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A new Cuba has the same old obstacles for Canadian business

People walk along a street of Havana on Nov. 29, 2016.

Juan Barreto/AFP/Getty Images

The last of the fatigues-wearing Marxist revolutionaries may finally have shuffled off the stage, but Fidel Castro's death doesn't mean Cuba is poised to become a capitalist playground any time soon.

The Cuban leader's passing has removed only one impediment to doing business in the island's antiquated economy. Dilapidated infrastructure, from crumbling highways to wonky phone systems, remains an obstacle.

So does the country's stifling bureaucracy, fierce nationalism and odd dual-currency system, as well as a worrisome level of corruption. On top of all that, no one knows how hard a line U.S. president-elect Donald Trump will take on Cuba and what that may mean for its tourism industry.

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Read more: Canada-Cuba tourism industry braces for change

Read more: U.S.-Cuba relations up in the air as Trump threatens to reintroduce sanctions

Read more: From Brazil to Venezuela, Fidel Castro's influence felt across Latin America

A handful of Canadian companies, including miner Sherritt International Corp. and tour operator Sunwing Vacations, have demonstrated it is possible to make money in Cuba. But the hard reality is that Canadian-Cuban merchandise trade is barely a blip after decades of effort.

Canada imports copper and aluminum scrap, cigars, rum and frozen lobsters from Cuba. It exports wheat, legumes, chemicals, fertilizers and auto parts to the island. But in 2015, the total amount of merchandise trade between the two countries totalled only about $1-billion, less than 1 per cent of Canada's international trade.

While spending by Canadian tourists in Cuba may add another $700-million to that total, the bottom line is that anyone hoping to cash in on post-Fidel Cuba should brace for a long slog.

"There are [Canadian] companies that have been doing very profitable business here since the mid-1990s," says Gregory Biniowsky, a Havana-based lawyer for Canadian law firm Gowling WLG. "But it takes patience to handle the bureaucracy and a willingness to negotiate."

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While Mr. Biniowsky believes Cuba will see significant improvement over the next two to five years, others are more cautious. "The business climate remains challenging," according to Export Development Canada, a Crown corporation that provides credit to exporters.

Gary Hufbauer of the Peterson Institute for International Economics in Washington, the co-author of a book on how the U.S. can normalize relations with Cuba, predicts the Caribbean country will move only gingerly toward liberalizing its society so long as Raul Castro, Fidel's younger brother, remains in power.

Raul's "preferred option is to do the Chinese-style game of having more market forces but with one party remaining firmly in power and keeping political control," says Mr. Hufbauer, a former U.S. trade official.

The regime's desire to maintain control probably implies a continuation of Cuba's monetary scheme, in which most domestic workers earn non-convertible pesos while foreigners swap their dollars and euros for a parallel currency known as convertible pesos. The convertible pesos are pegged at parity to the U.S. dollar while the non-convertible pesos trade for a fraction of that value.

The system "is completely wacko," Mr. Hufbauer says. "It amounts to a big tax on labour." It's also a red flag to protectionist politicians like Mr. Trump, because it tilts trade in Cuba's favour by making U.S. goods very expensive for ordinary Cubans while simultaneously making Cuban labour very cheap from a U.S.-dollar perspective.

Other opportunities in Cuba also come with question marks. For instance, foreign companies hoping to get in on the ground floor of key industries should ponder the fact that the Cuban military controls important sectors of the economy ranging from major hotels to electric power.

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"It's essentially a state-owned economy with military people having the leadership positions," Mr. Hufbauer notes. "If there is ever a privatization, [the military leaders] would be poised to take over the firms in some kind of bargain-basement deals."

Mr. Hufbauer acknowledges that Cuba could receive a big boost if the U.S. ever allows its citizens to vacation freely in the country.

However, he says Cuban business remains highly inefficient, with a level of corruption higher than in most developed nations. "I think it's very hard to do business in Cuba without greasing some important palms," he says.

Transparency International, a non-profit group that tracks official dishonesty around the globe, rates Cuba's level of public sector corruption as No. 56 in the world, just above Greece and just below Kuwait. That is well above some Latin American countries such as Brazil (No. 76) but far below others such as Chile (No. 23).

For his part, Mr. Biniowsky insists the level of corruption in Cuba is not all that different from other countries in its immediate vicinity. "If you're patient, and you're prepared to deal with the bureaucracy, you can do successful business here."

He argues that it's important for companies to establish a position in Cuba now, before rivals get there. Among the country's advantages are the highest level of literacy in Latin America as well as a low crime rate.

A lifting of the U.S. embargo could, practically overnight, provide a major boost to the country's fortunes, he says.

"Cuba is a very difficult country to do business in, but if you look at the per capita potential for growth ... it's one of the most promising of the emerging markets."

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About the Author

Ian McGugan is a reporter with The Globe and Mail's Report on Business and has been writing about investing, economics and business for more than 20 years. He joined the Globe and Mail in 2010. He has been executive editor of Canadian Business magazine and founding editor of MoneySense magazine. More


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