“We don’t have banks in Cuba!”

The taxi driver helming a splendid 1957 Pontiac Pathfinder clasico off the taxi rank at Havana’s Hotel Nacional snorts with scorn.

Euromoney has asked him to drive us to a rare meeting at the Banco Central de Cuba (BCC), one of his country’s most important institutions. But the cabbie neither knows what a central bank is, nor where his country’s own is located. Euromoney tells him the address, in Havana’s crumbling old town, along what was once Cuba’s raffish version of Wall Street at a time when his car arrived on this famously feisty island.

He knows the street, but that’s all. “Are you sure it’s a bank?” he asks.

It’s a reasonable question.

Fidel Castro’s communist command economy advantages its ruling military elite but pays most of its workers around $25 to $30 a month. Though five years into an erratic embrace of free-market reforms of their sclerotic Soviet-styled economy, most Cubans don’t yet have much call – or money – for banking services.

The cabbie is wrong, but he’s kind of right too. There are no formal capital markets in Cuba. There are some domestic banks, but in the island’s primitive financial system, they bear little resemblance to banks elsewhere. As for confidence in the island’s socialist system, ask a Cuban where they keep their cash, particularly those in the peppier tourism sector, and they’ll indicate under the proverbial mattress at home or gesture across the sea to Miami.

It wasn’t always like this. Before Castro nationalised Cuba’s banks in 1960, a year after his fabled revolution, some 49 banks serviced the island, including six foreign banks operating with full licences. Such was their acclaim that a 1957 edition of American Banker listed two Cuban-owned banks in a Latin America top-10 list, second in the region only to Brazil’s top banks of the day.

Today, BCC lists nine domestic banks, eight of them owned by the state. Moving about the capital, the only bank with any retail visibility is an occasional branch of Banco Metropolitano, largely created from the commercial side of Cuba’s old central bank, Banco Nacional de Cuba (BNC) in the 1990s and mostly serving Havana’s handful of diplomats and foreign firms. One of Metropolitano’s branches was once the majestic neoclassical head office of Canada’s Bank of Nova Scotia before the revolution, just three blocks from the central bank.

The ninth bank with a local licence is also state-owned, but by Venezuela. Banco Industrial de Venezuela opened with immediate access to the local market in 2005 after a visit by the late Hugo Chavez, then Venezuelan president and Fidel’s fellow ideological traveller. But the BCC’s list of local banks needs updating. The Venezuelan bank was shuttered in Caracas earlier this year after a succession of corruption scandals and massive losses.

A Havana banker says Cuba’s local banks “function as departments of the central bank. Bank credit to the business sector is practically zero”.

But now the Cuban government says it wants to transform its banks, to make them compete with each other. Where they’ve been traditionally run as the financial arms of ministries, there are plans to turn them into more universal banks, offering products like mortgage loans, hitherto largely unknown in Cuba. Banks here lend for basic household items or home improvement, but not for outright property purchases.

Banco Internacional de Comercio (BICSA) and the military-owned Banco Financiero Internacional (BFI) have traditionally dominated Cuba’s foreign trading. As the most outward-looking of Cuba’s banks, they have an eye on the fast-expanding private entrepreneur ‘cuentapropista’ class that has been unleashed by reforms.

Likewise, the traditionally Havana-focussed Banco Metropolitano (BM) and the nationwide savings bank Banco Popular de Ahorro (BPA), which operate the bulk of Cuban bank accounts, want exposure in trade finance and business. Bank account penetration among Cubans, usually via state-issued debit cards for salary, is no more than 20% to 25%.

That Cuban banks need capital might provide an opportunity for a foreign joint venture or takeover in a reformist economy that legally does not bar them. Despite the notionally liberal law, Havana economists say the market is effectively closed to outsiders.

For the foreign financiers that once revelled here, Cuban law officially does not restrict foreign banks from operating on the island. And there are four more listed by the BCC in Havana today than the six present up to 1959/60; Spain’s BBVA, Bankia and Sabadell, Canada’s Scotiabank and National Bank, Republic Bank of Trinidad and Tobago, Lebanon’s Fransabank, BPCE of France and the defunct Venezuelan bank that the BCC deems local.

“Generally, the foreign banks that come here tend to be provincial in their home markets, not the leading bank, and so they’re looking for opportunities,” says a Havana-based foreign banker. “There’ll be some dominant alpha male at head office who says: ‘We’re going to do Cuba’.”

There’s a 10th foreign bank registered with the BCC, the little-known London-based HavinBank, the former Havana International Bank, the Cuban state’s only foreign-domiciled bank. HavinBank is 86% owned by the BCC, with minority stakes held by Cuba’s Bank of Investment, Popular Savings Bank and Bank of Credit and Commerce.

Regulated by the UK’s banking agencies, HavinBank claimed assets of £177 million in 2015, mostly “loans and advances to banks and other financial institutions”, generating a modest £1.22 million profit. HavinBank boasts an eclectic board. Its members include UK Labour party peer Baron Triesman, an under-secretary in the Blair-era Foreign Office and a one-time British Communist Party member, who once ran that bastion of new wealth, the English Football Association.

HavinBank’s chairman is Gustavo Roca Sanchez, who the BCC website lists as a vice-president of Cuba’s central bank. Cuban dissidents claim HavinBank enables a network of international assets controlled by the communist party’s elite, particularly its military top brass. They cite repeated reports and academic studies that claim the Castro brothers, regarded as ‘Castro Inc’ by many Cubans, are some of the world’s richest national leaders.

Indeed, Cuba’s international bankers and business fixers in the UK, Spain and Switzerland have often been subject to US government sanctions. But last year, amid warming relations between Washington and Havana, the US Treasury department removed various people associated with HavinBank and Cuba’s central bank from its sanctions blacklist.

In Havana, local bankers regard a stint at HavinBank’s Canary Wharf office as an international finishing school, a chance to learn about international finance and earn some extra money. HavinBank’s 2015 annual report reveals one director, believed to be the BCC’s monetary policy specialist Guillermo Gil Gómez, last year earned the equivalent of around Ps50,000 (depending on which version of the Peso you use, that’s either $50,000 or $1,900), in contrast to the Ps600 annual salaries the BCC is currently offering banking specialists.

Far from the extensive branch network and market access that foreigners from Scotiabank, Chase Manhattan and a Taiwan-owned Bank of China enjoyed before Castro, today foreign banks in Cuba are mostly confined to an ambassadorial representative desk, perhaps dabbling in some modest trade financing.

With the US economic blockade of Cuba still formally in place, foreign banking in Cuba has been fraught. France’s BNP Paribas shuttered its Havana office in 2014 after huge fines for busting US sanctions. ING Bank did likewise in 2009 after penalties, while liquidating the Netherlands Caribbean Bank joint venture it had with Cuba’s BPA and the state shipping company Acemex. Deutsche Bank, Crédit Agricole and Société Générale have also been fined or investigated by Washington over their Cuba dealings. Spain’s BBVA dodged a bullet by scaling back its Cuban activities when it started buying in the US, notably Alabama-based Compass Bancshares in 2007.

“At the end of the day,” says a foreign banker in Havana, “you had to decide if Cuba was worth it when you wanted more to be in New York.”

It can also be tricky to be in Cuba itself. The expatriate community is littered with horror stories about foreign businessmen who unwittingly found themselves on the wrong side of revolutionary justice, for something as innocent as incentivizing local staff, or saw their painstakingly formed joint ventures mysteriously wrenched from them by powerful local players, sometimes accompanied by a stint in prison.

Now that is all changing. Cuba’s reforms and a US softening toward Havana have got foreign bankers looking more meaningfully at Cuba. Various Spanish and German banks were in town for exploratory look-see inspections when Euromoney was there.

In July, Cuba’s central bank, with the Florida International Bankers Association, hosted a landmark Havana conference of US and Cuban bankers. The US Federal Reserve even made a presentation, unthinkable barely a year earlier. One of the attendees was Raul Faldes-Vauli Jr, CEO of Florida’s Professional Bank, whose family had owned Banco Pedroso that had been seized by Castro decades earlier. Another delegate was David Seleski, CEO of Florida’s tiny Stonegate Bank, which recently became the first US bank authorised by the BCC to use its debit MasterCards at 10,000 outlets in communist Cuba. Seleski tells Euromoney he believes US-Cuban banking joint ventures will soon follow.

]Ten dollars and five minutes in the Pontiac later – Havana cabbies can make more money in a morning than Cuba’s state doctors and scientists do in a month – and we are in tumbledown Old Havana’s one-time financial district. It’s very evocative, but anything vaguely resembling a booming business district seems a very long time ago. The banks and buildings that once crackled with commerce here had their chambers divided into tenements and outposts for the official ‘defenders’ of Castro’s revolution. Sepia-toned alleys that in a previous Havana might have heaved with bars of suits dealmaking over mojitos today house occasional kiosks offering shoddy local goods to Cubans with little cash. A few streets away is Calle Obispo, once the pounding heart of commercial Cuba. It’s also charmingly photogenic for tourists, but it’s not Oxford Street.

A gold plaque struck by Cuba’s National Association of Economists and Accountants on a wall outside the central bank informs passers-by that here on November 26, 1959, 11 months after dictator Fulgencio Batista fled the island, the guerrilla hero Ernesto Guevara ‘took possession’ of the then central Banco Nacional de Cuba.

Che, as he’s lovingly known, was central bank governor for 15 months, serving concurrently as finance minister too. (A tale oft-told by Havana-based bankers describes how Che got the posts. After taking power, Fidel Castro canvassed volunteers for a ‘good economist’ to lead the central bank. Che raised his hand, believing that Castro had wanted a ‘good communist.’ Apocryphal or otherwise, Che was appointed.)

Though the BCC admits on its related BNC website: “Guevara was not an expert in economics or anything like that”, his pecuniary legacy lives on in Cuba’s unwieldy dual currency system, his image illustrating the three convertible peso note used primarily in the tourism sector, and its local three peso note, valued at 1/25th its convertible counterpart.

Che’s plaque is opposite the BCC, occupying a building that doesn’t so much dwarf its low-rise neighbours as out-renovates them, one of Old Havana’s few structures to have benefitted from restorative masonry or a post-revolutionary coat of paint.

If the central bank’s 510-odd functionaries, 63% of whom are women and 89% university graduates, need any reminder as to why they toil, a mural opposite the main entrance reminds them of ever-vigilant revolutionary heroes Guevara, Camilo Cienfuegos and Juan Almeida, and epic depictions of the 1959 uprising.

It’s not just on Cuba’s banknotes and walls where the spirit of Che lives on. Irma Martinez Castrillon, the BCC’s first vice-president and a former BNC president before its central bank functions were absorbed by the BCC, tells Euromoney that Che’s “inspiration” infuses the central bank today.

“How is it not so?” Martinez asks. “For us it’s very important to follow and know that Che’s spirit and his political and economic policy thinking is present in all the work and all the policies of our central bank.”

When Martinez arrives, she’s tapping into an iPad, a device rarely seen in Cuba. One of the country’s most powerful officials, the formidable Martinez is a Moscow-educated 50-something lawyer who has been at the bank for six years, having moved across from BNC, where she also was president.

The economic reforms announced in 2011 by president Raul Castro, Fidel’s 85-year-old younger brother (by five years), uncorked a free market genie after decades of Soviet-inspired central planning. Today, as many as 450,000 self-employed entrepreneurs have emerged, kickstarting an embryonic private sector.

These so-called cuentapropistas are transforming the tourist sector, making it the most dynamic part of the otherwise moribund military-run economy, opening bars and restaurants in atmospheric spaces and guest houses in their homes, turning private cars into cabs and rejuvenating basic services that had ossified under state control.

According to economists, Cuba now allows private operators in around 200 types of businesses, which in turn employ around 20% of the Cuban workforce, and are steadily tilting salaries away from state control.

Though the economy remains firmly under the wing of military conglomerates, ordinary Cubans now have more of a say in its direction. They can now sell their homes and cars, travel abroad (where many keep bank accounts), import goods, stay in what were once foreigner-only hotels and own mobile phones, though internet data services are either not available or prohibitively expensive.

Despite the advances, Martinez is most comfortable ploughing through safe ideological ground, describing almost by rote the history and legal remit of the central bank. “We have the same function as any central bank in the world,” she claims. She cites the law and date – May 28, 1997 – when the BCC was incorporated, and says its role is to supervise local banks, to issue and safeguard the peso, and manage Cuba’s national reserves. “It should contribute to the economic balance and orderly development of the economy,” she intones. “Our philosophy is based on building an efficient banking system.”

Euromoney asks Martinez about the bank’s independence in implementing policy, citing foreign examples where central banks operate separate of government. “It is not like that here,” she says. “We have comprehensive contact in order to avoid contradictory policies. We don’t respond to the entities and companies of the state.” But “given the peculiarities of the Cuban economy,” she says, key decisions such as monetary policy and interest rates “are discussed and approved with other instances of macro coordination.”

So far, so doctrinaire and formulaic and, perhaps, so revealing too, a contrast to the meeting with another powerful Cuban bureaucrat, Deborah Rivas Saavedra, the dynamic general director of foreign investment at the Ministry of Foreign Trade and Investment. At her Vedado office in a building that was once a showroom for General Motors’ cars, Rivas enthusiastically maps out a vision for her country that could well be Singaporean; of foreign investors being able to hire and fire staff as they see fit, of tax holidays, full repatriation of profits and 100% ownership of Cuban subsidiaries.

Educated in Cuba and Sweden, Rivas worked for years at the state sugar monopoly, the country’s biggest exporter. “We are trying to increase the GDP to 5% to 7% annually,” Rivas says. “We don’t have internal savings, so we have to attract foreign savings in order to invest, and to increase the (savings) rate to 20%. Now we achieve not more than 10%.”

The economic and political challenges confronting Cuba today are starkly, and unwittingly, evidenced in a July post on the Banco Central de Cuba’s own Facebook page, advertising jobs at the central bank. The BCC (above) solicits a range of ‘banking system specialists’; compliance officers, bank inspectors, specialists in finance and economic law, bookkeepers, accountants and computer scientists. Tertiary qualifications are a prerequisite. But few Cubans have the facility to access the BCC’s social media activity, or any sort of online information, even were they inclined to. The Castro government severely limits internet access for Cubans, or makes the few – grindingly slow – connections that are available prohibitively expensive for public use. The more pressing issue for communist Cuba 57 years after a revolution few Cubans today have any profound connection to, are the salaries the BCC offers for highly qualified people to fill its vacancies, especially when compared with what Cuban entrepreneurs can now make working for themselves. A banking specialist at the prestigious BCC will be paid Ps315 ($13.50) a month. A senior bank inspector or lawyer specializing in monetary and economic law will receive Ps415 ($17.90) a month. There’s the ‘incentive’ of a Ps180 ($7.70) monthly top-up, plus a 21 convertible peso ‘stimulus’, making the highest monthly take available, for a highly educated computer scientist or principal banking inspector, around Ps1,100 ($49.50). By comparison, a cuentapropista (who doesn’t need a university degree) taxi taking foreign passengers to and from Havana’s international airport charges 50 convertible pesos (around Ps1,200). One privately owned Havana restaurant, La Guarida, serves around 1,000 covers a week at an average of $50 a diner. It’s very popular with Havana’s communist nomenclature.

Rivas continues: “We don’t want to depend anymore on anyone. We used to depend on Spain, then the US, then the USSR because of the US blockade and now we have some dependency on the oil from Venezuela. “Our main goal is not to depend. That’s why our foreign investment law is so open.”

The discussion with Martinez turns to Cuba’s economic reforms. But the career apparatchik seems at odds with the very term, perhaps reflecting what diplomats and other Cuba observers say is a thorny ideological struggle inside the bureaucratic establishment about what sort of Cuba should emerge after the Castro brothers pass, about how far Castro’s market opening should go or, as far as the doctrinaire Martinez thinks, whether they should even be regarded as reforms at all.

“What do you mean ‘reforms’?” she asks. “We are not implementing reforms. What we are doing is updating the economic management model in Cuba. One of the main tasks that we are performing today is contributing to the transformation of the economic environment. We cannot say we are following a specific model. We cannot lose sight that our economy is a planned economy.”

Euromoney raises Cuba’s dual-currency dilemma. President Castro has committed to unifying them, with primacy to the peso (the weaker CUP), over the convertible peso (CUC) that shadows the US dollar, and which is 25 times stronger than the CUP.

Economists say there are huge structural issues in combining the two pesos, what they call ‘Day Zero,’ not least the inflation implications for ordinary Cubans operating outside the CUC universe, and devaluation issues for those within it.

While economists say the simplest method would be an abolition of the CUC alongside a newly floating and convertible CUP, the US blockade and Cuba’s inability to call readily on multilateral financing makes even that ‘big-bang’ approach problematic.

Cuba has made a number of stop-start attempts to combine its currency, making the CUP convertible and balanced against a table of international currencies, including the euro, yuan and dollar. There was also a brief experiment to introduce CUC1/CUP10 exchange rates in the state sector but that proved too disruptive, and extension to the wider economy didn’t proceed.

Local bankers describe ‘peso piles’ at banks like BPA, which it’s estimated has as much as Ps15 billion on its books, but an unconvertible currency few want to touch. One banker describes currency union as a “ticking time bomb”, particularly with private, CUC-touting cuentapropista entrepreneurs becoming more prominent in the economy. “Everyone wants CUCs now, and you don’t know how much of them are covered by reserves.” Another banker says: “The right time to join the currencies is when the US embargo is lifted.”

Euromoney asks Martinez if the CUC economy is bigger than the CUP economy, as should be indicated by the BCC’s supply of both currencies. She bristles. “This information is not available for you. We don’t share those indicators outside of the bank.”

But she relents, admitting that the BCC has been working on currency union since Raul Castro urged action in 2011. “It has been said publicly that one of the clearest examples of how complex the process of implementing the (market reforms) guidelines is precisely this topic.” “We must do it without shock therapy, without it having a direct impact on the population,” she says. “It’s a complex process. There will not be a magical solution to all the problems of the economy.”

Asked if this is the biggest challenge on her desk, Martinez says a greater problem is Washington’s continuing financial blockade of Cuba, despite the improving diplomatic relationship. We ask about Cuba’s foreign reserves and import cover, some of the most basic information a central bank can make publicly available.

“(That is) even less (available),” Martinez says defiantly. “It is information we consider very sensitive.” To stress the point, she repeats three times: “We do not share this information.” She continues: “I believe that we are transparent, (but) certain information could be used against the national interests of our country.” She breaks into English as if to underline how seriously she regards the matter. “Everybody likes to know.”

What is her take on the economy? “This is a question for the economy ministry, not the central bank,” Martinez says, referring us to speeches made at the recent communist party congress and the state statistics agency. Discussion of Cuba’s ambitions at the World Bank and IMF are also off-limits, because they are “political matters”.

Euromoney runs Martinez’s defensive responses past foreign bankers in Havana. “It’s an artless old-school Soviet reply,” says one. “She could score a political point by revealing the number, which we think would probably be around $10 billion, and say the reason it’s so low is because of the US blockade.” Says another banker: “I doubt very much that they would actually know. Their data is hugely unreliable.” Another says: “They won’t go very far with this kind of reasoning. The market wants disclosure. Yes, there is a US blockade, but a lot of other countries that have not blockaded need to do business in Cuba.”

Robert Feinberg, a former national security adviser in the Clinton presidency, and professor at the University of California’s School of Global Policy and Strategy, agrees, saying: “Investors want to know what the capital account looks like, what’s the reserve levels, the monthly coverage, the basics and they tell you that’s a state secret?”

He adds: “If they really want to attract meaningful foreign investment, they have to create a business climate, and a business climate means at least some degree of transparency.” Feinberg has just published ‘Open for business’, a book on the recent Cuban reforms. “They’ve got to come to grips with this transparency if they really want to open to the global economy and eventually join the international financial institutions. They are facing a serious foreign exchange crisis and I bet in their heart of hearts they’re thinking: ‘Oh boy, wouldn’t it be great if we could go to the IMF and World Bank and borrow a couple of billion’,” he says. “But that’s not going to happen until they at least show some cracks in this non-transparency mode they’ve been in for decades.”

As for Cuba’s banking system, Martinez says it needs strengthening to be more efficient. “We should focus on financing, not only the state companies, but also the new forms of management which are non-state. We are hoping to have a banking system that is in accordance with international standards, as a necessary element of long-term growth.”

Martinez says that the banking sector is open to foreign investors “but we suggest they start with a representative office…. and so long as they are within the regulatory framework”. She says she has travelled widely, an opportunity not readily given to the bulk of her countrymen for years, until it was included in Raul Castro’s 2011 reform package. She cites study tours of central banks in China, Vietnam and Mexico.

“I cannot say that I am impressed by one central bank in particular as a model for us,” she says. “We review all of them and try to take the best experiences out of all of them.” She continues: “Some central banks have shared their experiences in similar processes to the one we are now involved in, this updating of our economic model. We try not to repeat those actions which did not work in those cases.

“We are not like any other central bank.”

Quite.