russian Aircraft

Photo: Reuters / Ekaterina Shtukina
Cuba's President Raul Castro and Russia's
Prime Minister Dmitry Medvedev look through
a photo album during their meeting in Havana,
February 21, 2013

During his February 2013 visit to Cuba, Prime Minister Dmitry Medvedev reached an agreement to provide the island with Russian airplanes worth 650 million USD. Cuba will purchase three AN-158 and three IL-96-400 aircraft reworked from cargo to passenger versions. Additional spares will be also supplied for the aircraft in service in Cuba. The AN-158s will be supplied under a financial leasing scheme based on a sovereign state guarantee for extending further commercial loans to be covered by Cubans through a series of leasing payments. Loans are to be extended by Russian state-owned banks. The Ilyushin Finance Co. will obtain the loans in Russian banks under the Russian government guarantee to be subsequently repaid by the Cuban side through leasing payments over the next 10 years.

The state company Cubana de Aviacion operates six Russian-made aircraft, i.e. four IL-96s and two TU-204s, plus many airplanes of Soviet construction.

Russia and Cuba have agreed on the construction of an international air transportation hub on the site of the former airbase in the city of San Antonio de los Banos located 30 km from Havana, as well as on the establishment of a joint air carrier to fly from Havana to Latin America and the Caribbean, inside Cuba, and possibly to North America. Currently, most Russians travel to Latin America and the Caribbean through Europe. As a result, Europeans are able to grab the lucrative transatlantic flights, while Russians operate only the less profitable European stretch.

According to leading air transportation and airfield building experts, the reconstruction of the airbase is comparable to laying a single runway in a Moscow airport, while the new Cuban airport should have three runways to expedite the repayment of modernization expenses.

Mutual Benefit as the Basis for any Business

Photo: Wikipedia.org
Visitors in Cuba 1985-2011

Cuba is very interested in upgrading its central railway and constructing new lines, specifically to the port of Mariel that promises to become the Caribbean’s largest in 10 years. A trans-island railway is a vital need for Cuba that sees Russia as an attractive partner because of its world-longest railway network and enormous experience in constructing lines and appropriate infrastructure. Today, Cuban sugar comes to Russia, Ukraine and Belarus through traders, which makes it significantly more expensive. The same pattern is used for Cuban coffee, citruses, tropical fruits, tobaccos and marine products delivered to Russia. The elimination of intermediaries from the scheme could notably raise the efficiency of Russian-Cuban trade and considerably increase the supplies of unique biotechnological preparations, medications and other items to Russia.

Tourism is of paramount importance for Cuba, which is very willing to attract more Russian vacationers. In 2012, 87,000 Russians visited the island, i.e. 10.8 percent more than in 2011. The growth in the number of Russian tourists seems inevitable not only due to the gorgeous Cuban beaches and friendliness of the locals. Rising tensions in Turkey and Egypt, which are still Russia's top attractions, will naturally reorient Russian tourist flows to other places, including Cuba. Its tourist services are developed enough to draw Canadian, European and Latin American travelers, while the price-quality ratio is quite satisfactory. However, there are problems, one of them related to credit cards. If issued by a bank with an office in the U.S.A. (something potentially unknown to the holder), the card will be of no use in Cuba. International payment systems, for example Western Union, have Cuban branches that are open only to Cuban citizens with relatives in the United States. At that, the transactions are strictly limited.

* * *

Cuban Tourist Arrivals by Country of Origin, 2010

Cuba is becoming a key player for global actors who regard the island as a promising partner in many areas, from tourism to biotech joint ventures.

At the same time, Cuba is energy dependent, its needs being filled almost entirely by Venezuela, which might as well change its stance after the death of Hugo Chavez. Cubans do remember their overall dependence on the USSR in the 1970s and 1980s as well as the catastrophic consequences after the breakup with the big brother, primarily with regards to energy supplies.

Hence, both politically and economically, Cuba would like to achieve some energy independence, which makes cooperation with Russia in offshore oil and gas exploration a priority. According to the Zarubezhneft-Cubapetroleo contract, the Russian side must also raise oil production at the existing fields near Boca de Jaruco east of Havana.

No matter how strange it might seem, cooperation in the oil sector could help both Russian-Cuban and American-Cuban relations, since it should make Cuba less dependent on Venezuela, the U.S.’s key Latin American opponent which appears even more hostile after its early readiness to extend asylum to former NSA contractor Edward Snowden.

Cuban modern history has seen two special relationships – first with the U.S.A. and then with the USSR, both of them ending in sorrow. Cuban leaders have made their conclusions and now prefer normal mutually beneficial relations with anyone ready to cooperate. More than that, Havana is not eager to aggravate relations with the United States, as seen from its neutral attitude to American defector Edward Snowden, unlike the initial reaction of Nicaragua, Bolivia and Venezuela.

However, Russian businesses do enjoy advantages vis-à-vis their competitors as many Cuban industrial, farming and transportation facilities are equipped with Soviet machinery, some enterprises still use Soviet technologies, and many engineers and technicians have been trained in the USSR. Although there are more objective and subjective factors working in the Russian favor, dynamic steps are needed to make advances in the Cuban market, among them:

• Prioritization of companies that may help promoting Cuban goods in Russia.
• Establishment of JVs proceeding from synergies between Cuban industries and Russian and Soviet technologies.
• Reanimation of "sleeping" Cuban enterprises for production of various items using local raw materials and their subsequent sale in Cuba, Russia and other countries.

If Russia fails to work hard in this direction, the highly promising Cuban market will definitely go to other players.

1. Russia and Cuba in Context of Economic Globalization, Moscow, RAS Institute for Latin American Studies, 2005. P. 496.

2. Ibid, P. 493.

3. Countries and Regions of the World: Economic and Political Handbook. Ed. by A.S. Bulatov. Moscow: Prospect Publishers, 2009. Pp. 294–295.

4. 4. Fresh Opportunities for Investments in Cuba: A Businessperson's Handbook. Moscow, 1997.