International Business : BRIEFING BOOK : How to Deal With Communist Cuba’s Slowly Opening Economy

ISSUE: Cuba is becoming more open to foreign investment and trade just as the United States allows more exceptions to its 30-year-old embargo against the Communist-ruled island.

BACKGROUND: The collapse of the Soviet Union and the breakup of the socialist trading bloc in Eastern Europe has left Cuba without its traditional commercial partners, whose favorable trading terms in effect provided Cuban industry with an estimated $5 billion in annual subsidies.

The Cuban economy is deteriorating rapidly. To survive, Cuba has overhauled its once rigidly socialist economic system.

First, the government began seeking international partners for foreign-currency-earning businesses, such as hotels and oil exploration. Foreign bankers have even been invited to open offices.

The government is offering foreign investors tax exemptions, 25-year renewable contracts and guarantees that their initial investments will be recovered in five years.

Lately, the economic rules have begun to change, creating new opportunities for the nation’s 10 million people.

Cubans are now allowed to hold foreign currency, which is expected to increase the amount of money that Cuban exiles in the United States send back to their families. A few weeks ago, tradespeople were told they can start small businesses to perform such services as shoe and watch repair, cabinetmaking or crafts making. However, while they can work for themselves, they cannot hire others into the business.

Meanwhile, the United States is adding more exceptions to the embargo imposed after revolution brought Fidel Castro to power.

Information has been added to the select list of products exempted from the embargo, and indications are that the category is being interpreted broadly.

For example, the State Department recently approved a Washington-area poster store owner’s request to take a buying trip to Cuba.

Travel restrictions have also been loosened, adding religious and educational purposes to the previous categories of family visits, research by academics and journalists, and guests hosted by the Cuban government or other organizations based outside the United States.

OUTLOOK: Cuban officials say publicly that they see little chance for turning back to old-style socialism.

“The changes we are making are irreversible,” Carlos Lage, vice president of the Council of Ministers and architect of Cuba’s economic policy, recently told a group of foreign executives.

The future course of Washington’s Cuba policy is less clear.

The Clinton Administration appears to be divided between those who favor tighter restrictions to hasten the crash of the Castro government and those who want the United States to negotiate further easing of the restrictions or an end to the embargo altogether.

Those who favor reaching some sort of normalization with Cuba cite concerns that a further deterioration of Cuba’s economy could result in a flood of new refugees to the United States.

The same discussions divide the Cuban-American community, which has long been the guiding force in U.S. policy toward Cuba.

Further, top Administration officials are far more worried about getting health care reform and the North American Free Trade Agreement successfully through Congress than they are about Cuba.

As a result, the prospects are for gradual and uneven changes in the embargo.

STRATEGY: Businesses that have stayed informed and laid the proper foundations will have the best chance at opportunities in Cuba if the embargo is loosened or lifted.

The State Department is in charge of enforcing rules on visiting and trading with the island.

Currently, 87 U.S. companies are authorized to trade with Cuba, mainly in travel-related businesses.

Business people who do not fit into the authorized categories--people with relatives, researchers or travelers with religious or educational motives--may go to Cuba if a sponsor pays the bill.

The Cuban government regularly hosts such visits by groups and individuals seeking information and contacts.

In preparation for striking a deal, U.S. businesses may negotiate letters of intent to do business with Cuba, which would take effect as soon as permitted by U.S. law.

Businesses should be prepared to deal with government agencies, keeping in mind that, despite reforms, Cuba still does not permit its citizens U.S.-style entrepreneurship.