Investing in Cuba: Havana Does Not Mean Business

Nick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

[continued from "Investing in Cuba: Telecommies"]

Consumer goods in Cuba are a somewhat different story than telecom providers due to the differing nature of their products which require less physical infrastructure (or government approval).  Anglo-Dutch Unilever (NYSE: UL) and Swiss Nestle (NASDAQOTH: NSRGY) and their brands are establishing themselves as premium high-quality options and connecting with consumers ahead of American competitors.  As long-time Cuba trade consultant Kirby Jones of Alamar Associates observes, “Nestle’s bottled water, ice cream, and candy as well as Unilever, especially its cosmetics joint venture, are already in Cuba in a big way.”

However, in a demonstration of how a planned economy is terrible at planning, just as Cuba is preparing to open up its new port facilities, government officials are running out a long-established Israeli-Panamanian juice processor, imprisoning Commonwealth executives for paying workers bonuses, and refusing to renew the successful fifteen year arrangement with Unilever.  Earlier this year, Unilever figured that since it bears all the costs and responsibilities it should have a 51% share in its Cuban operations.  The previous 50-50 split has proven quite lucrative for the Cuban state and has served as a reliable way for authorities to recapture convertible currency it allows into the domestic economy.

If recent history is any guide, it is likely that Unilever will be sent away if it does not concede – at least for awhile.  In 2005, Canada’s Sherritt International which had been developing Cuba’s mining and energy sector since 1992, was “bought out” by the Cuban government (though it never fully received the compensation it was promised).  Shortly, thereafter the company returned and has become Cuba’s largest foreign investor.  Although its newer oil and gas operations are 100% owned by Sherritt, its metals and power subsidiaries are 50-50 and 33-67 Sherritt-Cuba ventures.  In a new twist on an old story, there has been a purge of Cuban officials connected to Sherritt in recent months, though explanations vary depending on the faction commenting.  Regardless, Sherritt’s interests in Cuba are likely doomed regardless of the current shuffle – and should the shift occur in the next of years, the company’s other sources of revenue are unlikely to sustain the enterprise in its current form.

Experience seems to indicate that while Cuba’s leadership is willing to do just about anything to secure energy resources which the Havana politburo believes holds the key to their longevity, outside of petrochemicals, commercial brinksmanship is a precedent likely to be repeated (at least in Cuban officials’ minds).  Unfortunately the communist mandarins have learned the wrong lessons and fail to realize that Cuba is an insignificant concern for Unilver, whereas at the time they were teaching Sherritt a lesson, the Canadian miner's entire salvation lay in Cuban nickel (and even now, over half of Sherritt's soul is a wholelly-owned subsidiary of Havana despite it now being Canada's domestic coal king).

Yet Ponces on the other side of the Florida Strait are equally deluded.  From statements that have been made (most amusing is former US Congressman Lincoln Diaz-Balart’s belief he will be Cuba’s next president) it is clear many still live in the delusional Fantasy Land sub-division of Orlando and believe that the death of Fidel (and Raul) will result in a fully-formed, fully-realized market democracy springing forth. Cuba is not Estonia– and despite all the loonies invested, Cuba is certainly not going to be the next Canada. 

Post-Brothers Castro, there are three likely scenarios for the island:

  1. Cuba is Cuba– A narco-mafia state of crony capitalists, a modern update on the pre-Castro Batista regime.
  2. Cuba is Ukraine – A painfully slow (and likely to fail) transition to a liberal republic along the lines of what is taking place in Burma/Myanmar currently, and which will yield a result much like Ukraine’s current predicament.
  3. Cuba is Vietnam – Another decade of communist authoritarian rule (especially should larger reserves of oil be found) that eventually makes reluctant common cause with the more forgiving/indifferent/apathetic newer and younger Cuban-Americans – effectively a long-delayed Vietnamese-American approach.

Assuming current trends hold and the US let’s its loudest portion (though increasingly the smallest part) of the Cuban-American community loose on a campaign of revenge and re-appropriation whatever scenario begins to shape up will be forced to rebuff American advances to stay politically viable.

 

 

 


Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication.  The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Unilever. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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