Tuesday, July 10, 2018

A Peek at the Slow Emergence of Cuban Economic Activity Within Global Capital Flows

Pix © Larry Catá Backer 2017

Cuba's tourist sector continues to draw interest among global financial and management markets, especially those in Europe.  This trend appears to have drawn some interest in recent months.  Cash strapped Cuba has long sought to attract foreign investment as well to leverage operational and technical know-how of operators from European tourist sector managers to ensure the appropriate development of the tourist sector ultimately controlled by the state for the purpose of funding programs central to its political objectives. These efforts are undertaken under the shadow of the U.S. Embargo and targeted sanctions that are meant to cripple the ability of the Cuban state to profit from its investment in the tourist sector directly.  Beyond the threat of U.S. political objectives is the ever present danger that the holders of Cuban sovereign debt, now quite sizeable, can use any effort by Cuba to access financial markets as an opportunity to recover at least some of their investment. Access to capital on its own terms has been the greatest challenge of the Cuban economy for the last generation, yet one that has made Cuban authorities quite adept at exploiting political fracture to its own economic advantage if only on a just-in-time basis.

Within this environment, small European firms have become more interesting objects of investment and management. Recent reporting has suggested that some elements of global finance appears to be betting on continued growth of the tourist sector, enough, at any rate, to make modest investment worth the risk. My brief thoughts and reporting by Marc Frank in Havana and Karin Strohecker in London (Asset manager Aberdeen Standard to run first Cuba fund) follows.

Most of the news about Cuba recently has focused on the "usual suspects:"  These include the melodrama of the now globalized scandal that is the Affair of the Sonic Weapons Attack. But it also includes Cuban interventionism in regional politics, mostly in the Caribbean, and its efforts to develop counter organizations to those that dominate global economic activity, its markets and the production chains that have come to dominate global economic activity. To add spice, of course, there is the ever present tease of Chinese and Russian interests in Cuba, which both China and Russia do their best to ensure there is something here to entertain (the Americans).  

But beyond those headlines, Cuba is moving aggressively to advance the objectives in its “national plan for economic and social development until 2030” (Conceptualización del modelo económico y social cubano de desarrollo socialista y en las bases del plan nacional de desarrollo económico y social hasta el 2030). A key sector in this 2030 Economic Plan is tourism (e.g., here). Tourism involves both the delivery of space and of entertainment within Cuba (including new forms of eco- or sustainability tourism to appeal to younger well off cohorts from developing states less interested in trinkets than their parents but form whom money must be extracted).  But also the investment necessary to build rooms, necessary infrastructure and support the venues necessary to draw tourists and extract their money while they are visiting.  

Investment in Cuban tourist infrastructure, then, might provide a metric for assessing the viability of that sector and the confidence of global capital in the ability of the Cuban state to make money for itself and its global partners in this sector. Ironically, this is a sector from which most U.S. investment is excluded, because most of the rooms inventory and many objects of tourism are controlled by or through people or institutions with whom U.S. interest may not  ordinarily deal directly. And yet they might deal indirectly with them. 

And so investment instruments operating outside of Cuba sometimes (and among some sectors of risk takers and money makers) looks interesting for financial interests that seek to take a stake in the growth of the Cuban tourist sector, but who cannot directly invest or deal directly with Cuban principles. Among these is CEIBA Investments. Ltd.
CEIBA is exclusively dedicated to investment in Cuba, with a focus on investment in Cuba’s commercial real estate, tourism and other prioritized sectors of the Cuban economy. The Company may make any investment primarily related to Cuba, but its primary emphasis is on the development and acquisition of commercial and hotel properties, two major segments of Cuba’s real estate sector. The Company was established in 1995 and is presently one of the largest foreign holders of tourism and commercial real estate assets in Cuba. . . . The majority of the Company’s asset base is made up of direct and indirect equity investments in Cuban joint venture companies governed by Law 118 of 2014 on Foreign Investment. (CEIBA, About).
CEIBA also  has a sole interest in GrandSlam Limited, through which it operates a travel agency out of Havana specialising in ecotourism and sports fishing. It now appears that global money is betting on the Cuban tourist sector, at least through these intermediaries. It has been reported that Aberdeen Standard, self described as "the largest active manager in the UK and second largest in Europe,"  will be taking over the management of CEIBA Investments.  That will be combined with a likely effort to raise up to 100 million pounds and list on the Specialist Fund Segment of the London Stock Exchange (LSE). Here is the opportunity American interests may be looking for to have their embargo and to avoid it as well. For the Cubans, this appears to be a small but potentially useful means of raising funds for a critical development sector.

Yet understand the small stakes around which all this interest is being generated.  One speaks here of an investment of around $510 dollars, smaller than the operating budget of many small universities in North America, and hardly enough to warrant the interests of the U.K. vulture funds sitting on substantial amounts of defaulted Cuban sovereign debt (Cuba Creditor Hires Lawyer Who Won Argentina Debt Settlement ("seeking a payout from the Cuban government on more than $1.3 billion in defaulted debt and back interest")).

Yet it is a start, and Cuba a substantial experiment in global finance whose history remains to be written.  It is also an indication that normalization, as such term can be understood in the context of Cuba, continues to proceed in tiny increments along a European path. For a poor government with quite specific ambitions this may be enough.


Asset manager Aberdeen Standard to run first Cuba fund
Marc Frank

LONDON, July 6 (Reuters) - Aberdeen Standard Investments is preparing to take over the management of CEIBA Investments, a fund that owns stakes in hotels and commercial property across Cuba, a spokesman for the asset manager said on Friday.

The change will go ahead once CEIBA is listed on the London Stock Exchange and will mark Aberdeen Standard’s first experience of managing investment in Cuba, a country which is seen by investors as having huge potential but is still subject to crippling U.S. sanctions.

CEIBA, launched in 2001, has some 130 million pounds ($172 million) invested across Cuba in office buildings and four hotels across the capital city Havana and the beach resort of Varadero.

Tourism is a vital industry and a main source of foreign revenues for Communist-run Cuba, whose economy is suffering after decades of sanctions from Washington, dwindling support from crisis-hit ally Venezuela and devastation from hurricanes.

“It is the first (Cuba project),” a spokesman for Aberdeen told Reuters, without giving further details.

In a separate statement, privately-owned CEIBA said it was planning to raise up to 100 million pounds and list on the Specialist Fund Segment of the London Stock Exchange (LSE).

As part of the listing, Aberdeen Standard Investments will start managing the company and the existing management team under CEIBA CEO Sebastiaan Berger will become its portfolio manager within Aberdeen Standard Investments.

“Having concluded the Management Agreement with Aberdeen Standard Investments underscores both the fact that Cuba is indeed a promising emerging market, as well as ASI’s vision and courage to open up new markets,” Berger said in the statement.

Asked about the timing of the listing, Berger told Reuters that preparations were in process, but declined to give a date.

Proceeds from the capital raising are earmarked to upgrade and expand existing properties as well as build a new 400-room hotel in the central town of Trinidad.

Investors in Cuba’s tourism industry had high hopes for the sector when then-U.S. President Barack Obama restored diplomatic relations in 2015 after more than five decades of hostilities.

His successor Donald Trump, however, has been dialling back the changes. His introduction of new travel restrictions has sucked some air out of Cuba’s tourism boom, but a number of foreign businesses such as Spain’s Melia Hotels and China’s Jin Jiang are pursuing new investments.

The LSE said this would be the first Cuba business to list on its exchange.

Reporting by Marc Frank in Havana and Karin Strohecker in London; Writing by Karin Strohecker in London; Editing by Mark Potter

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