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Investors keeping a close eye on Raúl's latest reforms
CubaNews / April 2008

By Larry Luxner

Despite an upswing in Cuban asset prices following Fidel Castro’s Feb. 19 resignation and his replacement as president by younger brother Raúl, no one really knows where the market is headed in the short term.

“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,” noted Phil Peters of the Lexington Institute in Arlington, Va. “They could keep the rules the same, or they could push ministries like Agriculture and Sugar that have been traditionally close to foreign investment to liberalize so that more companies will be attracted to invest in Cuba.”

Observers hoping for some sign Raúl would enact far-reaching economic or political reforms were disheartened by the National Assembly’s unanimous decision Feb. 24 to elevate 77-year-old hardliner José Ramón Machado Ventura — rather than the reform-minded economic czar Carlos Lage, who is 56 — to Raúl’s old job as first vice-president.

“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 it,” says Stuart Culverhouse, chief economist at Exotix Ltd., which specializes in emerging-market illiquid and distressed bonds, loans and equity.”

“Obviously, 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 said in a phone interview from London. “The market is very thin because it’s distressed paper. Although there’s buying in-terest, we think that maybe holders of the papers are looking to see if the price will get bid up a little more before they’re willing to sell.”

Cuba-watchers were encouraged by a Mar. 13 decree that allows the unrestricted sale of computers, DVD players and video players, followed by other rules that let ordinary Cubans, for the first time, have mobile phones and stay in hotels that until now were only for foreigners. Such luxuries, however, are available only to those paying in convertible pesos.

“There will be modest changes in agriculture and [the lifting of] some social restrictions,” said one 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 circulating outside of this island are way ahead of anything that’s happening on this island.”

At present, a dozen foreign banks operate in Cuba, including Bancomext, BNP Paribas, BBVA, Banco Santander, ING Bank, Netherlands Caribbean Bank BV and National Bank of Canada, though there used to be more.

“Several European banks have pulled out of Cuba. They’ve come under a lot of pressure from the U.S. government, which has tried to interfere with their operations,” noted Robert Muse, a Washington lawyer with extensive experience in laws relating to Cuba.

In November 2005, after Zurich-based UBS and Credit Suisse vowed not to do business with Havana, officials of Cuba’s Central Bank said the decision was “nothing more than an act of submission to the United States.”

On the other hand, on Feb. 17, just four days before Fidel announced he would resign, Mexico agreed to restructure $400 million in Cuban debt and reopen credit lines with Havana after a six-year hiatus.

Officials of Bancomext, who signed the ac-cord in Havana, said the deal would lift trade flows that fell to a historic low of $200 million in 2007, less than half the levels of the 1990s.

“With the signing of this agreement, a great step has been made to normalize financial and commercial ties between both countries,” Bancomext said in a statement, without giving details of the restructuring plan.

Raúl has promised to eventually do away with the dual-currency system, under which Cubans are paid state salaries in the weak national peso, while the much stronger “peso convertible” circulates in the tourist sector and hard-currency shops.

But even if he does, said Muse, little will change for the banking sector, since all transactions by foreign banks in Cuba are done in foreign currency anyway.

“Apart from some trade financing and some lending to state enterprises, I am unsure what the mid-term future is for banks in Cuba, because I don’t see any indication the Cuban government is actively looking for foreign investment from the private sector,” he said. “Its orientation is clearly on sovereign-to-sovereign arrangements, whether it’s with Brazil or Venezuela or Russia.”

Once the U.S. embargo is gone, however, the picture will change entirely.

“I’m not really thinking about Raúl. I’m thinking post-embargo,” said closed-end fund guru Thomas J. Herzfeld, whose Miami-based Herzfeld Caribbean Basin Fund is worth about $28 million.

“Capital will come from multinational corporations that want to expand their businesses into Cuba — and from investment companies, private-equity funds, venture capital, institutional investors like our fund, all types of companies that take on risk,” said Herzfeld. “Then you have the Cuban-American community in South Florida, who will be very heavy investors, and we hope to partner with them.”

The Herzfeld 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.

Last year, Carlos Saladrigas and his Cuba Study Group called for the creation of a $300 million fund to start small businesses in a post-Castro Cuba. This proposed Cuban Enterprise Fund would be financed by the U.S. government, the European Union and private firms hoping to encourage capital growth — in the form of $100 million from each of these three sources.

“The banking industry is going to be one of the last to develop in Cuba,” said Saladrigas, who fled the island in 1961 and is today vice-chairman of Premier American Bank in Miami.

“Banking requires a very specific set of regulatory systems and structures that do not exist in Cuba right now. The initial banking opportunities will be more for banks like Santander which already have branches in Cuba. They’ll be well-positioned from the start.”

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