BY Paolo Spadoni
He is a PhD candidate in the Department of Political Science at the University of Florida.
American investments in foreign companies that operate in Cuba are perhaps the most emblematic example of gaping holes in U.S. policy.
Last June, the United States reinforced its decades-long economic embargo against Cuba with new restrictions on U.S.-based travel and remittances to the island. The basic goal of these measures, according to the State Department, is “to isolate the Cuban government economically and deprive it of U.S. dollars.”
Just a few weeks ago, the Bush administration also introduced more stringent rules on payment procedures for Cuba’s purchases of U.S. food products, mainly aimed to force Havana to spend more of its scarce foreign exchange and stifle commercial practices that have boomed in the past three years.
There is little doubt that Washington’s recent moves on Cuba will intensify pressure on its communist neighbor and deny a significant amount of hard currency resources to the cash-strapped Castro government.
However, while U.S. direct business links with the island have been severed, the presence of American investors in foreign firms that operate in Cuba is actually on the rise. The growth of U.S. indirect business connections with Cuba is an important and largely unexplored development that defies the logic of economic sanctions and undermines their main goals.
Under the embargo, direct investments in Cuba are prohibited for U.S. entities. But the Department of the Treasury authorizes a U.S. firm or individual to invest in a third-country company that has commercial activities in Cuba as long as this investment is not a controlling interest, and provided that a majority of the revenues of the third-country company are not produced from operations within the island. Thus, if the investment is an indirect one, a U.S. entity should have no problem in building a Cuba-related stock portfolio.
American entities hold publicly traded shares of several major foreign firms that have provided the Castro government with much-needed capital, technology, management expertise, and new markets for its main exports. For instance, individuals subject to U.S. law hold more than 15 percent of the shares of Spain-based Sol Melia and France-based Accor, the most important foreign investors in Cuba’s tourist sector. Sol Melia is the leader in the island’s leisure industry, with equity interests in four hotels and 23 management contracts. The Accor group manages several hotels in Cuba, with establishments that operate under the Sofitel, Coralia and Mercure brands.
In addition, U.S. investment funds and individual shareholders own about 25 percent of the French-Spanish conglomerate Altadis, 20 percent of Switzerland-based Nestle, and 6 percent of Brazil-based Souza Cruz. United Kingdom-based British American Tobacco (also with significant U.S. capital) owns 75 percent of the Brazilian company. Souza Cruz, in partnership with the Castro government, has the virtual monopoly of cigarettes in Cuba’s hard currency stores and for exports. Altadis has invested almost $500 million in a 50-50 joint venture with Cuba’s Habanos S.A. for the exclusive right to market Cuban tobacco products internationally. Nestle has a joint venture with the Cuban company Coralsa that produces and markets the best selling soft drinks and mineral waters in the island
In recent months, U.S. indirect business links with Cuba have become even more important, mainly thanks to new operations on the island by multinational oil companies. American entities own approximately 22 percent of Spain-based Repsol YPF, a substantial amount of shares of Brazil-based Petrobras, and even about 14 percent of communist China’s Sinopec. Between June and July 2004, Repsol spent about $50 million drilling for oil in Cuba’s virgin Gulf of Mexico waters and said it would continue studying the area and could begin drilling again next year. Petrobras is also considering exploration in the same area and has announced it will invest $20 million to build a lubricants plant in Cuba. Sinopec, China’s second-largest oil company, has just signed an agreement with Cuba’s state-run Cubapetroleo (CUPET) to jointly produce oil on the coast of western Pinar del Rio province.
American investments in foreign companies that operate in Cuba are perhaps the most emblematic example of gaping holes in Washington’s effort to economically isolate the Castro government. As multinational corporations headquartered in a foreign country can rely on U.S. capital to help finance their business activities on the island, one is left wondering if it makes any sense for the United States to keep using economic sanctions as a tool to achieve ambitious foreign policy goals.
Cuba’s front door may be closed to U.S. investors, but the back door is wide open.