NO TRADING WITH THE ENEMY !

February 28, 2008

The Cuban Economy: After the Smoke Clears

For most Cubans, life remains a slog. But here's the surprise: There's plenty of potential for growth in everything from oil exploration to upscale tourism
Roger Johnson knew that Fidel Castro would step down eventually. But the Cuban leader's Feb. 19 retirement announcement, while Johnson was in Havana, added an unexpected bit of drama to an otherwise routine visit. As North Dakota's agricultural commissioner, he was on his seventh trip to Cuba in as many years, signing a contract to sell $7.5 million worth of peas and lentils.

Wait a minute. What was a North Dakotan doing peddling beans to a country that Americans aren't supposed to trade with? He was taking advantage of rules that, since 2000, have allowed U.S. companies to sell food and agricultural products to Cuba. And he's far from alone. The U.S. shipped $438 million in such goods there last year. "We have a lot of commodities that Cuba wants," Johnson says.


And somehow, Cuba scrapes together enough cash to pay for them. Despite the run-down buildings, potholed roads, and empty store shelves, the country's economy grew by 7.5% in 2007, the third straight year of rapid expansion. Record high prices for nickel exports, promising deepwater oil finds in the Gulf of Mexico, brisk sales of premium cigars, and white sand beaches that attract millions of foreigners all add up to a stronger economic base than you might imagine. The robust growth could keep the communist regime under Fidel's brother Raúl Castro afloat by allowing him to raise salaries and improve crumbling infrastructure. "Cuba's state economy is in the best shape it has been in since the Soviets left in 1991," says Jorge R. Piñon, a Cuba expert at the University of Miami. "They don't need the embargo to be lifted."

That's not to say Cuba is in glowing health. Far from it. When Raúl Castro took over as acting President in 2006, he publicly acknowledged that government services were inefficient, and he urged Cubans to air their grievances and suggest how to make things better. In a series of roundtable discussions across the country, people complained about lousy public transport, low salaries, shoddy housing, and excessive government regulation. Although some 53,000 new homes were built last year, a half-million more are needed. And while Havana splurged on hundreds of new Chinese-made buses to replace tractor-pulled contraptions called "camels" that once hauled commuters, most people still wait in long lines or hitchhike to get to work.

For anyone outside a small elite, just getting by is a struggle. Benito, a 48-year-old cobbler who declined to give his last name for fear of losing his job, earns just $11 a month repairing shoes at a government-run, open-air workshop in Havana. His wife earns $13 monthly as a seamstress in a state factory. They live with Benito's sister because they can't afford their own apartment. The family gets a monthly ration booklet that provides enough food for 10 days; the rest has to come from less regulated markets where prices are far higher than in stores with rationed goods. In January, as part of a program to cut electricity consumption, the government delivered a new Chinese refrigerator and carted away their 30-year-old Soviet model. They'll pay off the new appliance?-they had no choice in the matter?-through a payroll deduction of $2.50 a month over eight years. "Everyone is expecting big changes under Raúl," says Benito. "It's impossible to live like this forever."

Many Cubans are looking for more than better salaries and food: They want to be less isolated from the world. Cuba's television stations spew out mind-numbing fare such as lectures on dialectical materialism and platitudes about the revolution. Few young people have pocket money to go to a disco or buy a beer, so many hang out in a park along Havana's Avenida de los Presidentes. On a recent Friday evening, 20-year-old Miguel Alejandro, his hair in dreadlocks, and 18-year-old Reinier, sporting a Marilyn Manson T-shirt, chain-smoked cigarettes and spoke dreamily of the possibility of traveling. "Even if we had the money, the government wouldn't let us leave the country," Reinier said. Miguel Alejandro complains that he's been fined five times by the police for offenses such as failing to carry his national ID card or sitting on the back of a park bench with his feet on the seat. "I'm tired of being hassled," he says.

THE PROMISE OF OIL
Despite the travails of the likes of Benito, Reinier, and Miguel Alejandro, the economy has some surprising bright spots that could mean a more prosperous future. Perhaps the most promising sector is oil. Before the 1959 revolution, prospectors from Texas surveyed Cuba and concluded that it had little in the way of energy resources. But today, Cuba produces as much as 52,000 barrels of crude a day?-some 36% of its needs. It comes from onshore and shallow-water wells operated for the past 15 years by Canadian companies Sherritt International and Peberco, as well as Cupet, the Cuban oil monopoly. And that represents just a fraction of Cuba's onshore potential, says Rafael Tenreyro-Pérez, Cupet's exploration director, who studied in Moscow in the 1970s, then returned home to work alongside Russian advisers searching for crude.

Farther offshore, in a triangular section of the Gulf of Mexico that belongs to Cuba, things look even better. The U.S. Geological Survey estimates that as much as 9.3 billion barrels of oil may lie in the 6,000-foot-deep waters. A half-dozen foreign outfits, including the state oil companies of China, Norway, and Venezuela, have snapped up exploration rights and are conducting seismic studies. Several expect to drill exploratory wells next year. Cuba has encouraged investment by offering standard international production-sharing deals, giving foreigners a percentage of output. "We have tried to make the contracts as fair and flexible as possible because we are interested in finding oil quickly," says Tenreyro-Pérez. Within a decade, he says, Cuba could be a net exporter of oil.

WHITE SANDS AND TURQUOISE WATERS
Major offshore discoveries would have important geopolitical ramifications: Cuba could reduce its dependence on the charity of the mercurial Venezuelan President, Hugo Chávez, who now sends 92,000 barrels a day of oil to the island at heavily subsidized prices. And it would provide the Cuban government with funds needed to improve living standards, which could buy it more years in power. "Even if Cuba simply becomes self-sufficient, that would be a very big change," says Jorge I. Dominguez, a Latin American studies professor at Harvard University. "And Cuba as an exporter of energy would make things even more interesting."

It's far from certain, though, that Cuba will ever get there. As long as the U.S. embargo remains, Havana would have nowhere to send the crude for processing, since nearby refineries are either operating at capacity or are U.S.-owned. And if Cuba's economy keeps growing as fast as it has, consumption will surely climb, too.

Tourism is similarly promising?-and faces similar problems. Cuba has long attracted plenty of tourists, but not Americans, who are barred from visiting the island without special permission. After the collapse of the Soviet Union, Raúl persuaded a reluctant Fidel that they should open the borders to foreign visitors so the country could earn needed hard currency. Cuba began pitching its white sands and turquoise waters to armies of budget vacationers from Canada and Europe. It went from receiving just 340,000 tourists in 1990 to more than 2 million by 1994 and 2.3 million in 2005. Today, package-tour visitors burn themselves to a crisp on the beaches of Varadero and Cayo Coco, while the more adventurous dodge 1950s Buicks and Chevys in the streets of Old Havana looking for the Floridita and other bars where Ernest Hemingway used to toss back daiquiris.

Now, Cuba wants to go upscale. Officials aim to attract richer tourists by constructing dozens of new four- and five-star resorts and restoring some 50 historic buildings as boutique hotels. The epicenter of this effort is the Tourism Ministry, a 1950s edifice overlooking the Malecón?-Havana's seawall?-whose breezy hallways are plastered with travel posters. To keep wealthier visitors busy, the ministry wants to offer those most capitalist of amusements, golf and yachting. Ten golf courses?-to supplement the two Cuba has today?-are on the drawing board. "To compete, we really need as many as 25 golf courses," ministry adviser Miguel Alejandro Figueras says, noting that the Dominican Republic has 35. And he figures that Cuba could receive 49,000 pleasure boats from the U.S. each year if the embargo were lifted, but the country has just 500 or so berths in its 10 marinas.

Tourism, though, has its share of troubles. For starters, business has fallen off slightly in recent years as tour prices have crept higher and resorts have aged. Arrivals fell to just over 2.1 million last year. Worse, it's tough to create a service culture in a country where the propaganda machine has long frowned on anything smacking of luxury. Hotel phones go unanswered, taxi drivers are notorious scammers, and you can queue for an hour simply to buy extra minutes for an overpriced mobile phone rented from the government monopoly.

Another potential moneymaker: tapping Cuba's huge corps of doctors to offer foreigners a tummy tuck or help in kicking a drug habit. Cosmetic surgery and other procedures in Cuba can cost less than half what they do in the U.S. Last year, 6,000 foreigners visited Cuban hospitals and clinics for treatment, bringing in a total of $22 million, and Argentine soccer star Diego Maradona has checked in twice to overcome a cocaine addiction. "By charging [foreigners] for these services, we help defray the cost of our universal health system," says Gelacio Aday, director of international services for Cubanacan, the health tourism agency.

American business, meanwhile, is eager to join the party. A growing number of U.S. farmers, manufacturers, and oilmen argue that they're missing a chance to get a foothold in post-Fidel Cuba.

In their place are companies such as nickel and oil producer Sherritt and Spain's Sol Meliá, which runs two dozen hotels across the country. All told, Spanish companies have 73 joint ventures in Cuba, particularly in tourism. Canada has 38 and because of Sherritt is the country's single biggest investor. Relative newcomer China has 12, and even Iran has gotten into the game, selling freight cars to Cuba's state railway.

Only a handful of Americans have managed to get a foothold, using the few licenses that the U.S. Treasury Dept. has issued to food exporters. One of them is John Parke Wright IV, a 58-year-old rancher from Florida whose family began trading with Cuba in the 1860s. At the time of the revolution, he notes, Cuba "was one of the richest cattle countries in the world," with 6 million head. Today, there are fewer than 2 million. "We've witnessed agricultural decline on a massive scale," he says. That drop, though, has created a big opportunity for Parke Wright, who has visited Cuba frequently over the past eight years to help restock the country's herds.

Don't expect Cuba to achieve the kind of hypergrowth seen by Asia's stars anytime soon. The U.S. embargo will continue to bite, forcing Havana to pay higher prices for everything from powdered milk to satellite telephone connections. But 7.5% growth isn't bad, and if Raúl Castro can ease in changes that his brother might not have tolerated, the regime isn't likely to collapse in the near future either. "Raúl needs legitimacy, and the only way he can get it is by delivering results through significant economic reforms," says Carlos Saladrigas, a Cuban-American businessman in Miami who heads a group drafting strategies to deal with post-Castro Cuba. "He doesn't really have much choice."