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Cuba: Reviving the Cigar Industry
Smokeshop / September-October 1995

By Larry Luxner

The cigar -- that traditional symbol of capitalist indulgence -- is becoming a key ally in Communist leader Fidel Castro's efforts to keep the Cuban economy afloat these days.

In recent months, the Castro government has created a new state agency, Habanos S.A., to promote the island's cigar exports, and is looking beyond traditional customers in Spain, France and Great Britain to new markets in the Middle East, Africa, Latin America and Japan.

At the same time, Cuba has developed a decidedly un-Marxist incentive program to boost tobacco production. Under the new system, according to a Cuban government publication, "foreign-currency certificates or an equivalent means of payment will be given to workers who fully comply with production guidelines, enabling them to buy durable and perishable goods at foreign-currency stores."

That's a switch from 1990, when workers at the crumbling H. Upmann cigar factory in Old Havana were still being paid 180 pesos a month (about $30 at the time) whether they rolled 100 cigars a week or 1,000. The important thing then, as observed during an organized tour of the plant, wasn't how efficiently workers could produce cigars, but how loud they could shout "¡Socialismo o Muerte!" over the factory's booming public-address system.

Now, for the first time since the 1959 Cuban revolution, incentives will be paid throughout the entire cigar process, from seed production, cultivation and harvesting to processing, stripping, drying and cigar-turning, as well as the making of boxes and molds for the industry.

"Cuba's getting smarter," observes Richard Thakin, sales manager for Wings of the World Inc., a travel agency that offers trips to Cuba as well as "legal Cuban cigar smoking evenings" for well-heeled cigar connoisseurs in New York and Chicago.

Ana López, commercial and marketing chief at Habanos S.A., predicts Cuba's 1995 cigar exports will top 50 million units, and that 1996 exports will hit 65 million units. Spain, the largest customer, buys around 25-30 million Cuban cigars annually, followed by France, which purchases 6-8 million. New markets include Mexico, Argentina, Brazil and Kingston, Jamaica -- where the Cuban government has opened up cigar shops in franchise ventures with local businessmen.

One of them is Jeremy Tromp, the leading distributor of Cuban cigars in Asia. His company, Hong Kong-based Pacific Cigar Co. Ltd., markets Cuban cigars in Australia, New Zealand, Fiji, Indonesia, the Philippines, Malaysia, Thailand, China, Japan, Singapore and Canada. "Altogether, our radius of action covers approximately half the world's population," he said. "The Asian-Pacific market is new and still not well-established, unlike that of Europe and Canada, so we are developing the cigar's image there."

Another developing market is Lebanon, which already spends $2 million annually on Cuban cigars. "We will try to increase cigar production in order to cover the demand of the Lebanese market," said Benigno Pérez, deputy minister of foreign affairs.

In addition to the new incentives aimed at boosting tobacco production, Cuban officials are now considering a foreign-investment law that would allow non-Cuban companies to own up to 100% of a joint venture, and could even let foreigners choose their Cuban employees and pay them directly in U.S. dollars.

The last provision, however, is subject to intense debate within Cuba because it would create a two-tier economy in which some Cubans working for foreign companies would earn dollar incomes worth far more than those of other Cubans working for state companies and earning pesos.

Currently, foreigners may own up to 49% of joint ventures, and must hire workers through state employment agencies. The companies pay their workers' salaries in dollars to the agencies, which pay the employees in pesos and pocket the difference. Recent such ventures include Spain's Tabacalera S.A., which is financing the production of 54,116 acres of tobacco in Pinar del Río province in return for the tobacco itself.

Another is BrasCuba, an unusual deal between Cuba's Unión del Tabaco and Río de Janeiro-based manufacturer Souza Cruz, a subsidiary of the British tobacco giant BAT. The two entities plan to use the Rene Arcay factory in Havana to produce cigarettes for export and domestic sale in Cuba's hard-currency market. Partners in the investment -- the first in 35 years by a foreign company in Cuba's cigarette industry -- hope to begin production before the end of 1995, with 1996 production forecast to reach 5 billion cigarettes a year. Output, according to the Miami-based monthly CubaNews, will include both black and blended-tobacco cigarettes to be sold under a variety of names. The newsletter reports that Souza Cruz will also provide capital and know-how to develop Virginia and Burley tobacco varieties throughout Cuba.

The agreement, signed after a lunch between Castro and Sir Patrick Sheehy, the chairman of BAT, is reportedly worth $3 million. Sheehy said that in the Rene Arcay factory, "the most modern equipment dates from 1940, although some machines are as old as 1914. It would be the perfect decor for a production of Carmen."

The BrasCuba deal is important because it signifies the return of BAT to Cuba after 35-year absence. BAT, the world's third largest tobacco company after Philip Morris and RJR Reynolds, reported pre-tax profits of £1.8 billion in 1994 on sales of £21.1 billion. If the new foreign investment is passed by this September, as is expected, even more companies might be convinced to make similar investments.

"Under the new law, the foreign partner could have 100%, and companies would be able to hire employees directly, without having to go through Cubalse or any other government agency," said Ismael Sene, a top official of Cuba's Ministry of Foreign Investment. "But we have to avoid creating social problems."

Sene, who spoke at a recent conference in New York entitled "Preparing for Prosperity in the New Cuba," revealed that in the past 13 months, his office has received visits from 212 U.S. companies interested in investing in Cuba. That includes eight of the top 15 Fortune 500 firms, he said. But he refused to identify the companies for fear of causing friction between them and the Miami-based Cuban exile community, which strongly opposes any U.S. or foreign investment in Cuba until the Castro regime is overthrown.

In the agribusiness sector, the exiles don't have much to worry about for the moment. Foreign investment is limited to citrus -- where Israeli, Chilean, Greek and British firms have invested more than $50 million to improve the quality of Cuban oranges and grapefruits -- and, to a lesser extent, tobacco.

"Agriculture is the key to the Cuban economy," said William Messina, executive coordinator of the University of Florida's International Agricultural Trade and Development Center. "Tourism is growing by leaps and bounds, but it still represents only 10% of the economy."

Messina said three developments offer short-term hope for Cuba's agribusiness future, even without a lifting of the U.S. embargo that makes importing Cuban cigars illegal: the October 1994 decision to abolish state farms in favor of smaller cooperatives, the long-awaited reopening of farmers' markets, and the welcoming of foreign investment into all sectors of agribusiness including the once-sacred sugar industry. Yet foreign investment still has yet to make a difference for that struggling sector, which this year is bracing for its smallest crop in 50 years.

Tobacco is faring little better. Cuba is now spending $7-8 million a year just to buy inferior-quality tobacco from foreign countries to meet demand for cigarettes, because of "disappointing crops, failure to meet planting goals and lack of productivity," according to a June 8 broadcast by Radio Rebelde. For example, Villa Clara province produced 147,000 quintales (hundredweights) of tobacco in 1986, but only 20,000 in the last harvest.

"Farmers' markets are designed to allow farmers to sell surplus, over and above their quotas," said Messina. "But we understand that the quotas are not being met. So we don't know if that's really an increase, or just a reshuffling of production." He added that "we know the embargo won't last forever, and there's a very good possibility that once the embargo is lifted, it will have more of an impact on U.S. agriculture than all the nations of the Caribbean Basin Initiative."

In the meantime, most of Cuba's tobacco production remains in the hands of three state entities: the Cooperativa de Producción Agraria (CPA), the Cooperativa de Caña y Servicios (CCS) and the Unidades Basicas de Producción Cooperativa (UBPC).

As of August 1994, according to government statistics, about 141,000 acres of Cuban farmland were dedicated to tobacco, of which state-run farms account for 11%, the CPA 12%, the CCS 49% and the UBPC 28%.

Over the years, many of Cuba's best cigarmakers have left the island in search of greener pastures. One of them, Nestor Plasencia, has established himself as one of the leading cigar manufacturers of Honduras -- where the soil is nearly identical to that of his native Pinar del Río province. Plasencia, who fled Cuba in the early days of the revolution, went to Nicaragua in 1965, but his family's lands were confiscated by the Sandinistas 14 years later. So he fled over the border to the Honduran town of Danli, which is today home to eight cigar factories. Likewise, Switzerland's Davidoff no longer sources cigars from Cuba but from the neighboring Dominican Republic, which now ships more cigars to the U.S. market than any country in the world.

Says José Antonio Rivero, president and CEO of Amerop Sugar Corp. in Miami: "Cuba lacks the basic infrastructure to permit the normal flow of its agricultural output to its domestic market as well as to its foreign clients. Public transportation is deteriorating every day. Cubans wait for hours for buses and when they come, they are overloaded. Gasoline can only be bought with U.S. dollars at a price that makes it impossible to be bought by Cubans. As a result, there are now 1.7 million bicycles throughout the streets and roads of the island. It is almost impossible to make a telephone call even within the city of Havana."

Rivero adds that "Cuba also lacks the productive, industrial and marketing know-how to exploit its agricultural potential. To update this know-how and compete with free-market economies, Cuba has to open its doors to the outside world. In order to open its doors effectively and make it attractive for foreigners, the Cuban government has to be willing to give up its total control over Cuban life in general."

In addition to problems posed by shortages of fuel, fertilizers and spare parts in the wake of the Soviet collapse in 1991-92, Cuba's tobacco industry faces another obstacle: the U.S. trade embargo. Tromp, of Pacific Cigar Co. Ltd., says Washington's anti-Cuba policies cause no end to his frustrations.

"For example, we buy humidors and accessories for the covers and matches in the United States, and that creates some difficulties for Havana House in Canada," Tromp told the Cuban government mouthpiece Business Tips on Cuba. "The U.S. government makes it difficult to do business with U.S. firms, which is unfortunate and absurd. But we don't distribute in the United States. It isn't one of our markets. If a tourist from that country wants to buy in our store, that's his business."

The embargo also bans U.S. citizens from traveling to Cuba (except for journalists, those with relatives in Cuba, members of the clergy and academics involved in bona-fide research projects). Nevertheless, the number of tourists visiting Cuba -- mostly Canadians and Western Europeans -- jumped from 424,000 in 1991 to 619,000 last year, with one million tourists expected in 1995.

At least a few of those tourists are Americans traveling to the forbidden island with Toronto-based Wings of the World Inc., which among other things offers a "five-day cigar adventure of Cuba" for $2,195 per person. This includes round-trip airfare from New York's JFK to Havana via Nassau, lodging at Havana's luxurious Hotel Nacional, city tours of Havana, and a private meeting with Georgio Fuentes, Ernest Hemingway's boat captain. In addition, the trip visits the Yagrumas Park & Cigar factory, the Vuelta Abajo Plantation, the H. Upmann plant and El Laguito, home of the famous Cohibas -- not to mention El Morro, the National Museum of Fine Arts, the Natural History Museum and the ultimate glorification of Fidel Castroism, the Museum of the Revolution.

"Finally," says a tour brochure, "the adventure will be capped by two days on the diamond-dusted beaches of Varadero, where while staying at a world-class resort you will be able to swim in the ocean, kick back, light up your favorite Cuban cigar and decompress while sipping your favorite drink."

Thakin, a Burmese native who serves as the agency's "destination specialist" for Cuba, Vietnam and North Korea, says the Cuban cigar trip has attracted at least 500 participants -- most of them Americans -- in the five years Wings of the World has been offering the tours. Yet the agency, which plans more "cigar adventures" in November 1995 and January and February of 1996, has also attracted hate mail and obscene phone calls from right-wing Cuban organizations.

"We have to play very safe. We cannot jeopardize our travelers' safety or expose them to abuse," he says, explaining why his agency flies to Cuba from the Bahamas and not on charter flights from Miami, where the tourists would almost certainly face the wrath of the Cuban exile community. "The people we take are very well-cultured. These people don't go to lie on the beach, they go to observe something."

Unfortunately, that kind of travel might become a thing of the past if a bill proposed by Sen. Jesse Helms (R-North Carolina) becomes law -- as many Cuba-watchers expect it to in one form or another.

This so-called Helms bill would pose a "substantial obstacle" to normalization of relations between the United States and Cuba, warns New York attorney Michael Krinsky, who is considered an expert on Cuban legal issues. It would also make it much more difficult to circumvent the travel ban, he says, because even something as innocent as staying in a Cuban hotel might be interpreted as trafficking in stolen property.

"It's a wide-ranging bill that attempts to hurt Cuba and internationalize the embargo," he said. "At its core is the expropriation of property owned by Cubans in the early days of the revolution. For those people, the Helms bill would establish the possibility of bringing lawsuits in U.S. courts against any person who traffics in their expropriated property. This would include investing in a business, buying the property or buying or selling in goods produced in expropriated factories."

That means a Cuban exile now living in Miami could, for instance, use the U.S. court system to sue any person -- American or otherwise -- who invested in Cuban tobacco land. By the same token, a company like Lone Star Cement of Connecticut would be within its rights to sue the Mexican conglomerate Cemex -- which recently bought a controlling interest in a Lone Star cement factory that was confiscated by the Cuban government in 1960.

Krinsky said that even if the Clinton administration drops the embargo -- and even if Fidel Castro were overthrown tomorrow -- normal relations following passage of the Helms bill would still be impossible until all claims between former Cuban citizens and the Cuban government were settled. That would essentially involve "a reversal of the revolution and a return to the state of affairs in 1958, something the Cuban government is not prepared to do."

Yet Jesse Helms doesn't scare Wings of the World -- at least not yet.

"We don't give a damn," Thakin says. "Let him do whatever he likes. The State Department reads our brochures all the time. We have a very good track record and we do everything legally."

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