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Reforms and Brazil Drive Cuban Potential

5 MINS READDec 18, 2014 | 13:42 GMT
(ADALBERTO ROQUE/AFP/Getty Images)
Mariel port in Artemisa province, Cuba, during its inauguration Jan. 27.
Summary

Editor's Note: In light of moves made Dec. 17 toward normalizing relations between the United States and Cuba — the most significant shift to occur in several decades — Stratfor is republishing this analysis on Cuban economic reforms from April 18, 2014. The development of Cuba's Mariel port is increasingly relevant, especially as a competitor for the Port of Miami. This analysis sums up the significance of the port and emphasizes that, for reforms and economic expansion to make real progress, the current embargo will need to be lifted — something Stratfor has been expecting. 

Cuba is making meaningful progress toward reforming its economy. Recent changes center on the port of Mariel and the nearby industrial zone Cuba is building. The Cuban government hopes that the area will become a major container port and a destination for high-tech investment. On April 16, the government released the details of a new investment law approved by the Cuban parliament March 29. The law sets the stage for a much more favorable investment climate for foreign companies, at least in theory. Historically, Brazilian companies have had the most success in forming partnerships with Cuba. The island nation's ability to take that experience and apply it to a broader set of investors will depend on its political will. But the availability of Venezuelan oil supplies that Cuba depends on is in question, and economic improvements are increasingly urgent.

From a legal standpoint, Cuba has been open to foreign investment since the mid-1990s. The 1995 foreign investment framework technically allowed foreign companies to own 100 percent of a Cuban venture. In practice, this was rare. The new law offers a variety of guarantees to companies, including protecting profit remitting. The law lowers taxes on profits from 30 percent to 15 percent on all companies with foreign participation. An eight-year exemption to profit taxes is possible for partnerships between Cuban and foreign firms. Even better terms have already been established in the industrial zone around the Mariel port, which Cuba hopes will attract manufacturing investment to provide jobs and diversify the economy.

Brazil's Success

Brazil has already had notable success in partnering with Cuba. The development of the port at Mariel has taken center stage in that relationship. Brazilian construction giant Odebrecht played an integral role in helping to build the port. Financing came from the Brazilian Development Bank. Odebrecht completed the first stage in January, at a cost of $927 million. Of that, the Brazilian Development Bank provided $681 million. In January, the bank promised another $290 million to finance more infrastructure improvements. Odebrecht has other projects in Cuba, including a late 2012 partnership to manage the 5th of September sugar mill for 13 years. Odebrecht may also invest in a chemical processing plant at the Mariel industrial park, according to Brazilian news reports.

Port of Mariel, Cuba

Port of Mariel, Cuba

Brazil's investments are a welcome relief for the impoverished island. Cuban President Raul Castro is pushing economic evolution following decades of isolation and communist-era economic policies. These efforts, including loosening restrictions on private property and personal travel, have been slow. The real progress has been a result of Brazilian assistance.

Odebrecht is at the forefront of these relationships, but the Brazilian Development Bank has provided the financing. This shows clear support from Brazilian President Dilma Rousseff, who has prioritized economic involvement in Cuba. Cuba offers a way for Brazil to expand its influence in the Caribbean region as it navigates a period of economic and political transition. Brazil's method for exerting influence through direct investment and aid is inoffensive to neighboring nations. And at the same time, the relationship Brazil is building will give the South American giant a head start in other countries as Cuba liberalizes its economy.

There is increasing urgency for Cuba to build a more sustainable domestic economic system. Venezuelan stability is faltering, calling into question its ability to continue supplying subsidized energy to Cuba. For domestic security, Cuba must attempt to become more independent of outside subsidization. A key option for Cuba is to tap into global capital flows to attract job-creating foreign direct investment. The most obvious impediment is the ongoing U.S. embargo on Cuba. Yet, even before Cuba considers a world without the U.S. embargo, there are serious questions about the island's ability to handle an influx of investment. The investment law approved in March, if applied consistently, should help allay regulatory concerns. Brazil's investments may be just as important, since they focus on addressing infrastructure deficiencies.

In addition to serving as an investment zone, the explicit goal of the Mariel port is to be a transshipment hub for the greater Caribbean and Gulf of Mexico region. This is another area where the U.S. embargo will pose serious challenges to Cuba. The port at Mariel will reportedly be deep enough to handle post-Panamax-sized ships, making it a potential location for large ships to offload containers for transfer to smaller ships serving shallower gulf ports. Mariel will be in direct competition with established ports that already serve as key transshipment hubs. The bulk of the transshipment market in the Caribbean is driven by cabotage regulations in the United States. Cabotage rules prevent ships flagged, crewed or owned by foreign companies to carry goods or passengers between U.S. ports. As a result, ports such as Freeport in the Bahamas have become important for non-U.S. shipping lines to use as a waypoint between U.S. ports. Cuba's competitiveness will be largely determined by its ability to access this market, in addition to providing efficient and economically competitive port service. But with the U.S. embargo in place, Cuba would be unable to serve as a transshipment hub for ships headed to the U.S. market.

The infrastructure improvements at Mariel port are therefore very important to Cuba's ability to develop on its own terms. However, the U.S. embargo will prevent any serious consideration of Cuba as a transshipment port. The port will only become truly useful if Cuba can significantly boost its export industries. For this, Cuba will need foreign investment beyond what Brazil so far has been willing to provide. Brazilian government support will only go so far. Much about Cuba's economic future still rests on reconnecting with its biggest neighbor and largest natural market, the United States.

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