US embassy cable - 05BRASILIA1636

UNCLAS BRASILIA 001636 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA 
NSC FOR BREIER 
TREASURY FOR OFAC 
 
E.O. 12958: N/A 
TAGS:   ETTC, BR, CU 
SUBJECT:  ACTIVITIES OF THE BRAZILIAN FIRM SOUZA CRUZ IN 
CUBA 
 
1.  (U)  Recently the Brazilian magazine Epoca published an 
article recounting the experiences of the Souza Cruz company 
(controlled by British American Tobacco) in doing business 
in Cuba.  The article, a translation of which is set forth 
below, is instructive as it speaks of the day-to-day 
difficulties in operating on that island as well as the 
degree to which U.S. sanctions have posed a barrier to 
investment in Cuba. 
 
2. (U) Begin Text of Unofficial Translation. 
 
PROFIT REVOLUTION 
 
Meet Brascuba, the Souza Cruz capitalist enterprise in Fidel 
Castro's socialist territory 
 
Isabel Clemente, from Havana 
 
The minimum wage in Cuba increased 125  at the beginning of 
the month.  It went from 100 pesos (US$4) to 225 (US$9). 
This increase was celebrated not only by Cuban workers, but 
also by a group of Brazilian executives.  They are 
administrators of the Souza Cruz company, partner in one of 
the few private business dealings on Fidel's island.  Souza 
Cruz is associated with a Cuban state-run company to 
produce, sell and profit in a country that has fought 
against capitalism since the revolution of 1959.  The 
Brazilian enterprise in the Pinar del Rio industrial 
district has shown itself to be an adventure worthy to be 
lived by Cubans during the revolutionary years. 
The objectives of the Brascuba cigarette factory are purely 
capitalist.  Their 220 employees, of which only three are 
Brazilian, produce cigarettes for the domestic market and 
export.  When you circulate through Havana, you see many 
billboards celebrating the revolution.  Between a panel with 
a photo of guerrilla Che Guevara and another protesting 
American imperialism, there is a lone ad.  "Cigarrillos 
Romeu y Julieta - Una exquisita pasion", announces Brascuba. 
The company has its eye on the low-income population, who 
love cigarettes.  Cuba has one of the highest percentages of 
smokers in the world.  If there wasn't a law restricting 
smoking in public places, there would be around four smokers 
in every group of ten anywhere around Havana.  They are 
"companeros", as people are known in Cuba, in numbers large 
enough to consume 2 billion cigarettes a year; an attractive 
market for the tobacco industry, which doesn't mean doing 
business is easy. 
 
The Brazilian adventure in Cuba started ten years ago, in 
the middle of U.S. pressure against Fidel Castro's socialist 
regime.  At that time, British American Tobacco (BAT), Souza 
Cruz controlling company, decided to invest in the island, 
but feared eventual retaliation from the United States 
against countries that helped their troublesome neighbor. 
With the Brazilians in the lead, the British believed the 
U.S. actions would be milder, said Souza Cruz financial 
director Dante Letti, who was then in charge of managing 
factory start-up.  They were right.  The only reaction 
happened in 1996 when Milton Cabral, then director of Souza 
Cruz, was approached by the U.S. Consul in Rio de Janeiro. 
The U.S. government wanted to know if Souza Cruz was 
occupying a building taken from the Americans during the 
1959 revolution.  But the building belonged to BAT 
themselves before the guerrillas took power, according to 
company records. 
 
Since then, the partnership has been productive for both 
sides.  The Cubans provided the tobacco, famous 
international brands, and the building, while the Brazilians 
brought technology, equipment, their own brands, and money. 
In a decade, Souza Cruz invested US$28 million and lent 
another US$50 million to the subsidiary.  Today, the company 
invoices US$24 million a year and are in the black. 
Specializing in the black cigarettes market niche, with 
strong taste and smell, Brascuba has famous cigar brands 
like Cohiba and Romeu y Julieta.  They export to 20 
countries, and just this year their sales to Europe should 
go up 18 .  But when you look at the results for the decade, 
they don't look as good.  During this period, the company 
only removed US$12 million from the island, that is, they 
are running at a loss.  Considered normal in the country 
known for long lines in stores and restaurants, making money 
requires patience.  "If you put it on paper, the deal 
doesn't make sense, but no one comes to Cuba thinking short- 
term", said Nicandro Durante, president of Souza Cruz. 
 
One of BAT's short-term problems is the competition in 
cheap, unfiltered, low-quality cigarettes.  These aren't 
pirated brands like you see in Brazil.  They're second-class 
wage increase, the minimum wage is only 225 pesos, or US$9. 
Another problem are the U.S. trade sanctions, that make 
foreign sales difficult.  Our costs have gone up a lot, 
especially freight.  If it weren't for the embargo, we could 
purchase raw materials from the U.S. which would come out a 
lot cheaper," said the co-president of Brascuba, Brazilian 
Jose Beniques.  "Ships take 90 days to get here from Europe. 
We are forced to keep four months worth of stock because of 
the long lead time", said the other president of the company 
67-year-old Cuban Adolfo Dias Suarez, a political scientist, 
ex-combatant from the revolution. 
 
And besides the hefty trade barriers, there are everyday 
difficulties when working in a country in extreme crisis. 
The problems start right away.  To open a factory in Cuba, 
the Brazilians spent three years in meetings in Havana, a 
good part of them by candlelight (blackouts lasted 16 hours 
a day in 1992).  To renovate the building (from the 19th 
century) that was falling apart, took two years of 
construction.  The delay wasn't due only to the difficulty 
of the work, but also because the Cuban workers liked the 
cafeteria so much that they didn't feel like finishing the 
job.  Exchange of gifts was the norm, and led to anecdotal 
episodes.  To please the Cubans, the Brazilians donated 
street clocks to the city of Havana, something new on the 
island, until then completely isolated and dependant on 
outdated Russian technology.  The problem is that the 
machinery malfunctioned in the Caribbean heat.  They got the 
time and temperature wrong, besides showing the yet unknown 
Hollywood cigarette brand.  They became a standing joke. 
The clocks were removed, and sometime later the brand came 
out on top.  Today Hollywood (an Americanism not typical for 
the Cuban authorities) is among the most consumed cigarette 
brands in that region.  From the Cuban Brazilian interchange 
have emerged weddings, whole families exported to Brazil, 
and at least one diplomatic incident.  A Cuban sent to the 
Rio de Janeiro Souza Cruz headquarters for training, didn't 
show up at the airport on the day of his departure.  The man 
surfaced days later in the USA where he decided to live; one 
more episode in the Brazilian capitalist adventure on 
Fidel's island. 
 
What is Brascuba? 
 
- they produce 1.8 billion cigarettes per year 
 
- they are the largest Latin American exporter of black 
smoke (i.e., a heavy type of tobacco) 
 
- Invoiced US$24.21 million (2004) 
 
End Text of Unofficial Translation. 
 
 
Danilovich