News Column

Prospecting In Cuba

Page 3 of 1

With 80-year-old dictator Fidel Castro's health in question, interest within the United States has grown over what many see as Cuba's inevitable change in government – even if just to see his brother Raul permanently assume power.

And outside of this nation's sizeable Cuban expatriate community, few want to know more than U.S. businesses eager to tap into the 11 million consumers located just 90 miles off of Florida's coast.

Mr. Castro maintains that when it comes to Uncle Sam, it will be business as usual – or rather very little business as usual – in Havana during his illness. But the U.S. State Department believes he has given up day-to-day management of the island-state and his fade out creates a time "fraught with possibility" for both nations.

Florida East Coast Industries – whose CEO is Havana-born Adolfo Henriques – is in a unique position to pounce if ties can be resumed. One of its businesses, the Florida East Coast Railway, is a regional freight railroad that operates 351 miles of mainline track from Jacksonville to Miami.

Miami-based investment manager Thomas J. Herzfeld says that the railroad is anticipating a significant increase in the amount of freight going through Florida once the embargo is lifted, and foresees a rail barge operating to and from Cuba since the railways are compatible there.

Other big American companies eyeing a re-opened Cuba are in the metals, sugar, and tobacco industries, although there's certain to be a spurt of investment and entrepreneurship from expatriates eager to do business in their motherland.

One big obstacle will be the United States' insistence on compensation for U.S. assets confiscated by the Cuban government when Mr. Castro took over. That potential bill is estimated by University of Miami's Cuban Transition Project to now range between $6 billion and $20 billion.

In just one example of how sticky that situation can be, one Cuban exile family has lobbied the U.S. government to punish a Spanish hotel chain, Grupo Sol Meliα, which built inns on property the family had lost to the communist government. Interestingly, family members were not American citizens at the time of their loss. The claim by the Sanchez-Hill family of South Florida already is an irritant in United States-European Union relations, and suggests the Pandora's box that will inevitably spring open once Cuban-American relations start to normalize.

EARLY BIRDS

Money manager Mr. Herzfeld has been planning for an open Cuba since the early 1990s, Castro or no. Barron's Online described him as "early to the party – very early." His firm's Herzfeld Caribbean Basin Fund (NASDAQ: CUBA) operates with a built-in contingency plan should trade agreements open Cuba to his investors.

Mr. Herzfeld saw Cuba and the Caribbean as emerging markets that would allow him and his investors to gain pole position when the race to Havana begins.

"Since we didn't know when the embargo would be lifted, we decided to make it Caribbean," Mr. Herzfeld says. "We saw it as an opportunity to be in position to be the first fund to invest in free Cuba.

"Our strategy 13 years ago was that there is no way to predict the embargo lifting, and we didn't just want to sit on the money."

Managed by his Thomas J. Herzfeld Advisors, Inc. firm, the closed-end fund has been successful thus far – its original investors are ahead at least 100 percent, according to Mr. Herzfeld, although it's capitalization is still a tiny $13 million. (A closed-end fund is like a mutual fund that trades on a stock exchange.)

The fund's holdings must meet two basic tests: Companies have to do well even if there's no lifting of the embargo, and if trade ensues, companies need to do additional business. Currently, approximately half of the companies are in the U.S. with the rest in the Caribbean basin.

His biggest investment is Florida East Coast Industries. He also cites cruise lines Carnival and Royal Caribbean as companies that also have everything to gain from an open Cuba – mainly more options for customers.

What's more, Mr. Herzfeld says the firm is planning a second fund, initially coined The Cuba Fund, which won't launch until the embargo situation changes. While he wouldn't give details, and no prospectus exists, it's going to be larger than his existing fund to capitalize on all of the new businesses that could be created in a democratic Cuba.

"It's not unreasonable to believe many stocks in our portfolio will rally [if trade with Cuba ensues]," says Mr. Herzfeld. "We'll take some of those profits and look at ventures to invest with Cuban Americans."

U.S. RESISTANCE

The Helms-Burton Act of 1996 is the biggest hurdle for businesses looking to crack the Cuban market. The law stipulates that Cuban democracy is a necessary element to any trade relationship between the U.S. and Cuba. The law's reach is wide – Helms-Burton is the legislation the Sanchez-Hills are using to bludgeon Grupo Sol Meliα, and the United States has long tried to warn off any foreign investors sniffing around confiscated properties.

And, although both the House and Senate have voted in recent years to overturn a ban an American travel to Cuba and to allow the sale of American goods to Cuba, President George W. Bush is maintaining a hard line toward the regime. In June, he suspended operations of three major remittance agencies – La Perla del Caribe, Transeair Travel and Uno Remittance Inc. – to stifle the flow of hard currency into the struggling island.

In July, the administration's Commission for Assistance to a Free Cuba issued a report that pledged an additional $80 million to support Cuban opposition to the regime as well as to push for a free media. The multi-agency commission, co-chaired by Secretary of State Condoleezza Rice and Havana-born U.S. Commerce Secretary Carlos Gutierrez, recommended initiating assistance to Cuba after a transition government took over. Under current U.S. law that government cannot include Raul Castro.

Meanwhile, some are starting to fear the U.S. is dallying while global competitors from places like China and Venezuela are stealing a march on the Cuban market.

REAPING WHAT WE GROW

One of them is Rep. Solomon Ortiz (D-TX), who for years backed the trade embargo. Now, fresh from a July trip to Cuba to scope out trade opportunities for his district's port of Corpus Christi, he recalls Mr. Castro asking, "You are members of Congress. Why do you do business with China and Russia, but you don't do business with me, and I'm only 30 minutes away?"

The congressman agrees on some levels, asking rhetorically, "Why are we out of the ballgame?

"There's a lot that Cuba needs to do with their regime, but when you see what deals they're making. … God forbid they decide to block the Gulf of Mexico."

Of course, the congressman has reason to worry about that. Corpus Christi and 16 other Gulf ports are interested in increasing trade with Cuba (the current agreement allows for the U.S. sale of agricultural goods and medicine).

"It [trade with Cuba] means a lot of jobs for the area, for farmers, ranchers, and cattle people," Mr. Ortiz says. "This opened up a new avenue for the farmers, and they can now stay in the game."

According to the USDA's Foreign Agricultural Service, U.S. agricultural exports to Cuba reached $380 million in 2004, the highest level since passage of the Trade Sanctions Reform and Export Enhancement Act of 2000 that authorized the resumption of U.S. agricultural exports to Cuba. The U.S.-Cuba Trade Association estimates the total amount exported to Cuba since 2000 as nearly $2 billion.

Even that relatively small effort involves more than 35 states that have entered into agreements to sell American products to Cuba, which by law Cuba has to pay in advance. Interest is growing. In August, New Mexico's Navajo Agricultural Products Industry signed a letter of intent to sell produce to Cuba, New Mexico's first such agreement with the island.

"We cannot let other countries come in there and build businesses at the expense of us, "says Mr. Ortiz.

"I've always voted for the embargo, but now that I went there and saw what is happening, all these other countries in the middle of it … we need to be friendlier toward Cuba. I'm going to change my vote. God says he enjoys when a sinner repents."




Cuba Timeline:

1898 – Two months after an explosion sank the USS Maine in Havana Harbor, the United States declares war on Spain. Spain grants Cuba's independence as part of the treaty ending the Spanish-American War.

1901 – Provisions known as the Platt Amendment are incorporated into the Cuban Constitution, thereby making Cuba essentially a protectorate of the United States. The amendment is subsequently repealed in 1934, although the United States maintains control of Guantanamo Bay naval base.

1958 – Fidel Castro's guerilla army forces dictator Fulgencio Batista and his regime to flee Cuba on New Year's Eve.

1960 – Cuba nationalizes U.S. corporate assets, and the United States responds by imposing a partial embargo excluding food and medicine.

1961 – CIA-trained Cuban exiles attack Castro forces in the Bay of Pigs invasion. Its failure initiated a total U.S. embargo on Cuba. A ban on travel is introduced for all U.S. citizens.

1975 – The United States announces that it will allow foreign subsidiaries of U.S. companies to sell in Cuba. It will also stop penalizing other foreign nations from doing business with Cuba.

1977 – President Carter lifts the travel and spending ban for U.S. citizens.

1980 – Fidel Castro relaxes emigration restrictions resulting in a massive migration of Cubans to the United States – more than 125,000 people – via the Muriel Boat Lift.

1981 – Newly elected President Ronald Reagan announces a tightening of the embargo. The following year, the Reagan Administration re-establishes the travel and spending ban for U.S. citizens.

1992 – The Cuban Democracy Act passes in Congress, prohibiting foreign-based subsidiaries of U.S. companies from trading with Cuba and blocks family remittances from the United States to Cuba.

1996 – President Bill Clinton signs the Helms-Burton Act, which makes the Cuban embargo law, but more importantly allows U.S. businesses and citizens to sue foreign investors who profit from expropriated U.S. assets seized by the Cuban government.

2000 – President Clinton relaxes the trade ban to allow the sale of agriculture and medicine to Cuba for humanitarian purposes. In 2005, the U.S. Treasury Department issues a rule requiring Cuba to pay for U.S. imports up front.

2006 – June 5: The Bush Administration suspends operations of remittance agencies to Cuba as part of its intensifying economic war against the communist country.

2006 – August 1: Fidel Castro hands over power to his brother Raϊl due to an emergency surgery. It is the first time that Fidel is known to have ceded power since he won control of Cuba in 1959.

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