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Posted June 28, 2005 by Cubana in Business In Cuba

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Chicago Tribune

Fri, Jun. 24, 2005

HAVANA - (KRT) - In a further sign of economic retrenchment, Cuban officials have closed scores of foreign businesses that were welcomed here a decade ago to bail out the nation’s faltering economy.

Some of Europe’s largest companies formed joint ventures or other arrangements with Cuba’s state-run enterprises, including Swiss food giant Nestle, cigarette producer British American Tobacco and Spanish hotel-management giant Sol Melia.

Sherritt International of Canada also has invested heavily in boosting Cuba’s oil, nickel and energy production.

But many smaller companies also took advantage of the economic opening in the 1990s, importing everything from toys to spark plugs to hospital equipment.

Diplomats and business people say it is primarily these small and medium operators who have been asked to leave Cuba as Fidel Castro and other officials express confidence the island’s economy has recovered sufficiently to withstand the companies’ departure.

“There is a very clear rethinking of foreign investment,” said one businessman, who like others spoke on the condition he not be identified.

“The Cuban market is not open for foreign investment except in very specific areas, and the Cubans only want to deal now with large and important foreign firms,” he said.

Several executives said that only about a half-dozen of the more than 350 foreign firms once based in Cuba’s duty-free zones are still operating. Investment that once streamed into the country has slowed significantly.

Although Cuban officials have suggested that some foreign businesses were gouging the country and fueling corruption, the crackdown also is aimed at limiting the influence of foreigners on Cuban society, according to diplomats and other experts.

Many executives live in large, state-owned homes, send their children to one of the handful of private schools in Havana and belong to Club Havana, an exclusive beach resort closed to most Cubans.

Their lifestyle contrasts sharply with the island’s 11 million residents, who struggle with frequent blackouts, poor public transportation and salaries that average about $12 a month.

“It’s creating an elite that is outside the control of the state,” said a second businessman. “Castro doesn’t like that. It creates a two-tier society. It’s ideological contamination.”

Rather than reaching out to European companies, Castro is strengthening economic ties with Venezuela, an important ally now providing Cuba 90,000 barrels of discounted oil daily.

Cuban officials also are counting on an economic lift from China, which has promised to invest hundreds of millions of dollars to boost nickel production, a key Cuban export.

“For the Cubans, having foreign capital and companies operating is not something that’s inherently good but was a way to help them solve a set of problems from the 1990s,” said Philip Peters, a Cuba expert at the Lexington Institute, a Washington area think tank.

“They put the reforms in place and got to a point where they feel they have reversed the economy,” he said. “When it came to those reforms, Castro was holding his nose and now he is scaling back.”

But some diplomats and business people do not share Castro’s optimism about Cuba’s economic future. Local manufacturing and other activities remain severely hampered by a dearth of investment and an unmotivated workforce.

Cuba also does not have the hundreds of millions of dollars needed to repair its deteriorating electrical grid, water system and other infrastructure.

By pushing foreign investors out, Cuba risks permanently damaging its international reputation even though it may need those investors should the island suffer another economic collapse.

The U.S. economic embargo prohibits American companies from operating in Cuba, though an exemption to the embargo allows U.S. food and agricultural sales to the island.

“For the last 10 years, Cuba has carefully built up an image as a difficult but willing partner,” said the second executive. “The danger for Cuba is that it’s really frightening people off. It will be much harder to get them back.”

The downsizing of the foreign business community is part of an ongoing effort by Cuban officials to recentralize the economy and concentrate foreign investment in several key areas, including tourism, mining and oil exploration.

Tourism and nickel are Cuba’s most important sources of hard currency, along with the hundreds of millions of dollars Cuban exiles send annually to family members on the island.

Spanish and other multinational companies also are helping Cuba explore offshore for oil, an expensive proposition that has yet to yield a major discovery.

It was the collapse of the Soviet Union and the East bloc - Cuba’s main trading partners and patrons - that sent the island’s economy into a free fall in the early 1990s.

To lure capital and technical expertise, Cuba not only opened its doors to Western firms but legalized the U.S. dollar’s circulation, liberalized food production and allowed some Cubans to practice trades and open restaurants and other businesses.

But the number of self-employed Cubans has dropped from a peak of 209,000 in 1996 to 153,000 last year, according to Peters.

Cuban officials also have taken the dollar out of circulation, tightened controls over state enterprises doing business with foreigners and sharply increased foreign business costs by revaluating the local currency.

The number of joint ventures between Cuban and foreign companies has fallen from about 400 at the end of 2002 to about 300 today, experts say.

Still, Cuban officials say the value of exports from mixed enterprises has actually increased in the past few years, pushed upward by the high international price for nickel.

“The Cubans say that there are less (foreign) businesses doing more business,” said one expert who tracks foreign business trends in Cuba.

That offers little comfort to executives from Britain, Italy, Mexico, Spain and other countries that have either been forced to close shop or say that they are being squeezed by Cuban officials looking for a reason to send them packing.

Several businessmen complained that Cubans authorities have recently visited their offices unannounced, poring over their books searching for accounting and tax irregularities.

Foreign executives said it is difficult to make money in Cuba, where the bureaucracy is maddening, fixed costs such as electricity, telephone and other services are exorbitant, and payment delays by state entities can last months or years.

Still, many business people have become hooked on Cuba’s tropical lifestyle and relish the challenge of trying to make a buck in one of the world’s last communist nations. Some have experience in prewar Iraq and North Korea.

Other executives said they were drawn here by the expectation that the Cuban economy would soon adopt free-market reforms like those in China. That expectation has vanished.

“There is no change and there will be no change,” said the first businessman.

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