Miami Herald Miami, Florida 25 August 2021
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U.S.-Cuba Trade and Economic Council, Inc. New York, New York Telephone (917) 453-6726 • E-mail: [email protected] Internet: http://www.cubatrade.org • Twitter: @CubaCouncil Facebook: www.facebook.com/uscubatradeandeconomiccouncil LinkedIn: www.linkedin.com/company/u-s--cuba-trade-and-economic-council-inc- Miami Herald Miami, Florida 25 August 2021 Cuba’s private-sector law comes with restrictions — and a ban on Cuban American investment By Nora Gámez Torres Customers are served at a private café in Havana. Alejandro Ernesto EFE Prodded by an uprising, a wrecked economy and a worsening pandemic, the Cuban government is allowing the creation of small and medium-sized private businesses for the first time in decades. Still, most sectors will remain in state hands, and Cubans abroad cannot be owners, despite early suggestions to the contrary. Cubans haven’t been able to own a business since 1968, when the Fidel Castro government confiscated the last establishments still in private hands, everything from bodegas to frita stands. Five decades later, most state companies are bankrupt, agricultural and industrial production has plummeted, and widespread shortages of food, medicines and basic goods are the public facade of Cuba’s socialism. “The mere fact that they have done this, knowing how painful that is for some of the people in the Communist Party, is huge,” said John Kavulich, who has been tracking for years changes in Cuba as president of the U.S.-Cuba Trade and Economic Council. “There are few admissions the Cuban government could make that would better demonstrate the failure of their system than this announcement.” The new laws, published last week on the official government gazette, also set the stage for what experts believe are the first steps towards a veiled privatization effort by reconverting state companies into small and medium-sized enterprises (SMEs) that will remain state-owned but are expected to act independently. The government also authorized cooperatives in some activities other than agriculture. But as transformative as these changes might look, they come with several strings attached. Cuban Americans excluded According to Decree Law 46, Cubans will be able to own businesses of up to 100 partners and employees, organized as Limited Liability Companies, LLCs. Still, only those who reside permanently on the island can be partners. The law also considers the possibility of “mixed” enterprises, which most observers interpret as joint ventures between private entities — including foreign companies — and state businesses, but details are “to be determined.” The announcement excluding Cuban Americans and Cubans living in other countries comes after a government official told the Miami Herald the island was open to Cuban American investment. “This is a bucket of cold water,” said lawyer Pedro Freyre, who advises companies with businesses in Cuba and has advocated for the expansion of the island’s private sector. “One of the fundamental problems of the Cuban economy is its lack of capital. One of the main purposes of this business structure is to capture capital. If only Cubans living on the island can be partners, and they have no money, how do you do that?” After more than a decade in the works, the new legislation will provide legal recognition to the thousands of small businesses — from the private restaurants known as paladares to AirBnBs — that flourished under regulations for self-employment. This last category will remain for small family enterprises or those with up to three employees. Cuban Americans are already supporting many of these enterprises through remittances, but the community has long asked for government recognition beyond that. Cuban emigres lose most of their citizenship rights when they leave the country. Now that also includes being a partner in a private business. “The Diaz-Canel government has repeatedly stated that it seeks to both stimulate foreign direct investment and improve the state’s relationship with the Cuban diaspora. By denying Cuban émigrés the right to invest in private small and medium-sized enterprises, the Cuban government has effectively undermined both of these goals,” said Ricardo Herrero, executive director of the Cuba Study Group, a Washington, D.C., organization that promotes engagement policies with Cuba. Herrero said that funneling foreign investment to joint ventures with the state will have a “chilling effect” since most serious Cuban investors abroad will only consider funding private-sector enterprises. “The new law represents yet another missed opportunity by this government to improve relations with the diaspora, since it treats Cubans abroad, once again, as second-class citizens,” he added. Observers hope this might not be the final chapter and that the island’s government might change the regulations to respond to pressure coming from Cuban Americans. Some experts also believe there is space in the law for Cuban Americans or even American companies to bankroll some of these businesses, since it states in broad terms that these enterprises can seek any “legal” source of financing. Since the embargo generally prohibits this sort of financial transaction, members of the U.S. business community are asking the Biden administration — which is reviewing its policy towards Cuba — to allow just that. Too many controls Experts were impressed by some of the modern features in the law, like the nod to American-style LLCs. But they point to the many restrictions and controls still in place. Much like previous regulations on self-employment, the state will keep control of most of the island’s key economic sectors. And business owners will have to put up with an overall tight-control environment and heavy taxation. Banking, real estate and telecommunications are off limits, along with electricity services, mining, the production of sugar and tobacco, and health and education. Many other professionals like engineers, architects, and lawyers cannot start a private practice. Artists cannot have their own galleries, nor journalists a news agency or a media outlet. The new approved enterprises can import and export, but the state will still act as a middleman. The businesses will have more flexibility to decide on investments, salaries and prices. At the same time, Cuban entrepreneurs face several restrictions, including a ban on owning more than two businesses. Camilo Condis, a Cuban entrepreneur working in the private construction sector, said that is a major flaw. “Those most likely to invest will want to diversify their investment portfolio and invest in more than one company at a time, but they will not be able to do so legally,” he said. “This is a huge mistake and shows once again how little interest the Cuban government has in expanding the private sector.” In addition, the law sets limits to the businesses’ capital, which “must be in accordance with their level of activities,” and when partners want to sell their participation, they need the approval of other partners. The 175 pages that explain the new laws and regulations also detailed a highly bureaucratic process to get licenses and pay taxes. “We should not underestimate that it is an important step in the Cuban context, but the leitmotiv is ‘control, control, control,’” said Freyre. “It lacks boldness and the fundamental understanding that these sorts of steps are taken not to control or restrict but to facilitate attracting capital so that businesses can prosper.” Hesitation in departing from a centralized economy has been a serious obstacle in the Cuban government’s efforts to implement market reforms in the past 30 years. “Both the aberration of state-owned SMEs and the fact that it is not clear how the private companies will receive foreign investment shows that these changes are the result of complex discussions and negotiations within the government, and that powerful figures still have doubts” about private property, said Cuban economist Pavel Vidal, a professor at the Javeriana University in Colombia. In addition to excessive bureaucracy and lack of political will, the announced expansion of the private sector faces the same economic challenges currently affecting the country’s economy, Vidal said. That includes high inflation, a decline in tourism, a weak peso, and increased U.S. sanctions, which is why he believes the changes will not have an immediate positive impact. The Cuban economist also questioned the small and medium state enterprise model. There are many unknowns regarding those businesses, since the published documents say their implementation is yet to be regulated. Directors of state companies might suddenly see themselves acting as “owners” of their businesses. According to the Cuban constitution, state socialist property “belongs to all the people,” but the new law does not grant state employees working at these new enterprises a member status. Instead, the members will be “legal entities” chosen by the Ministry of Economy. Mass layoffs might be on the horizon, too, since the SMEs can decide the size of their workforce. “The state was always able to create small entities, and by the way, it did, and now it is difficult to accept that the state will give certain workers the property of a company through the LLCs,” said Cuban economist Omar Everleny. The contradictions in the new legislation are such that, on one hand, it states that the Ministry of Economy has broad power to decide partners, capital and regulations for these state enterprises. At the same time, it also says the enterprises will be independent and not subordinate to larger state companies or ministries. Observers point to these contradictions in the law as concessions to the Communist Party hardliners. There are doubts that the state SMEs will have much impact since many won’t be able to make it, as most state companies are bankrupt. But others see the “seed of privatization” in their design. “The Cubans have had 30 years to watch what happened in the former Soviet Union, and they learned from it,” said Kavulich.