Foreign business in Cuba: Beware the dangerous embrace

Foreign business in Cuba: Beware the dangerous embrace

Havana is at the same time attracting and terrifying entrepreneurs
by Nancy Macdonald and Gabriela Perdomo on Wednesday, August 8, 2012 10:16am

Until this spring, Stephen Purvis had it all. The British architect,
who'd helped launch the Saratoga, Cuba's poshest hotel, was one of the
more prominent figures in Havana's business community. As chief
operating officer of Coral Capital, one of Cuba's biggest private
investors, he was overseeing a planned $500-million resort in the
sleepy fishing village of Guanabo. The Bellomonte resort, which would
allow foreigners to buy Cuban property for the first time, was part of
Havana's ambitious, multi-billion-dollar plan to attract high-end
tourists and badly needed foreign exchange. Everything he touched
seemed to turn to gold. The musical Purvis produced in his spare time,
Havana Rakatan, had a run at the Sydney Opera House last year before
moving on to London's West End. But in April, the 51-year-old was
arrested on suspicion of corruption as he prepared to walk his kids to
school in Havana.

Purvis's arrest could have been anticipated. Coral Capital's
British-born CEO, Amado Fakhre, has been held without charges ever
since his arrest in a dawn raid last fall. The investment firm is
being liquidated, and both men have faced questioning at Villa
Marista, Cuba's notorious counter-intelligence headquarters. They are
not alone. Since last summer, dozens of senior Cuban managers and
foreign executives, including two Canadians, have been jailed in an
investigation that has shocked and terrified foreigners who do
business in the country.

Since replacing his brother Fidel as president in 2008, Raúl Castro
has painted himself as a reformer, and Cuba as a place where foreign
businesses can thrive. Over the last year, he has relaxed property
rights, expanded land leases and licensed a broad, if random, list of
businesses—everything from pizza joints to private gyms. And he's
endorsed joint venture golf courses, marinas and new manufacturing
projects. Canadians are chief among those heeding Raúl's call to do
business with Havana. Hundreds have expressed interest in the Cuban
market in the last year alone, according to Canada's Trade
Commissioner Service. Flattering reports in Canadian media have
praised Raúl's efforts. Yet they seem to overlook troubling signs that
Cuba appears to be moving backwards.

Raúl's sweeping changes were meant to pave the way for massive foreign
investment in Cuba. The country, which was forced to lay off 20 per
cent of its public workforce last year, is barely as developed as
Haiti, and will need an influx of foreign cash to stay afloat. There
is urgency to the project. Time is running out for Venezuelan
President Hugo Chávez, Cuba's benefactor, who funds the country to the
tune of $10 billion a year, says José Azel, a University of Miami
research associate. At home, Chávez, who is sick with cancer, is also
fighting off a tough challenge from Henrique Capriles in presidential
elections slated for October. His successor will almost certainly cut
Cuba's generous aid package to deal with Venezuela's own needs.

So a strange incongruity exists in Cuba today: Havana is bending over
backwards to attract foreign currency at the same time it is
imprisoning some of its biggest Western investors. For all Cuba's
reforms, this Castro appears to be as intent on maintaining an iron
grip on the country as the last one.

Few are more keenly aware of the pitfalls of doing business in the new
Cuba as a pair of Canadians sitting in jail in Havana. It has been
more than a year since Sarkis Yacoubian, the president of Tri-Star
Caribbean, a trading firm with headquarters in Nova Scotia, was
detained in the Cuban capital. And September will be the one-year
anniversary of the arrest of Cy Tokmakjian, the president of a trading
company based in Concord, Ont. He and Yacoubian have both been
imprisoned without charges. Their assets now belong to Cuba. No trial
date has been announced.

Both Yacoubian and Tokmakjian ran well-established businesses in Cuba,
had years of experience in the country, and multi-million-dollar
contracts with several government ministries. Yacoubian imported the
presidential fleet of BMWs. Tokmakjian, who'd been in Cuba for more
than 20 years and did $80 million in annual business there, had the
rights to Hyundai and Suzuki, which are used by the country's police.

So far, Raúl has scared off more joint ventures than he has attracted,
jeopardizing the investment Cuba needs to succeed. Spanish oil giant
Repsol quit the country in May. Canada's Pizza Nova, which had six
Cuban locations, packed its bags, as did Telecom Italia. The country's
biggest citrus exporter, BM Group, backed by Israeli investors, is
gone. A Chilean who set up one of Cuba's first joint enterprises, a
fruit juice company, fled after being charged with corruption last
year. He was convicted in absentia. Shipping investors are pulling
out, even as Cuba prepares to open a new terminal on the island's
north coast.

Experts say Raúl's crackdown is an attempt to reassert control. By
targeting the biggest names in the business community, he's sending a
message, says Azel. "Raúl doesn't want to be Gorbachev," the Soviet
statesman who brought down Communism in the former Soviet Union. "He
wants to be the guy who makes socialism work."

Yet as detentions pile up it remains unclear what exactly the jailed
Canadians and Britons have done, or what the regime means by clamping
down on corruption. "Cuba's version of what is legal and proper is
different from the rest of the world," says Ted Henken, president of
the Washington-based Association for the Study of the Cuban Economy.
Even sales commissions are viewed as corrupt, says Yoani Sánchez, a
Havana-based journalist. Foreign companies can't pay their Cuban
employees any more than the standard wage, about $20 a month, says
Sánchez—barely enough for two weeks' living in poor conditions with a
poor diet. Many foreign bosses routinely top up pay with bonuses and
commissions, which Havana considers bribery. For years, says Henken,
corruption was the grease that made wheels turns. "You got what you
needed to live from what was thrown off the back of the truck."

It is not clear whether the detained Canadians are facing charges for
salary top-ups, for example, or for legitimate corruption allegations.
Canada's Foreign Affairs department would only confirm that "consular
services are being provided to two Canadian citizens detained in
Cuba." Executives at Tri-Star Caribbean and members of the Tokmakjian
family declined comment, citing the "extremely sensitive" nature of
the situation.

Azel's advice to potential Canadian investors? Stay away. "You're
defenceless. There's no independent judiciary to adjudicate any kind
of claim," he says. "Doing business with Cuba is a very risky
proposition."

So then why all the new resorts and planned golf courses? Why do so
many Brits and Canadians take the personal and business risk? Because
it's widely believed that the days are numbered for the U.S. travel
ban on Cuba, which has barred Americans from visiting the island for
almost three decades. Predictions for tourism growth are off the
charts—up to six million annual visitors, from two million today, says
Gregory Biniowsky, a Canadian consultant who's lived in Cuba for two
decades. Cuba's boosters believe the country, with its vast,
undeveloped white sand beaches, just 45 minutes by plane from Florida,
could come to rival Jamaica or the Dominican Republic as a tourist
draw. "It's just a matter of time before things boom here," says
Biniowsky. Five billion barrels of oil lie under Cuba's waters,
according to the U.S. Geological Survey. To some, getting in on the
ground floor is worth the risk. But foreign investors who lose sight
of the dangers could find themselves in serious trouble.

http://www2.macleans.ca/2012/08/08/cuba-risky-business/