Cuban capitalism is getting real. Cuban capitalists hope U.S. help will be just as real

Cuba’s communist economy is sinking, but its capitalist entrepreneurs are rising — and the U.S. wants to partner with them before Russia does. Critics, meanwhile, call the Cuban private sector a hoax. WLRN Americas editor Tim Padgett surveys the realities.

Cuban engineer Idián Chávez says he and his employees are putting the finishing touches on the roof of a small factory in the Marianao borough of Havana. When it goes online later this summer, it will produce a good that’s desperately scarce in Cuba today: toilet paper.

But this won’t be one of Cuba’s notoriously inefficient state-run plants. It’s the privately-run venture of Chávez’s company, called FADIAR. It’s a pyme, Cuba’s Spanish acronym for a small- and medium-sized private enterprise (pequeña y mediana empresa). And Chávez knows it represents a big new step for Cuba’s fledgling private sector.

“We’re not starting a small restaurant or a hair salon here,” Chávez, who’s 29, told WLRN by WhatsApp from Havana. “This is a manufacturing production line.”

Cuba’s communist economy is in catastrophic collapse today. The government legally recognized privately owned businesses only two years ago, after a decade of letting them operate informally on a very small scale. Now it wants them to play a larger role. Pymes can import raw materials, for example, and receive foreign investment.

And aspiring capitalists like Chávez are responding with larger pymes.

Chávez points out Cuba has to import more than half its toilet paper. Since he specializes in industrial process, he says he’s designed a more streamlined assembly system that will help meet the island’s demand — which is more acute because the state has to direct so much of its own toilet paper production to Cuba’s crucial tourism sector.

“My passion is business,” Chávez says. “I’m always in search of a product people need and a better way of making it.”

Independent space

But Chávez also points out he had to import his factory equipment from China — because the U.S. embargo against Cuba doesn’t allow licensing for that kind of heavy U.S. export to the island.

He says the $200,000 to buy it, build his factory and purchase raw materials like paper pulp came from a Cuban-American friend in Miami, whom he declined to name, via a convoluted cash remittance process, and not through normal investment channels — since the embargo also prohibits banking between the U.S. and Cuba.

“I totally would have preferred to do all this directly with the U.S.,” Chávez says, “but U.S. policy still makes it very difficult.”

Granted, the Cuban regime has also made things difficult by not clearly spelling out for foreign investors just how freely pymes like Chávez’s can operate. For example, just how much money they’re allowed to make before communist officials say: enough.

Still, the emerging private sector is one of the few arenas where the U.S. feels it can influence change in Cuba — the only real independent space where democratic and free-market seeds might grow. And U.S. officials warn, as one told WLRN, that as Cuba and Russia forge stronger economic ties — last month they inked unprecedented deals that even give Russian investors 30-year land leases on the island — “the Russians are now trying to jump into that [private sector] space and mold its development as well.”

Given Russia’s anti-U.S. and anti-democratic stratagems around the world, that’s turned the promotion of Cuba’s private entrepreneurs into a U.S. national security concern as well as an economic aid project.

“We recognize that as a reason that we on the U.S. side need to engage [Cuban entrepreneurs] more,” the official said. “[They’re] coming to us flagging what the Russians are doing, saying, ‘Hey, we would much rather partner with U.S. private sector investors. We see you all as a much more reliable partner.”

Which is why Cuban entrepreneurs are also urging the U.S. to make it easier for American investors to jump in.

«On the human front, there is no more pro-American place on earth than the Cuban people,» says former Miami Congressman Joe Garcia, a Cuban-American Democrat who today advises Cuban entrepreneurs and U.S. businesspeople who want to partner with them.

“The policies we’ve created in the U.S. have held back the ability to invest in sectors of the Cuban economy which are creating independence and opportunity. But in the end, the natural business market for Cuba is the United States, right?”

Benjamin Ziff, the chargé d’affaires who heads the U.S. embassy in Cuba, agrees.

“The Cuban private sector wants anything that will facilitate their engagement with the United States,” Ziff told me from Havana.

He points out that last year the Biden Administration significantly expanded the list of capital goods Cuban entrepreneurs can import from the U.S.

“There is a mistaken conception that the U.S. embargo is somehow so total that it prevents almost everything from coming in” to Cuba from the U.S.,» Ziff says, “when in fact it’s merely a question of securing the appropriate license to be able to [export U.S. goods] to the island.”

And he says that’s a big reason that, ever since the private sector was made legal in Cuba, it now receives half of all the shipping container traffic coming into Cuba from the U.S. (Cuban officials say the private sector’s purchases of capital goods could in fact reach a billion dollars this year.)

“The growth has been astronomical,” Ziff says.

“There are now over 8,000 registered [private] companies [in Cuba] … The speed with which they have been able to organize and expand and supply themselves speaks to the amazing entrepreneurial abilities of the Cuban population.”

“The Cuban state sector is bankrupt, it can no longer supply the needs of the Cuban [population],” Ziff adds. Pymes, he stresses, “are the future of the island.”

Secret trip

U.S. investors like Ariel Pereda want to be part of that phenomenon.

“I want to be able to participate in some small way to help bring positive change to Cuba — to the country that my parents defected from,” Pereda, a Cuban-American, told me at his offices in Coral Gables, where he owns Pearl Merchandising and Distribution.

Pereda hearkens back to 2000, when the Trade Sanctions Reform Act suddenly allowed U.S. commercial agricultural exports to Cuba.

He was working then for a Fort Lauderdale investment firm that a few years before had helped introduce U.S. brands like Kentucky Fried Chicken into Eastern Europe as the Iron Curtain fell. So Pereda in 2001 agreed to be the firm’s point man selling fruit juices to communist Cuba — despite his exile family’s opposition to visiting the island they’d fled.

“I made the decision to go to Cuba without telling anyone in my family,” he recalls.

“This was a secret trip to Cuba. I mean, I knew that what I was doing was controversial. But I always felt the sense that this was actually helping to put food on the tabletops of Cuban homes.”

Two decades later, in 2021, when the Cuban regime authorized the pymes, that conviction moved Pereda to leap at the chance to partner with Cuban entrepreneurs like Aldo Alvarez in Havana.

Alvarez is a lawyer by training. But after watching Cuba’s economic suffering during the pandemic, he decided last year to take loans from friends and become a large-scale private food wholesaler.

His company, Mercatoria, imports products from Pereda. It already employs 60 people — a reflection of the fact that Cuba’s private sector now employs more than a third of the country’s workforce — and its warehouses are distributing food beyond Havana.

“We sell only to other private sector enterprises,” Alvarez told me at Pereda’s offices during his recent visit here. And, he says, there’s a reason for that.

Alvarez knows a lot of what he imports, like U.S. chocolates and potato chips, may not seem to be what ordinary Cubans need right now. But it’s in demand with Cubans who have some disposable income. The purchases they make at the private corner stores he sells to — call them the 7-11’s of Cuba — give their owners and employees more income to buy more of the basics they do need, like milk, chicken and rice. He argues that gives other Cuban private wholesalers more market impetus to import those foods and other consumer goods.

“We’re generating an economy and jobs and products that Cuba’s state apparatus is no longer able to,” Alvarez insists.

Or as Miami attorney and U.S.-Cuba private sector adviser Augusto Maxwell of the Akerman firm puts it:

“Cuba right now is the Galapagos Islands for social science. We’re seeing in real time capitalism emerge.

«It can be awkward and gawky, but it has its own logic — and it’s happening.»

Cuban-style China

But those who oppose U.S. engagement with Cuba call that an overly idealistic take.

“There is no private sector in Cuba,” argues John Suarez, a Cuban-American and executive director of the nonprofit Center for a Free Cuba in Washington D.C.

Suarez insists no independent private sector can really exist in Cuba, because any enterprise there operates at the pleasure of the state: «It’s dependent on those in power, not rule of law.»

“I would take a very close look at that [Cuban] private entrepreneur and see who their parents are, and see if they’re not part of the regime,” Suarez warns.

“What we’ve observed is that if you’re not in a good stead with the regime, you are impeded and blocked from being able to engage in that kind of business practice.”

Moreover, engagement critics fear, as Cuba’s pymes get larger and more profitable, more and more of their revenues will simply end up propping up the regime through the stiff taxes and fees they say the government imposes on them. The specter of a Cuban-style China — a more capitalist economy but just as totalitarian a state — looms large as a result.

“If the [Biden] Administration is thinking that U.S. economic engagement is going to change the behavior of the regime,” Suarez says, “that’s a fool’s errand.”

Suarez points to the Cuban President Miguel Díaz-Canel’s recent, full-throated statement of support for Russia’s invasion of Ukraine as one troubling indicator.

Economic rights

Still, leading private Cuban entrepreneurs like Marta Deus reject that assertion.

A decade ago, Deus had left behind the political repression and economic failure of the Cuban regime and was living in Spain. She returned to Cuba in 2013 after limited private enterprise had been greenlighted.

Today Deus runs several businesses — including an accounting firm, an app-based food delivery service called Mandao, and a business magazine. And she insists both she and those enterprises are all financially and managerially independent of the Cuban regime.

“It’s important for us to function like a company like anywhere in the rest of the world,” she told me during a recent visit to Miami.

What’s more, to be eligible for benefits like licensed imports from the U.S., Cuban entrepreneurs like Deus have to be vetted to ensure they have no regime ties. Which is one more reason, Deus argues, that it’s imperative the U.S. help them maintain that autonomy.

“It’s super important that the U.S. understands they need to help us to, you know, have a bank account here in the U.S.,” she says, “ so we can pay suppliers and services outside of Cuba.”

Alvarez, the entrepreneur importing U.S. food products into Cuba, also takes issue with the contention of Cuban-Americans like Suarez that Cuba’s private sector is somehow lashed to the state.

“Today I have economic rights I didn’t have three years ago,” says Alvarez — adding that as a lawyer he’s no longer a member of Cuba’s state-controlled bar association, which every attorney must belong to in order to practice on the island, precisely to guard his independence from the regime.

“Of course I pay taxes, like any business in the world. French businesses pay the state a lot of taxes, too, so does that mean there’s no independent private sector in France?

“This argument that we’re not a real private sector is made by people who insist the only thing that will change Cuba is a revolution engineered from here in Miami and not the evolution we’re engineering there. Cubans on the island have to lead that change.”

U.S. officials also challenge the notion that Cuba’s private sector is a ruse that benefits the regime.

Ziff at the U.S. embassy in Havana points out how spooked the regime still looks by the emergence of capitalist enterprise, evidenced by its reluctance so far to issue clearer pymes regulations to unleash their entrepreneurial drive.

“The Cuban regime’s penchant for utter control … works against the kind of … free environment that a business needs to succeed,” Ziff said.

“So the bulk of [Cuba’s pymes] are succeeding in spite of the regime, not because of the regime.”

«Laser-focused»

And what of the obstacles on the U.S. side?

U.S. officials tell WLRN they’re now “laser-focused” on getting Cuban entrepreneurs the tools they need — such as increased access to U.S. business training, micro-finance, cloud technology and e-commerce platforms, not to mention allowing more cash remittances from Cuban-Americans to the island as well as the resumption of U.S. flights to more Cuban cities than just Havana.

But what about the U.S.-Cuba bilateral banking relationship Deus was talking about, the kind that would let business owners like her access U.S. accounts from Cuba?

U.S. officials acknowledge that the lack of it — and the reliance on the kind of ad hoc, jury-rigged financing that ventures like Chávez’s toilet paper factor rely on — is a big reason potential U.S. investors balk at committing to Cuban businesses. In fact, only one American, John Kavulich — head of the U.S.-Cuba Trade & Economic Council in New York — has so far procured a U.S. license to invest directly in a Cuban pyme.

Those officials tell WLRN they’re trying to find ways to facilitate a facsimile of across-the-Florida-Straits banking. But they say the reality may be that it would require Congress to change the law underpinning the U.S. embargo. And that, for now, looks unlikely — even if the Russians do jump into Cuba’s private sector. (Many outside the Administration, though, insist it could do this itself with regulatory action.)

“Without it, the pymes are not going to get deep institutional money,” former Congressman Garcia admits. But he believes that as more Cuban-Americans, who are now doing the lion’s share of pyme financing from abroad, see the substantive returns their investments are making, it could influence legislative change.

“This isn’t the past, when I loaned my relative in Cuba money every month because I had to,” Garcia says. “Now Cuban-Americans for the first time are investing in their family inside Cuba and are deriving a benefit. That brother in Cuba is not saying, ‘Send me my $500 a month.’ He’s using that money now to make his own $500.”

Not to mention necessities like toilet paper — and perhaps a bigger space where Cubans can keep imagining a future free of their dictatorship.

This article was originally published in WLRN on June 29, 2023.