Cuba - the land of unexplored opportunities

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Writuparna Kakati | 10 Jul, 2008

When Che Guevara, the Argentine hero of the Cuban revolution visited India as a state guest with some Cuban officials, he expressed his interest in establishing economic relations with India. It was in July 1959, shortly after the Fidel Castro-led rebels formed a new revolutionary government in Cuba. Prime Minister Nehru met Fidel Castro in New York in 1960 and India's first resident mission in Havana was opened in the same year.

Thus, it has been a long time since both India and Cuba have maintained warm and friendly contacts with each other. Both countries have supported each others candidature in various international fora and India has consistently voted in favour of UNGA calling for lifting of US sanctions against Cuba.

But in spite of excellent bilateral political relations and existence of the potential and desire to increase bilateral trade, Indo-Cuba trade volume has always remained low.In the 1980s bilateral relations between the two countries were strong, and India-Cuba trade touched $300 million annually. But in the 1990s, trade between the two countries plummeted to $3 billion mainly due to the economic crises Cuba faced after demise of the Soviet Union and a change of policy in India.

With the disintegration of the USSR and the collapse of COMECON, Cuba faced a severe economic crisis known as the "Special Period", from which the country is progressively recovered gradually. In the recent years, Cuban economy is liberalised to a great extent. The post Fidel Castro government is even wooing Americans businesses interested in doing business in the country. As a result of such economic reforms, the gross domestic product grew by 50 per cent between 2004 and 2007. Cuba's economy is opening on many fronts and there are opportunities in a wide range of industrial sectors. The nation is looking for partners with capital, innovative products and technological expertise.

In this scenario, industry experts view that it is the best time for Indian companies to explore the most promising Cuban market. At present, India exports electronic equipments, cotton yarn fabrics and made-ups, drugs, pharmaceuticals and fine chemicals, plastic and linoleum products, machinery and instruments, spices etc. But the volume of Indian exports to Cuba is very low. Experts believe that there are much more to explore for Indian exporters in Cuba, while Indian importers may consider importing products like vaccines, medicines (like melagenina, interferon and streptokinase) nickel, and cigars from Cuba.

Cuban economy: Current situation
Sugar has remained the most important product in Cuban economy for years. But recently, it has more lost importance to tourism as a source of foreign exchange. The Cuban government is trying hard in these days to improve sugar production. Coffee and Tobacco production has picked up in the recent years while gold is being added to Cuba's traditional copper, nickel and cobalt mining operations. In addition, new oil fields are entering into operation in western and central Cuba.

Cuba has a reasonably well developed industry- all state owned. However, the level of activity of these industries decreased significantly due to the economic crisis stemming from the loss of the island's traditional partners. But recently, a significant number of joint ventures have been set up in the country as Cuban government has opened its doors to foreign investment. Cuba has also entered into high-tech fields such as biotechnological and pharmaceutical industries, and earned good results.

Cuba's foreign trade
Sugar with 32%, nickel with 27%, tobacco with 14%, lobsters with 6% and rum with 1%) concentrate around 80% of the total value of exports in the country. Medium-term forecasts indicate that these same products will continue to be the main exports.

On the other hand, imports make up for 75% of the trade exchange, with fuels and lubricants in the first place with 22% followed by foodstuffs with 13%, machinery and equipment with 17% and chemical products with 6%, among others.

Market entry
Foreign companies which want to enter into the Cuban market cannot simply go there, set up a representative office and start operations. A few years back, companies want to do business with Cuba had only two basic options- either sell from an offshore base or enter into an investment relationship with a government-controlled Cuban partner. In 1996, the Cuban government approved Decree Law 206 establishing regulations for the National Register of Subsidiaries and Agents of Foreign Commercial Associations. In post Fidel Castro Cuba, government polices are liberalised gradually and it is most probable that soon new options will be made available to foreign companies interested to start business with Cuba. At present, there are he following options which Indian companies may consider while doing business with Cuba-

Selling from Offshore: This is the best option for Indian SMEs willing to export to the Cuban market. The process is simple - obtain a business visa to travel Cuba, stay in a hotel, search for potential customers and make sales. After establishing a regular market, businesses may consider making contract with a Cuban importing agent to ship to a duty-free warehouse. The agent will distributed the products from the warehouse on your behalf. But remember, exporting companies are not allowed to establish a sales office in Cuba nor their executives to reside in the country unless they have established themselves in the market first.
Registered agency or office: Under Decree Law 206 of 1996, Cuban government licences a foreign company to establish a registered agency or office for a term of 5 years. The license may be renewed thereafter for a term of 3 years. By law, applications must be approved or denied within 60 working days. Applicants should keep themselves prepared to submit documents in detail regarding their legal status, technical capabilities and financial stability. Allowing a foreign company to operate a registered agency or office in Cuba does not imply that the company can carry on wholesale or retail distribution. A company can be the consignee of an import shipment, market its product and provide after sales service but it must hire an agent to physically handle the goods. A Cuban entity can be registered as an agent of the foreign company without the requirement for a minimum 3-year business relationship. A Cuban agent can be the consignee of an import shipment only if it is authorised as an importer.
Joint Venture: It is the best option for Indian businesses with a medium-term strategy and adequate financial resources. Setting up a joint venture or economic association contract can be completed in Cuba within a two or three months. But companies should remember that they must have unique capability- capital, technology and management expertise for the specific job. Cuban organizations hardly show any interest in general concepts.

As Cuba is not a member of the IMF, companies which want to trade with the country should keep in mind that they will not receive any from international lending institutions such as the World Bank.

Market research
Gathering information about the Cuba market is not as easy as in many other countries. Cuba is a socialist country and there is virtually no source of information or analysis which is independent of the government. Worsening the situation, the official industry statistics often come with incomplete information. It is therefore foreign companies in Cuba have to rely solely upon field data for market research. Interviews with government officials or with executives of government enterprises can help a lot in collecting information about the market. To help gathering information about the Cuban market, there are four main market research services in Cuba-

1. Centro Para la Promocion de Exportaciones Cubanas (CEPEC): Cuban centre for export promotion, CEPEC offers market research services to foreign companies interested in exporting to Cuba or forming joint ventures with Cuban entities. It also help to match Cuban exporters with foreign buyers.

2. Consultores Asociados (CONAS): Established by the Ministry of Foreign Investment and Economic Cooperation of Cuba, CONAS assists foreign companies to form joint ventures and economic associations in Cuba. It helps foreign companies to find partners, negotiate agreements, and to expedite government approval. Other responsibilities of CONAS include handling legal documents associated with incorporation and registration, providing advice on economic, tax and accounting, conducting feasibility studies, audits and inventories, clear shipments by air or sea, etc.

3. TIPS: This is a monthly business magazine with editions in seven languages and distributed in more than 70 countries. The magazine produces a series of sectoral bulletins, which are available by subscription. In addition, TIPS also publishes a calendar of upcoming trade events. Although the magazine has a tendency to present a rosy picture of economic development in Cuba, it is a very good source of news on current business events for foreign businesses want to operate in Cuba.

4. Internet: The Cuban government operates a number of websites on the Internet. Although few of these sites reflect an independent viewpoint, they can be regarded as a useful source of information for foreign businesses want to trade with Cuba. Some of these websites include-

CubaWeb (http://www.cubaweb.cu/)
Prensa Latina (http://www.prensa-latina.org/)
Desde Cuba (http://voicenetsl.com/desdecuba)
CubaTrade (http://www.cubatrade.org/)
University of Texas, Latin America Information Centre (http://www.lanic.utexas.edu/la/ca/cuba/)
Cubasource: http://cubasource.org/index_e.asp

Trade fairs
As it is very tough to gather information about the Cuban market, foreign companies may consider make the best use of trade fairs in the country to make contact with potential customers and partners. Havana International Fair , the largest cross-sectoral trade show in Cuba is held at ExpoCuba at the beginning of November each year, sponsored by the Cuban government. Indian companies interested in participating in the fair should contact the Commercial Section of the Embassy of India for further information. Other major trade shows held in Cuba include-

FIT (transportation)
InformÃ¡tica (steel and electronics)
Alimexpo (food)
Fecons (construction)
Health for All (medical)
Tecnotur (technology for tourism)
Metanica (mechanical and electronic).

Trade policy and integration
Cuba has an open economy due to its dependence on foreign trade. It annually trades on the average with 170 countries. The priorities of its trade policy focus on ensuring markets for the main export products. They also seek to favor the geographical approach to suppliers of basic items for the national economy. During the last five-year period the country strengthened its links with the Latin American and Caribbean integration schemes.

Cuba has been a full member of the Latin American Association of Integration (ALADI) since August 26, 1999. Trade with ALADI countries makes up for more than 80% of the Island's trade exchange with Latin America and the Caribbean. In accordance with these same integrationist principles, Cuba signed the Trade and Economic Cooperation Agreement with the CARICOM in 2000. The Island is also a member of the ACP (Africa-Caribbean-Pacific) Group and of the CARIFORUM, an agency in the Caribbean region for its relations with the European Union. It has also signed agreements on Economic Complementation with Guatemala and the CARICOM member countries. These agreements are the first of their kind to be signed with non-member countries of ALADI.

The European Union is Cuba's main trade partner with nearly 80% of its trade with the Old Continent. Among the UE countries, Spain holds the first place followed by Holland, France, Italy and Germany. The main export products to that region are nickel, cigars, frozen juice, shellfish and sugar. Foodstuffs, machinery and equipment, spare parts and chemical products stand out among imports.The main market for Cuban sugar is Russia, fourth country in Cuba's trade exchange. A sustained increase takes place in the exchanges with the People's Republic of China due to a large extent to the credit facilities granted by that country.

Foreign trade system
The import and export operations are carried out by Cuban enterprises and other duly authorized entities registered at the National Registry of Exporters and Importers attached to the Chamber of Commerce of the Republic of Cuba.

These enterprises specialize in the import or export of certain groups of products. In case of import or export of other goods not included in their nomenclature, these enterprises may request authorization from the Ministry of Foreign Trade to perform the operations.

Until the decade of the 1980s, foreign trade operations were performed only by some 30 state enterprises. At present more than 400 Cuban entities participate in foreign trade activities, among them state enterprises and companies with 100% Cuban or mixed capital. These entities may be specialized in certain groups of products or they market their own productions or those of groups or associations of small and medium industries with related productions.

Foreign businessmen must make sure that they sign the contracts with those Cuban enterprises authorized to perform foreign trade activities whose nomenclature includes the product in question, whether for export or import.

The import system does not establish limitations such as contingencies, quotas or licenses for individual cases.

All products that enter the country must be declared at customs and are subject to inspection.

The regulations in force related to the preservation of the national patrimony and the prohibitions of drugs, sanitary regulations and preservation of the environment must be taken into consideration as well as those on the protection of endangered species and the border movements of waste and other dangerous materials.

Imports of goods on consignment
Different mercantile forms are used in Cuba according to the international trade practice. Among them, the import of goods on consignment is very practical for those goods usually present in the Cuban market.

In their import operations, the Cuban entities sign consignment contracts, whereby the foreign entity acting as supplier commits itself to supply and consign to the Cuban entity acting as consignee goods to be settled once consumed or marketed.

The Cuban import entities also sign commission contracts for the sale of goods on consignment. In this type of mercantile relation, the foreign companies provide the merchandise and the Cuban entity which acts as agent is committed to receive and deposit the goods and promote their sale in the national territory. The Cuban entity acts in its name and on behalf of the foreign company once the foreign company has paid the commissions agreed upon for the trade services rendered.

Agency contracts may also adopt the form whereby the foreign supplier deposits the goods in a warehouse under the customs deposit regime. In that case the Cuban agent or commissioner is only responsible for the sale of the goods in the national territory.

Import of samples and advertising material
The Cuban customs legislation foresees the greatest facilities for both the import and re-export of goods for fairs, exhibitions and similar purposes. The most outstanding aspect of this system is that the exhibitors are not demanded payment of guarantee for custom duties.

Temporary imports of samples destined to fairs and exhibitions and samples sent to commissioners or branches of foreign companies registered in the country are exempted from payment of custom duties.

Cuba has signed several conventions to facilitate the temporary import of professional materials and samples for fairs and exhibitions. Cuba has also subscribed the International Convention for the Facilitation of Imports of Trade Samples and Advertising Material.

Import/export restrictions
The import and export of the following goods is forbidden:

Drugs
Explosives
Pornographic objects, photos, literature or any other article contrary to good manners
Any article, including literature, that attempts against the country's security and domestic order
Animals, plants and their parts listed in Annex No. 1 of the CITES Agreement (protected or endangered species).

The Central Planning Board limits and supervises imports according to the annual economic plan. Control of import transactions is effected by the Ministry of Foreign Trade (MINCEX) through specialised State Trading Organisations.

Customs procedures
Approved Custom brokers must handle all customs formalities. Larger importers arrange for their staff to be trained and certified, and pay a monthly fee to operate internal agencies.

Precise documentation and full compliance with all regulations is essential when exporting products to Cuba. Seemingly, minor discrepancies can lead to confiscation of improperly imported goods. Although compliance with these regulations is technically the responsibility of the importer or agent handling consignment shipments, careful documentation on the part of the shipper will reduce errors and delays. Moreover, since labelling, sanitary, phytosanitary and product safety standards regulations are enforced at the border, as a practical matter, the burden of compliance rests with the overseas exporter.

Some overseas logistics companies have co-operative agreements with Cuban customs brokers. This means that documents can be prepared overseas and then validated by the Cuban broker.

Customs duties

Following reductions in 1997, the simple average tariff on about 5 000 commodities was reduced from 11.9% to 10.7% for Most Favoured Nations (MFN) countries, according to the Ministry of Foreign Trade (MINCEX). The maximum MFN tariff is 30%. Cuba applies the MFN rate to goods originating in countries with which it has bilateral agreements. Import tariff classifications are based on the Harmonised System (HS) at the 8-digit level.

Regulation 4/98 provides for duty drawback in a number of circumstances including temporary importation for upgrading or re-export and replacement of materials incorporated in exported products as well as chemicals that disappear during the production process and, which are not incorporated to the final product. These drawbacks are granted only when the circumstances are deemed to be of national interest or for commercial viability in foreign markets.

The Tariff has two columns:

General Tariff, which is applied to non-members of the World Trade Organization (WTO) and to countries with no bilateral trade agreements with Cuba.
Most-favored Nation Tariff, which is applied to members of the WTO and to those countries with bilateral trade agreements with Cuba.

At present, the largest part of the country's imports is subject to the most-favored nation tariff. The average most-favored nation tariff is 10.7%, while the general tariff does not exceed 17%. Tariffs for raw materials are 5%, 10% and 15%. Only an 8% of the sub-entries has tariffs that exceed 20%, and more than 90% of them have tariffs below 15%. Tariff calculations are based on the value of the goods (ad valorem).

Currency exchange and regulations
Possession of foreign currency is legal in Cuban and in fact the country has two parallel economies: one in convertible currency and another one in local currency. Visitors usually do not need local currency, since all their expenses must be met in convertible currency (hotels, restaurants, taxis and recreational facilities) .

The official Cuban currency is the Cuban peso. Foreigners are required to make all the payments in Convertivel Currency (CUC). This convertible peso may also be used to meet expenses in foreign currency and may be exchanged for Euros or any other foreign currency at the airport upon departure. However, US Dollars attract additonal surcharge on it and, therefore, it is advisable to bring Euros or Pound Sterling.

Tips for Indian exporters

Most imports into Cuba are through state controlled entities. They often request credit facilities of DA 90 to 360 days. Special arrangements may be required to be made in Cuba to follow-up on timely payment of bills of exchange. Patience is the most important factor while doing business with Cuba.
Products, especially food and pharmaceuticals must satisfy Cuban standards before they can be imported. Product literature correspondence, and export related documentation should preferably be in Spanish.
Cubans prefer to do business directly with the producers and avoid brokers and commission agents.
Products selected should be price and quality wise competitive in Cuban market. Visits to Cuba and a local presence in Cuba are desirable. Exporting may require considerable efforts, costs, and commitment on a long term basis.