Agriculture as it Used to Be: Cuba’s Natural Crops have Massive Potential in Upscale Markets

By:  Colin Gaiser, Lynx Global Intelligence

 

When the United States relaxed travel restrictions to Cuba in 2015, it was an exciting moment for those of us who were always drawn to the island by photos of surreal, pastel-colored buildings and streets lined with classic cars. And Cuba is indeed an exciting place to visit — yet beyond the famous old city of Havana is a lush 110,000 km2 island, where 30 percent of land is used for agricultural production.

Cuba’s climate could hardly be better for agriculture — lying just south of the Tropic of Cancer, Cuba has a tropical climate with temperatures moderated by year-round northeastern trade winds. It also has a predictable, May-October rainy season. And while Cuba is historically better known for tobacco and sugar, the island also grows ample amounts of coffee, potatoes, rice, numerous tropical fruits, and citrus (the island is actually the world’s third-largest producer of grapefruit).

Organic and Sustainable

Unfortunately, a combination of Castro regime policies, lack of access to fuel and supplies after Soviet Union’s collapse, and the island’s economic and political isolation have made agricultural production relatively inefficient. A lack of fertilizer and modern agricultural technology hampers yields. And while the government has turned land over to independent farmers to lease, it still requires most of them to grow food for the state.

However, there is an upside: This unique situation left Cuba’s agriculture largely organic, dominated by small-scale farms (many in urban areas) that rely on more natural methods of production. With many Americans willing to pay a premium more for organic, sustainably sourced products, Cuban agricultural products could be very attractive to the upscale market.

Plus, there is reason to believe more economic liberalization is not far off. Raúl Castro is scheduled to hand over power to Miguel Díaz-Canel, his younger vice-president, in February 2018. Díaz-Canel supports increasing internet access (currently very spotty) as well as more economic openness, which is strongly endorsed by public opinion in both Cuba and the United States.

Brewing a New Market

Coffee, in particular, is a likely beneficiary of more economic openness. Despite a drop in overall production since the 1990s, it is one of the first Cuban agricultural products accessible to American citizens within the United States.

Swiss-based Nespresso is the first company to make Cuban coffee available to Americans. Though not on store shelves yet, for a limited time one could order their Cafecito de Cuba coffee pods online or over the phone. While this is just a small step toward providing Americans the experience of drinking Cuban coffee, the thawing relationship between the two countries makes one optimistic about the possibilities of coffee on the luxury market.

In the meantime, the president of Nespresso USA, Guillaume Le Cunff, has stressed that Nespresso is interested in developing a long-term arrangement to ensure a steady supply of Cuban coffee for U.S. customers. This project would also work to improve living conditions for Cuba’s farmers. Such a combination of a novel, high-quality product along with real corporate responsibility could strike a chord in the U.S. premium market.

A Bright Future

While the timetable is unclear, Cuba seems destined to liberalize and become more economically open to the rest of the world — and when this occurs, the challenge will be to maintain the sustainable, organic quality of Cuban agricultural products. This will not just be attractive to American consumers, but also necessary to maintain the magnificent environment and biodiversity of Cuba. Both the economic and social returns on investment could be huge for companies that take on this challenge.

 

 

Sources:

https://www.nytimes.com/2016/06/22/dining/cuba-us-organic-farming.html?_r=0

https://www.usatoday.com/story/news/world/2016/06/20/cuban-coffee-sold-in-united-states-nespresso-technoserve/86117020/

http://www.economist.com/news/americas/21719812-revolutionary-economy-neither-efficient-nor-fun-what-tourist-industry-reveals-about

https://www.entrepreneur.com/article/273135

 

North Korea: Recent Developments

By:  Trevor Jones, Lynx Global Intelligence

 

The strategic calculus has not changed around North Korea, but some details have. Unlike the recent cruise missile strike in Syria, kinetic action against North Korea would have far reaching consequences for businesses and governments in the region. Kim Jong-un relies on bellicosity for domestic legitimacy and international attention. He would react to an attack on his country with violence directed primarily at South Korea, sparking an exchange with dire regional consequences. The risk of mass migration across borders and the attendant challenges of millions of North Koreans fleeing a war is something neither China, nor South Korea, wants.

It is wrong to assume that because the US took unilateral action against the Assad government, that it will do so against Kim Jong-un’s military apparatus. The US is not, yet, directly threatened by North Korean missiles, and stands to lose much in the way of resources and energy fighting a land-based Asia war. Allowing China to shore up the threat is preferable.

It is possible that the Trump administration, having learned cruise missiles control news cycles, will search for the threshold required to attack North Korea, but voices in the region will call for restraint. Nevertheless, Japan’s Prime Minister Shinzo Abe did not miss an opportunity to link action in Syria with North Korea last week, stating the North was prepared to fill warheads with sarin, the same chemical agent that provoked response in Syria.

Both the strike in Syria and posturing around Korea have alternately satisfied and frightened various corners of the foreign policy elite. Many will agree that a United States that is willing to provide global leadership, through the organizing principle of deterrence, is better than a rudderless international political system. Others will counter that this thinking leads to unnecessary and wasteful intervention. Limited kinetic action is not possible in North Korea, due to hardened and geographically disparate targets.

While regional governments ponder and plan to prevent these contingencies, business continues as usual. From last weekend’s Business Insider:

“Asia trades as if North Korea wasn’t a problem,” Federico Kaune, the head of emerging markets debt at UBS Asset Management, told Business Insider. “Quite frankly, I don’t think markets are pricing in fully — or not even to some extent — the North Korean risks.”

 Geoffrey Wong, head of global emerging markets and Asia Pacific equities at UBS Asset Management, told Business Insider that the situation today is “very different” from the past, and that markets aren’t pricing in the current North Korean risk right now.

The global business community should begin understanding how to price in geopolitical shocks. Current pricing models do not fully account for these potentialities, only qualitative assessment of political realities will do. This analysis requires a mix of skills in an ever-broadening array of fields (intelligence, business risk, demographic analysis etc.) A kinetic conflict on the Korean peninsula would involve market disruptions across dozens of industries. Shipping lanes would clog, oil and gas infrastructure would reorient to a war footing and financial markets would swing wildly.

While the overall strategic calculus around the North Korea situation has not changed, the country did display new weaponry during last weekend’s parade, and a firm strategy from the Trump administration has yet to be delivered. Just because an event carries a low probability, does not mean it carries a low impact. In the case of North Korea, details matter.

The Paris Climate Agreement and Future Business Implications

Pursuing the goals of the Paris Climate Agreement will ensure businesses long-term success while allowing them to participate in the reshaping of the economy while saving the environment.

By:  Jenya Sakaeva, Lynx Global Intelligence

 

In light of recent political events, the environmental future of the United States, and consequently the world, may look quite bleak. Fortunately, as the saying goes, every cloud has a silver lining. For the planet’s climate, this silver lining could be businesses big and small leveraging their power for global good. While the Trump Administration has yet to formally withdraw from the 2015 Paris Climate Agreement, the executive orders to date signify the United States’ noncompliance with the goals set forth to prevent global temperatures from rising another 3.6 degrees Fahrenheit. This is a point when scientists have agreed the Earth will be irrevocably locked into “a future of severe droughts, floods, rising sea levels, and food shortages” [1].

Pursuing the goals laid out in the COP21 Paris Agreement will set businesses on a course of action that will lead to sustained success. In Lynx’s previous post, https://tinyurl.com/mnqbq9q, we outlined the ways in which corporate social responsibility and ethical business practices bring long-term prosperity to those who participate in them. Addressing climate change is a part of corporate social responsibility.

Why should businesses uphold the Paris Climate Agreement?

 A changing climate poses many risks to business. First, there is the risk of depleting natural resources that are either raw materials in a company’s product, or necessary to the process of manufacturing or shipping those products. There are tangible, physical risks associated with damage to facilities or manufacturing centers from a more extreme and volatile climate and weather events. Of course, there are financial risks that lack of natural resources or extreme weather will result in. Market risks in the form of shifting consumer preferences, behaviors, and demand are equally prevalent. Additionally, companies face reputational and regulatory risks for poor performance in climate related endeavors.

The Paris Climate Agreement is historic in terms of the goals set and number of countries that have committed to take them seriously. This reflects the global understanding of the multitude of issues stemming from climate related problems. The time to act is now.

In the words of some of our economy’s biggest players, “Implementing the Paris Agreement will enable and encourage businesses and investors to turn the billions of dollars in existing low-carbon investments into the trillions of dollars the world needs to bring clean energy and prosperity to all” [3].

The Paris Climate Agreement creates a global landscape in which business opportunities are plentiful. As the world economy and political powers move towards achieving reduced emissions and capping temperature rise, businesses will see a need to change their practices to support their country’s commitment to the agreement. Evaluating the strategic decisions now can put you ahead of the curve, but failing to adjust just means a more turbulent transition further down the road. Aside from political agendas impacting businesses and the Paris Climate Agreement, there are also economic, social and technological reasons to begin honoring the agreement sooner rather than later.

According to a business briefing on the topic by Cambridge University, “Companies such as GE, Unilever, Nike, IKEA, Toyota and Natura are already reaping the benefits of offering ‘green’ products and services, a market which has grown to over $100 billion” and “Unilever’s purpose-driven brands are growing at twice the rate of the rest of their portfolio and if GE’s Ecomagination was a standalone business, it would be a Fortune 100 company.” [4] Additionally, there are many economic opportunities to invest in renewable energies and new technologies, while oil prices may vary globally and contribute to higher energy prices.

Socially, consumers are increasingly more aware of the sustainability efforts and initiatives of the companies they purchase from and their behaviors are shifting to favor those businesses with more commitment to the environment. Patagonia is a classic example of a company that embodies the ideals of the Paris Agreement within the core functionalities of its strategy, and is rewarded for that by consumers. On the other hand, businesses that ignore these social patterns often witness consumer backlash and reputational damage.

Technology is already a rapidly evolving field in which some businesses have seen immense success. In order to reach the goals set forth in the Paris Agreement, many more technological advances will have to bridge the gaps between where we are now and where we aim to be. This presents businesses with huge potential. New business models, like the circular economy, have begun to emerge as an innovative response to dealing with climate problems. “Smart” technologies are becoming more customary in our daily landscape, from wearable technology to transportation solutions, and even smart cities. Also, the role of big data will only grow as the world tries to understand how to enact technological changes and incorporate them into society.

While the political approach to the Paris Climate Agreement remains uncertain in the United States, the rest of the world remains committed to the deal. As we know, neither climate nor the economy exists independently in one country or another. We live in a global world and a global economy, and businesses that realize the opportunities within the goals of the agreement will be successful in the long-term across many different aspects.

 

 

[1] https://www.nytimes.com/2017/03/28/climate/trump-executive-order-climate-change.html?_r=0

[2] http://www.cisl.cam.ac.uk/publications/publication-pdfs/A-New-Climate-for-Business.pdf

[3] http://www.lowcarbonusa.org/

[4] http://www.cisl.cam.ac.uk/publications/publication-pdfs/A-New-Climate-for-Business.pdf

 

Does Corporate Social Responsibility and Ethical Business Practices Pay?

In an increasingly globalized marketplace, CSR and ethics are crucial not only to businesses, but also to their stakeholders involved. How does one turn these concepts commonly believed to be weaknesses into strengths?

By:  Marc Babel, Lynx Global Intelligence

 

Companies spend hours, months, years, lifetimes to build a reputation that they can hang their hat on.  It only takes seconds to lose that reputation if ethical business practices aren’t fostered throughout the entirety of an organization. The word, ethics, is drawn from the Greek word, ethikos, which signifies character – the distinctive, noteworthy quality of an individual or organization. Perhaps one of the best qualities of ethics is that it is well understood across all cultures, languages, races, and income levels.

At best, organizations believe ethics to be an intangible idea that should be promoted in the stockholders’ annual report but nothing on which a financial analyst or CPA can calculate a rate of return. After all, ethics are not a profit center but a cost center, right?  It won’t generate revenue or attract new stockholders, will it?  Customers can’t tell a highly ethical firm from one who puts it on the back-burner, can they?

Research from The Institute of Business Ethics, leaders in promoting corporate ethical best practices, has shown for the first time that companies with a clear commitment to ethical conduct outperform those that don’t [1]. Using four indicators of business success – economic value added, market value added, price/earnings ratio volatility, and return on capital employed – it compared two groups of companies: those with a demonstrable commitment to ethical behavior through having a published code of business ethics and those without [1]. Their performances were then analyzed over five years to discover the firms with established ethics had clearly superior metrics in these indicators.

Furthermore, the market research organization GfK NOP surveyed 5,000 consumers in the United Kingdom, United States, France, Spain, and Germany and discovered a third of those claimed they would pay a 5 to 10 percent premium for the products and services from an ethical company over its competitors [1]. Another survey performed by Gfk NOP uncovered that 80 percent of U.S. and European consumers are willing to pay more for goods and services from a company with a well-regarded labor and environmental record [1]. Clearly it is becoming more difficult for the C-suite to justify watered down versions of ethical conduct in their firms.

Forty-five years ago, Milton Friedman penned a famous article for The New York Times Magazine whose title appropriately abridged his main opinion: “The Social Responsibility of Business Is to Increase Its Profits.” Friedman has since maintained his position of having no patience for those who believe otherwise, claiming corporate social responsibility is merely pure and unadulterated socialism [2]. Do firms owe their complete allegiance to the benefit of shareholders alone? John Mackey, the founder and CEO of Whole Foods, is one businessman who disagrees with Friedman. Mackey holds that Friedman’s view of capitalism ardently ignores the humanitarian facet common to many businessmen in the 21st century. According to Mackay,

“I strongly disagree. I’m a businessman and a free market libertarian, but I believe that the enlightened corporation should try to create value for all of its constituencies. From an investor’s perspective, the purpose of the business is to maximize profits. But that’s not the purpose for other stakeholders–for customers, employees, suppliers, and the community. Each of those groups will define the purpose of the business in terms of its own needs and desires, and each perspective is valid and legitimate.” [2]

Mackay does believe this can be done without holding profit hostage.  The challenge many of those on board with his train of thought is how much attention does each stakeholder receive in terms of value?  Mackay believes there is no magic formula for everyone, however, it can be a dynamic, fluid approach that attempts to satisfy stakeholders since stakeholders are usually satisfied for short periods at a time.

Some refute corporate social responsibility on the grounds that using resources and funds towards philanthropy is blatantly stealing from investors. After all, by legal definition, a firm’s assets belong to the investors, right? A firm has a fiduciary responsibility to maximize shareholder value; therefore, any activities that don’t maximize shareholder value are violations of this duty. If you feel altruism towards other people, you should exercise that altruism with personal resources, not with the assets of a corporation that doesn’t belong to you.

While that may be true, this argument is not wrong as it is too narrow. It is important to have an understanding with the investors since most firms can “hire” their initial investors, not vice versa. When philanthropy is regarded as a fundamental ethics practice in the corporate vision, shareholders and investors are bound by any investment to this type of corporate culture. Shareholders of company stock do so voluntarily, so if the philosophy of corporate social responsibility of a firm does not match with their own, they are free to exit their relationship with said firm.

The business model that Whole Foods has embraced could represent a new form of capitalism, one that more consciously works for the common good instead of depending solely on the “invisible hand” to generate positive results for society. The “brand” of capitalism is in terrible shape throughout the world, and corporations are widely seen as selfish, greedy, and uncaring. This is both unfortunate and unnecessary, and could be changed if businesses and economists widely adopted the business model of Whole Foods [2].

Advocates of CSR ought to reflect on the fact that the “triple bottom line” and the bogus pay scheme which rewards bad performance with riches have something important in common: the idea that the interests of “mere owners” should not be allowed to come between managers and their personal objectives [3]. Broken corporate governance and CSR are close relations. You often see them together.

However, CSR can be regarded as the antithesis to short-termism. Managers are increasingly seeing the importance of placing more of an emphasis on long term goals mixed with ethical practices alongside the short-term goals of profit. Companies deliver superior results when executives manage for long-term value creation and resist pressure from analysts and investors to focus excessively on meeting Wall Street’s quarterly earnings expectations [4]. New research, led by a team from McKinsey Global Institute in cooperation with FCLT Global, found that companies that operate with a true long-term mindset have consistently outperformed their industry peers since 2001 across almost every financial measure that matters [4]. As shown below:

ethics 2

While this can’t necessarily be the result simply of long-termism in the form of ethics and corporate social responsibility, it is hard to argue that those aspects didn’t contribute. For corporations, social responsibility has become a big business. Companies spend billions of dollars doing good works — everything from boosting diversity in their ranks to developing eco-friendly technology — and then trumpeting those efforts to the public.

Extensive research performed by The Wall Street Journal has delved into the consumer mind, uncovering just how much ethics can pay.  Results concluded that oftentimes, those consumers that will pay a premium for ethically sourced products will outweigh those that seek a cheap product without regards to ethics [5]. The lessons are clear. Companies should segment their market and make a particular effort to reach out to buyers with high ethical standards, because those are the customers who can deliver the biggest potential profits on ethically produced goods [5]. All stakeholders are becoming a priority in the 21st century. Firms employing corporate social responsibility and ethical practices will be the ones receiving long term benefits while pushing the envelope on the benefits capitalism can bring to society.

 

[1] http://www.fraud-magazine.com/article.aspx?id=374

[2] http://reason.com/archives/2005/10/01/rethinking-the-social-responsi

[3] http://www.economist.com/node/3555286

[4] https://hbr.org/2017/02/finally-proof-that-managing-for-the-long-term-pays-off

[5] https://www.wsj.com/articles/SB121018735490274425

 

Overview: The Future of the Republic of Turkey Remains Unclear After Failed Coup d’état

Turkish politics have taken a nationalistic turn as domestic affairs spiral out of control. Massive expulsions of bureaucrats, journalists, academics, businesses and political opponents continues to worry the international community.

By:  Zana Silevani, Lynx Global Intelligence

 

Turkey’s significance in the international community

Historically, the Republic of Turkey has served the international community as a commercial hub which has facilitated international trade, communication and intercultural exchange for decades. Modern day Turkey is an extremely valuable partner as it has characteristically carried on it’s traditions of free trade, military cooperation and fortified secular values. Turkey has established it’s presence in the international community—it holds tremendous weight when discussing economic and political affairs. The economic and strategic value of Turkey is attributed to it’s physical coordination as it is situated in a unique geopolitical position. Turkey borders Syria, Iraq, Iran, Armenia, Georgia and Bulgaria with Russia and Ukraine just across the Black Sea.

turkey-2

In 2014, The Republic of Turkey ranked in as the 27th largest economy in the world [2]. The dynamic nature of the Turkish economy has facilitated strong partnerships with it’s primary import trade partners: China ($24.6B), Germany (23.5B), Russia ($14.7B), Italy ($12.3B) and the United States ($11.8B)—it’s largest export destinations: Germany ($16.9B), Iraq ($10.8B), the United Kingdom ($10.3B), France ($7.87B) and Italy ($7.58B) [2]. Furthermore, as a critical member of the North Atlantic Treaty Organization (NATO), Turkey is an important asset for US interests in the Middle East and Europe. Geopolitical configuration and a versatile economy puts partnerships with Turkey at a high priority, but the many successes of the Republic of Turkey overshadow the murky essence of recent Turkish political developments. Turkish nationalists such as President Reccep Tayyip Erdogan and his Justice and Development (AK) party have consolidated executive power after the recent Summer 2016 coup d’etat attempt which has resulted in the arrest and detainment of thousands of people accused of aiding the coup.

 

The failed 2016 coup attempt and a new face for the Republic of Turkey

July 15, 2016—chaos erupted as a faction of the Turkish military took up arms and attempted to overthrow President Erdogan. The military began with the occupation of the Bosphorus bridge which connects the two shores of Istanbul then attempted to control key points in the Turkish capitol of Ankara [3]. The separatist faction which called themselves the Peace at Home Council, were defeated when loyalists to Erdogan’s existing regime thwarted the coup attempt and restored power. Using state operated media (TRT) Erdogan was able to garnish support to abolish the coup and rally his supporters. At least 90 people were killed and nearly 1,100 more were injured during the coup attempt [3]. The coordination of the coup was ultimately blamed on the exiled cleric Fethullah Gulen who resides in Pennsylvania, USA and is a long time opponent of President Erdogan and his Justice and Development party. The coup attempt resulted in massive material losses, but ideological damage in Turkish civil society took the harshest damage as President Erdogan began a campaign aimed at suppressing opposition through detainments and arrests. Thousands of bureaucrats, academics, political leaders and military personnel have been expelled, arrested, or detained as a result of allegations of involvement in the coup.

The failed July 15, 2016 coup d’etat attempt in Turkey shook the foundations of the state and thrusted Turkey away from it’s traditional secularism and towards civic nationalism. President Erdogan has utilizes a parliamentary state of emergency to bypass constitutional provisions and mobilize political power to the executive branch. President Erdogan and his Justice and Development party have undertaken considerable measures to consolidate executive power [1]. After the summer of 2016, the Turkish state has detained over 35,000 individuals thought to have some sort of tertiary involvement in the influence or potting of the 2016 coup d’etat attempt [1]. Over 17,000 individuals have been arrested in connection with the coup attempt—one third of Turkish security forces have been arrested on specific charges. Arrests after the coup are based on allegation of affiliation with the Gulen movement. Ultimately, Erdogan has delineated executive power to suppress Kurdish influence in Turkey. Kurdish mayors, lawyers and activists have been expelled from their posts and accused of having ties to Kurdish separatist organizations. The new far-reaching executive authority has monopolized AK party initiatives.

 

The new US administration and the future of US-Turkey relations

In early February 2017 President Trump and President Erdogan publicly voiced mutual admiration for one another in a late night phone call, but the US has not established a stance on it’s future with President Erdogan. In the phone call president Erdogan remained firm in his stance to influence decisions which favor disarming Kurdish YPG militias in Syria. The US administration has not commented on future endeavors with Kurdish militias in Syria, but continues to maintain Turkey’s NATO status as a crucial geopolitical asset to strategic operations in Syria. Because of the geopolitical importance of Turkey in air/ground campaigns, Erdogan must cooperate and deter interest in weakening the Kurdish front against ISIS.

The US must leverage Turkish cooperation to grant Kurds in Syria resources to continue to engage ISIS on the ground in northern Syria. The YPG have proven to be non-confrontational and malleable to US interests on the condition of material support. The YPG are a crucial indigenous force who provide essential tactical and intelligence support to US Special Operations Command personnel on the ground in Syria. Ultimately, President Erdogan perceives the new US presidency as an opportunity to initiate communication which supplements Turkish interests in cooperation in the Syrian Civil War. Turkey is seeking to strengthen ties with the US to ultimately influence US military cooperation with Kurdish factions in Northern Syria. Through the recent radical political transition in Turkey in the summer of 2016 was drastic, President Erdogan remains opportunistic in seeking to gradually restore US-Turkish relations which experienced significant strain towards the end of 2016 with the departure of president Obama.

Granting Turkey greater autonomy to influence US defense policy will significantly alter US-Kurdish partnership in Syria. Turkey will ultimately remain a formidable and valuable US defense partner. Though Turkey has taken an abrupt nationalistic and at time anti-western turn, the United States needs Turkey as a partner to supplement it’s campaigns in Iraq and Syria. Turkey provides invaluable resources to the US with optimal strategic capabilities in the global war on terror.

 

[1] http://www.newyorker.com/news/news-desk/the-end-of-democracy-in-turkey

[2] http://atlas.media.mit.edu/en/profile/country/tur/

[3] http://www.businessinsider.com/turkey-istanbul-military-bridges-2016-7

[4] (image) https://www.wired.com/2016/07/turkey-coup-livestream-map/

[5] (image) https://twitter.com/alivelshiot/status/499693038328094720

Why Cuba? The Race to Havana

Let the race to Havana begin with these economic insights.

By:  Tyson Guajardo, Lynx Global Intelligence

 

Under the Obama administration, the world witnessed the restoration of diplomatic relations between Cuba and the United States following decades of mutual antagonism.  Since this historic event, U.S. Citizens have seen their restrictions on travel to the Caribbean island come tumbling down.  Individuals who fall within 12 categories previously needed to apply for a special license to visit Cuba, but are now merely required to check a box on a form, committing not to engage solely in tourist activities during their stay.  Regular commercial airline flights, cruise, ships and ferries have also been recently authorized.  Although the trade embargo remains in place, this easing of US economic sanctions on the island provides numerous investment opportunities that few dared to dream of just a few years prior.  And while President Trump has threatened to undo almost all of Obama’s executive orders pertaining to Cuba, many experts see this as an unlikely move, as it would go against an increasingly one-sided public opinion and vast commercial interests.

It would be wise for many businesses in the United States (and anywhere else for that matter) to consider the possibilities of investment in Cuba, following its trend of economic liberalization: Since Raul Castro took over for Fidel in 2008, state regulations on private enterprise have steadily decreased.  This has opened a world of new markets for outsiders.  There are numerous prospects in the industries of tourism, agriculture, energy and manufactured goods.  Moreover, Cuba is abundant in highly skilled and educated workers.  Even more compelling is the strategic port location that the island provides for several other nations in the Caribbean and the southeastern United States.  And in 2018, Raul is scheduled to step down as president, which could lead to further economic restrictions being busted wide open under his successor.  Let the race to Havana begin with these economic insights:

Tourism

Cuba is hoping to build 21 new hotels in the Cienfuegos, Trinidad, Guardalavaca, Playa Santa Lucía and Covarrubias areas.  The state companies owning existing hotels are searching for new management contracts including 19 for new hotels and 14 for those already in business.  The government entity CubaGolf intends to “promote the island as a golf-holiday destination” and is already in negotiations with numerous foreign partners to establish joint ventures for the creation of tourism-golf condo complexes.  However, in exceptionally popular locations such as urban Havana and Varadero beaches, prospects are still mostly reserved for state owned enterprises.

Agriculture 

Most land is owned by the state with only 15 percent available to private farmers and another 7 percent for farmer cooperatives.  Despite this, Cuba is looking for joint ventures in cattle, pork, and poultry production; as well as in citrus, peanuts and shrimp farming.  Additionally, Cuba is open to a partner who would be willing and able to invest $10.3 million to create a “leading brand on the international level” of premium coffee grown in specific regions of the hills in Guantánamo Province.  Other opportunities will be available in greenhouses for vegetables, hog production, soy processing, confectionary facilities, and dry yeast production.  Unfortunately, sugar will remain with heavy restrictions, as well as tobacco/cigar industries and lobster fishing & processing.

Energy

While opportunities for joint ventures in petroleum extraction onshore and offshore will be available, Cuba’s goal is to raise the percentage of electricity produced from renewable sources from the current 4 percent to 24 percent by 2030.  This means that foreign investment in hydro, biomass and solar energy is in high demand (for wind farms, Cuba will allow 100% foreign ownership!).

Manufactures

Aluminum cans are in short supply as the firms Bucanero (InBev) and Los Portales (Nestlé) are the current primary clients tasked with producing 577 million of these in joint ventures.  In tech manufacturing, Cuba wants foreign investors to help produce desktop computers and tablets.  The current annual demand is only 75,000, but this is expected to grow to around 1 million in 10 years.

 

Source: Open for Business: Building the New Cuban Economy, Richard E. Feinberg

Russia: A Political Risk Assessment (Economic Intelligence)

February 22, 2017

By:  R. Sonny Betancourt, Co-Founder, Lynx Global Intelligence

 

US – Russia Business Talking Points

Key Judgements

Engaging in business with Russia is complex. The United States is currently in a complicated relationship with Russia. The allegations of Russian hacking, influence on the US Presidential election and overall pent up hostility over actions in Syria, Crimea and Ukraine has complicated the relationship even further. The sanctions in place against Russia will require congressional support and consultation in order to be lifted.

Introduction

Doing business in Russia requires understanding the business climate, cultural nuances and ramifications of US-imposed economic sanctions.  Expertise is required to handle the current frameworks as well as this byzantine business maze. Business with Russia requires a business background with proficiency in foreign policy, security and regional dynamics. Currently, both US bilateral trade and investment relations have been obstructed or outright frozen.  This exposes companies to potential political risk in the spheres of political, economic, technological, legal, and regulatory frameworks.

Background

Globally Russia is the 8th largest economy (GDP) and 6th largest purchase power parity (PPP) and has over 142 million potential customers, acute infrastructure needs and is a vital export market for US businesses. Russia has a highly-educated culture that spans 11 time zones but there are significant barriers to entry: sanctions, corruption, burdensome regulations, competition from large state-owned entities and inadequate rule of law. Sanctions against Russia currently are the biggest barrier to entry. The sanctions regime against Russia was put in place in March of 2014 in response to Russia’s invasion and annexation of Crimea and use of force in Ukraine.  The sanctions primarily targeted 14 defense companies, 6 banks and 4 energy companies.  These sanctions include goods, services and credit financing.[1] Since the implementation, the sanctions have already caused Russia well over 100 billion in economic losses.

Sanctions (backgrounder)[2]

  • Executive Order 13660
    • Sanctions put in place restrictions on the travel of certain individuals and officials and showed our continued efforts to impose a cost on Russia and those responsible for the situation in Crimea.
  • Executive Order 13661
    • Prohibiting the provision, exportation, or reexportation of goods, services (not including financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation
    • Sec 3 – Suspended entry of immigrant/nonimmigrant deemed detrimental to United States
  • Executive Order 13964[3]
    • Harm or compromise the provision of services by entities in a critical infrastructure sector;
    • Disrupt the availability of a computer or network or computers; or
    • Cause a misappropriation of funds or economic resources, trade secrets, personal identifiers or financial information for commercial or competitive advantage or private financial gain.
    • Order 13964 Expanded (December2016)
    • Russia’s Main Intelligence Directorate (Glavnoe Razvedyvatel’noe Upralenie or “GRU”);
    • Russia’s Federal Security Service (Federalnaya Sluzhba Bezopasnosti or “FSB”);
    • Special Technology Center (STLC, Ltd. Special Technology Center St. Petersburg);
    • Zorsecurity (Esage Lab);
    • Autonomous Noncommercial Organization Professional Association of Designers of Data Processing Systems (ANO PO KSI);
    • Igor Valentinovich Korobov, Chief of the GRU;
    • Sergey Aleksandrovich Gizunov, Deputy Chief of the GRU;
    • Igor Olegovich Kostyukov, First Deputy Chief of the GRU;
    • Vladimir Stepanovich Alexseyev, First Deputy Chief of the GRU;
    • Evgeniy Bogachev; and,
    • Aleksey Belan.
  • A group of US senators (both Republican and Democrat) and a separate house bill are poised to introduce legislation to prevent President Trump from lifting Russian sanctions

 

Economics (O&G snapshot)

  • Russian oil and gas companies including Rosneft, Transneft and Gazprom Neft have been blocked from securing long-term financing from US banks which has halted numerous large scale oil and gas projects[4]. These projects include expansion in the Arctic.
  • Well over 50% of Russia’s GDP comes from oil and oil activities[5] The sanctions in turn have crippled GDP and have also delayed or completely stalled new O&G development actions.
  • The Yamal LNG project ($27 billion dollars) could not obtain US financing and had to resort to Chinese banks. Chinese financing is less advantageous and is both more expensive and less flexible.
  • Lack of ability to finance exploration and production activities to find new oil plays and restrictions on U.S. technology purchases had a detrimental effect on Russian GDP (half of fracking tech used in Russia comes from the US). These restrictions could impact Russia’s overall O&G competitiveness on a global scale.
  • Import/Export trade constitutes 51% of GDP[6] This area has been significantly impacted due to both US and EU sanctions. The EU represents 8.4% of total Russian imports and is Russia’s biggest trading partner, constituting 48% of total foreign trade. Russia’s exports are dominated by mineral fuels 74.9% which has historically contributed to a Russian trade surplus in the range of 180 billion euros annually. (Notably gas was not under EU sanctions as member states are reliant on Russian gas).
  • All restrictions against IT & cyber-related products against the FSB were lifted on February 1, 2017[7]

 

Business Outlook/Industries

  • Russian Major Industries
    • Oil and Gas
    • Mining
    • Chemical/Petrochemical
    • Metallurgy
    • Agriculture
    • Weapon and Military
    • Aircraft Building
    • Aerospace
    • Transport
    • Pulp and Paper
    • Precious Stones

 

Forecasting

  • Lifting of the sanctions will be a boon for US oil and gas, banking and export industries
  • Easing as opposed to lifting sanctions are more likely to occur
  • Coordination in Syria and counterterrorism-related activities could potentially soften US stance
  • Academic and creative dialogues must be considered to repair foreign relations, security coordination and diplomatic dialogue
  • Opportunities legally exist within US businesses currently engaged in Russia – PepsiCo, Proctor & Gamble, McDonalds, General Motors, Johnson & Johnson, Alcoa, GE, Morgan Stanley and Cargill

 

Takeaways

  • The U.S.-Russian relationship is strained and requires adept, insightful analysis outside typical political dogma. How can we wage peace and reach an agreeable solution? Is it even possible to reach a diplomatic accord?
  • Russia has been buttressed by increased oil prices but has little control over sanction influence of global economy and domestic job losses.
  • How long can Russia continue to have sanctions impact GDP?

 

Historical Russian GDP Growth Rate Trending

A correlation between sanctions and a major drop in Russian GDP growth is clearly illustrated (see graph below). The sanctions will not remain in place indefinitely and need to be addressed before economic realities lead to potential conflict.

The ability to weather the storm requires adept business and geopolitical prowess. Doing business in Russia is possible but requires moving outside the realm of sanctioned sectors and positioning to be prepared when sanctions are lifted. Guidance within these frameworks requires expertise.

russia-gdp

Lynx Global Intelligence – Intelligence for Good

Lynx Global Intelligence provides an outside the beltway approach, dealing in fact, guiding companies currently in Russia to hedge their bets and provides the legal understanding to deal in a complicated geopolitical risk environment.

A looming Russian bank crisis, continued sanctions, reduced foreign direct investment, increased distrust and potential increased belligerency, requires a counterbalanced strategy. Tactics within the strategy should include maintaining open channels of communication, seeking negotiated solutions, and permitting U.S.-Russia foreign affairs to practice the waging of peace. Dealing with Russia requires a strong but respectful approach. The ability to engage in construction dialogue requires a balanced policy. This nuanced reaction requires an aptitude that Lynx Global Intelligence can navigate within security, economic, energy, investment and geopolitical realities to craft a business solution based on the realities on the ground.

[2] https://www.state.gov/e/eb/tfs/spi/ukrainerussia/

[3] http://www.polsinellioninternational.com/blog/2017/1/13/2017-begins-with-additional-us-sanctions-on-russia-for-malicious-cyber-related-activities

[4] http://www.forbes.com/sites/timdaiss/2016/08/19/prolonged-sanctions-rip-into-russia-causing-angst-for-putin/#cd8f3fc4c2f6

[5] http://carnegie.ru/commentary/?fa=61272

[6] http://www.heritage.org/index/country/russia

[7] http://www.usatoday.com/story/news/2017/02/02/us-eases-some-economic-sanctions-against-russia/97399136/