Investing in Cuba: Another Vietnam!? (part 2)

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Dr. Timothy Ashby, CEO of Federal Regulatory Compliance Services, has been involved in assisting governments and companies with post-communist transitions since the fall of the Berlin Wall.  Drawing on personal and professional experiences with Cuban decision-makers, Dr. Ashby discusses the eventual transition in Cuba and what investors can expect.

[continued from part 1]

Tim Ashby:  When I worked for Ernst & Young on privatizations in Russia and Eastern Europe in the early ‘90s I had opportunities to assist amazing leaders like Vaclav Havel [president and key reformer of the Czech Republic], and did things like privatized a hotel chain in Slovakia and a department store in Saint Petersburg. 

Nick Slepko:  Wow, Havel and working in Russia during its Wild East period – and you’re still alive?

Ashby:  Yes, but I did lose a couple friends – one, a Scottish lawyer, was caught in a cross-fire, and another Russian lawyer friend was killed by the mafia in Saint Petersburg.

Slepko:  So Cuba is no problem for you then.  What about if Fidel dies?  People believe everything is going to open up.  Is that true? 

Ashby:  I don’t know about that, but hopefully the holdover Bush appointees at State and Treasury will go their merry way, and if Obama is re-elected, there are a number of new people in both that intend to ramp up a more positive policy towards Cuba.  There are a lot of frustrated liberal Democrats that want to see some progress on this.  I’ve heard it all before, but we’ll see what happens.

I do know that a vice minister in the Cuban government told me two years ago that if everyone in the Cuban government stood on the Malecon and blew their brains out, the radical Cuban-Americans in Miami still wouldn’t be satisfied.  In other words, it won’t make any difference because people like Lincoln Diaz-Balart think they are going to return to Havana and take over – [Diaz-Balart] has even said he intends to be the next president of Cuba.  He’s delusional.

It is going to take some heavy duty work by a [US] administration to break the log jam and make some changes.  The tail has been wagging the dog for a long time. 

Slepko:  Tell me about it.  I grew up in Seattle and Santa Cruz, and even I think it’s odd that US elections pivot on South Florida, the craziest place in America.  What kind of craziness is in store for a post-Castro Cuba?  Will it evolve like Vietnam, or will it be a mafia state, or what?

Ashby:  They are talking openly about [a Vietnam-type transition].  The successor government will be a one-party state.  I think it will be a junta.  There will be a couple Castro relatives in the junta.  I think that General [Luis Alberto] Rodriguez, Raul’s son-in-law, will emerge as the real leader.  He’s a really smart guy, speaks English with an Oxford accent (not sure where he picked that up), and is currently the CEO of Grupo GAESA, the [multi-billion dollar] military industrial holding company.  I’ve met him, and he’s much more of businessman than a military man.  I’ve also met Fidel’s son, Fidelito, a nice, quiet man with a PhD in math and physics, but I understand that he has no leadership ambitions.

The Cuban people like the military.  They think it is the most efficient group in the government and will control the bureaucrats.  The Cuban people hate the bureaucrats and think they are holding back progress. 

Slepko:  Sounds like Cubans are natural Republicans no matter what side of the Strait they are from.

Ashby:  That’s a good way to put it.  They are actually conservative in many ways – and have gone back to the church en masse (no pun intended).  When the Pope visited, Raul actually knelt and kissed his ring.  It stunned people, but there’s still that respect for the church.  The church is very powerful in Cuba and basically supports the government and works hand in glove in driving change.  It is an interesting transition, but it will not be an overnight democracy.  I’m convinced of that. 

I believe the Castros will anoint a junta with their own children running it.  And their children are completely different.  They are well-educated, liberal (by Cuban standards), been around the world, educated abroad, and know Vietnam.  There’s a lot of interaction with Vietnam (more than China), and the Cubans have openly told me they would like to see more of a Vietnam-style model – state capitalism with a lot of people getting rich. 

Their largest trading partner is Spain, and they have a lot of influence from Spain and are looking around the world at different models – including Sweden.

Slepko:  Although ADM (NYSE: ADM) confirms it has activities in Cuba, Sysco (NYSE: SYY) has been more coy (and even curtailed its Gulf Coast subsidiaries for being too "aggressive").  While ADM's exports are mainly basic foodstuffs, Sysco seems to have taken advantage of the exceptions in the embargo that relate to not only food, but medical trade and is actively supplying hospitals and other facilities that can be construed as acceptable under US law.  Long-time Cuba trade consultant Kirby Jones of Alamar Associates believes that the Cuban government prefers and favors large US corporations like ADM and Sysco because they are more efficient and easier to work with than small- and medium-sized enterprises.  From your experience with exporters and Cuba, do you agree?

Ashby:  I do.  Also, part of the reason is that the Cuban government believes that big corporations can apply leverage on the US government.  Cuban officials have told me directly that they have sought these relationships to help change policy, but that they have been largely disappointed with the [political] results. 

But strictly from an economic perspective, ADM has made millions, and Wrigley and other major US food producers have also done well.

Slepko: Yes, I recall early on Sysco scrapped an initial letter of intent because it was "political" with a line that said Sysco would work to help normalize trade relations between Cuba and the US.  Clearly, as they appear to be the second largest US public company in Cuba (after ADM), they have been able to work around those early obstacles.

Slepko:  Will European and Canadian companies be very competitive when the Americans are allowed to finally (and fully) go into Cuba? 

Ashby:  No, the Cuban government wants to diversify foreign investment, but they realize the money will come from the United States and they are actively talking to the big American hotel companies.  A lot of those will be turn keys.  In other words, [Spain’s] Sol Melia has about 25 hotels and they will kind of downsize and a lot of those will be taken over by someone like a Hilton or a Marriott (NYSE: MAR).  The Cubans are pragmatists and are well aware that the United States is going to be the 800-pound gorilla.  They just want to control it.

Slepko:  Is it true that Starwood (NYSE: HOT) has a lot of prior claims?  Do you think they will go back?  Who is likely to have the best chance in Cuba?

Ashby:  Starwood has several claims, including part of a claim worth USD 1.4 billion that came with its purchase of an ITT subsidiary which had owned a radio station in Cuba plus several parcels of land.  I can tell you that they definitely want to go back and are among the many hoteliers in the US that want to go back in…Ultimately though the Cuban decision-makers prefer big names like Marriott…

 

 

 


Nick Slepko has no position in any company mentioned here at the time of publication. The Motley Fool owns shares of Archer Daniels Midland Company. Motley Fool newsletter services recommend Sysco . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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