OPEN FOR BUSINESS

By Kevin Fedarko

The hemisphere's last communist begins his evening with a martini. As he plucks the quintessentially American refreshment from the tray, Fidel Castro seems surprisingly muted. Or perhaps it is simply the mark of age: he is still a big man, trim and barrel-chested, but his 68 years are visible in the skin of his face, which is approaching the translucence of old parchment.

Taking his visitors on a slow walking tour of Havana's labyrinthine Palacio de la Revolucion, Castro gestures toward an enormous mosaic of birds, animals and flowers that dominates the reception hall and quietly begins a story. The artist, he explains, cast the ceramic tiles at the same time the architect was completing the building's interior. Through some misunderstanding between the two men, the ceiling was built too low. When it came time to install the intricately etched tiles, the top two rows did not fit. The artist never forgave the architect whose miscalculations robbed his mosaic of its crown.

Someone asks what became of the architect. Was he fired for his mistake? Contemplating the missing top rows, Castro shrugs. ``No,'' he deadpans, testing his listeners' sense of humor. ``He was shot.'' Then Castro roars with laughter at his joke, a parody of his image as a bloodthirsty dictator. And with that, the evening and the aging commandant suddenly come alive.

In a dinner conversation two weeks ago with a group of TIME editors and correspondents, the Cuban leader talked of everything from the perfidy of his former Soviet allies to the numerous attempts on his life by the U.S., joking that he holds an ``Olympic record'' in surviving assassination plots. But in truth he faces now what may be his gravest challenge yet.

No matter how vehemently he may deny it--and he does--the Cuban leader cannot escape the fact that after 36 years of wily international gamesmanship, he is stranded on the wrong side of history. The Soviet patrons who financed his ``socialist paradise'' for three decades have collapsed. The communist bedrock upon which he built his edifice of power has proved itself bankrupt on virtually every continent of the globe. As his own people clamor for a better life, Cuba's socialist dream appears to be fading fast.

Castro remains firmly in power; despite an economic crisis that gives him no good options, he does not face the imminent collapse of his regime. His tactical skills, his powers of endurance and the affection of many Cubans are intact. There is no organized opposition to him inside the country. His army and security forces are large and efficient. Despite spasms of discontent, like the riot last August that helped unleash the rafter exodus, there is nothing like a Tiananmen brewing. And unlike many similar leaders, he has surrounded himself not with cronies and coat holders but with the best and the brightest his country has to offer. He may be constrained by a terrible economy and his enduring faith in the failed ideology that produced it, but Fidel is not finished yet. The trick he is trying to master, however, is a neat trick indeed: modifying Cuba's communist system enough to survive but not so much that he betrays the revolution.

SINCE THE FALL OF THE COMMUNIST BLOC in 1989 and the loss of Soviet subsidies in 1992, Cuba has suffered through a period of plummeting prosperity that is euphemistically known as the ``special period.'' Imports have dried up. Industry has folded in on itself. Cuba's No. 1 money earner, the sugar crop, amounted to less than 4 million tons this year--a level not seen for decades. The island's factories are producing at only 30% capacity, giving rise to shortages in everything from clothes and cosmetics to pots and pans.

Castro has been loath to respond by renouncing his socialist credo in the fashion of former communists like Boris Yeltsin. But to salvage what remains of his economy, he has been forced to adapt, imposing some measures that are anathema to his beliefs. In 1990, for example, Castro began soliciting foreign investment. Though he continues to declare that Cuba will never sell off its state-run companies, he has opened up strategic areas such as telecommunications, oil exploration and mining to joint ventures. The latest shocker: condominiums for sale to foreigners, with titillating hints that even land ownership may soon be possible. Drawn by the promise of pent-up demand and the conviction that, in the words of a confidential British report to investors, the reform process is ``cohesive, systematic and unstoppable,'' Canadian, Mexican and European businessmen are taking the gamble.

By the end of 1994, Cuba had signed deals for 185 foreign joint ventures. The Spaniards and Germans were among the first to invest in tourism, which grew at an annual rate of 17% between 1991 and 1993; now interest is rising in Canada and across Europe. Meanwhile, the Monterrey-based magnate Javier Garza-Calderon of Mexico's Grupo Domos bought up half the Cuban phone system in a $1.5 billion deal last year. June saw the arrival of Cuba's first foreign financial institution, the Dutch ING Bank. British companies are looking into oil exploration--even though France's giant Total has recently pulled out--and Unilever, the British-Dutch giant, produces toiletries and detergents for the domestic Cuban market. Italy's Benetton now boasts five retail stores on the island, and plans three more by the end of 1996, while Japanese automakers Mitsubishi and Nissan are now sold in Havana.

Even Israel, the only country to side with the U.S. in a recent United Nations vote condemning the American trade embargo, does business with Cuba: Israeli firms are second only to Mexican companies in textile investments. These days, the palm-lined patio at the elegant La Ferminia restaurant in suburban Flores is jammed with foreign businessmen power-lunching with government ministers and discreetly whispering into their cellular phones.

All of which has made for a singular irony: the only people left on the sidelines are the Americans. According to a White House source, the Clinton Administration doesn't feel the changes in Cuba have been substantial enough to justify a diplomatic rapprochement, while the conservative Republicans now in control of the U.S. Congress--pressured by Miami's community of Cuban Americans--are bent on keeping the door to Cuba firmly closed to U.S. companies. Just last week Senate Foreign Relations Committee chairman Jesse Helms introduced legislation that would tighten the 33-year-old economic embargo even more. ``Let me be clear,'' said Helms. ``Whether Castro leaves Cuba in a vertical or horizontal position is up to him and the Cuban people. But he must and will leave Cuba.'' Nevertheless, Castro has also taken a number of other steps to ensure that this will not happen any time soon. In the doldrums of 1993 he legalized trade in dollars, widened opportunities for self-employment and turned over state farms to cooperatives or families. When food shortages became critical last fall, farmers were finally permitted to sell some of their produce on the open market.

Regardless of how disagreeable Fidel's apparatchiks may find these measures, they have produced real change. The trading ignited by newly legalized dollars has been fueling the economy for the past 18 months. Despite Clinton's move last August to diminish the remittances sent by Cuban Americans to their families back on the island, millions manage to get through. Last year Cubans spent nearly a billion dollars buying imported consumer goods in 600 state-run stores across the island.

Moreover, since the opening of the farmer's markets last October, there has been a flurry of economic activity even within the moribund peso-driven sector of the economy. One such place is the Marianao farmer's market, in a drab workers' suburb of Havana, where customers seem to be complaining about high prices--but are still buying. A vendor named Jorge is doing a brisk trade in his homemade marinade of vinegar, garlic, onion, salt and cumin. ``I used to teach language at the university,'' he explains. ``But I was making only 325 pesos a month. Life is very expensive, so I have become a merchant.'' His entrepreneurial efforts earn him 1,000 pesos a day. In general, Cubans now sense that the country has turned a crucial financial corner since the black days of 1993, when the worst effects of the economic collapse were being felt. ``For a while, even among revolutionaries, there was a depressed mood,'' admits National Assembly President Ricardo Alarcon. ``Now that's over. People realize there is a way out.''

But as ordinary Cubans race to take advantage of the reforms, inequalities are swiftly giving rise to their inevitable byproducts: class resentment, social unrest and crime. Prostitution once again flourishes in Havana. The influx of tourists (including some Americans, who slip onto the island illegally from Nassau) sets up a stark contrast between the fantasy playground being built for foreigners and the gritty reality that ordinary Cubans must contend with. As the inequalities increase, many poor but educated Cubans view the rush to the dollar with disgust.

For despite the recent flurry of economic activity, there are still few guarantees, many pitfalls and no safety net in Cuba's reformation. Castro's economic planner, Carlos Lage, told investors at the annual World Economic Forum in Davos, Switzerland, that the island's economy had ceased its free fall but warned that the recovery will be painful and slow. Cuba leaves much to be desired in basic infrastructure, such as communications and power supply. Moreover, the government has yet to face up to its most difficult challenge: paring down inefficient state-run industries and the loaded bureaucracies that serve as the backbone of the socialist state. Laid-off employees have nowhere to go for work, and the government has so far allowed only 160,000 people (out of a total population of 11 million) to seek self- employment.

Little wonder, then, that nowadays Castro's most frequent dinner guests are not fellow ideologues, but globe-trotting tycoons like Pierre Cardin, Ted Turner and Lee Iacocca, who can bring in the additional capital that Cuba desperately needs. In each meeting, Castro vows that he will never abandon socialism but also promises to continue holding open an economic window to the breezes of the free market. ``We have to be ready to conduct the necessary reforms to adapt our country and our economy to the present world situation,'' he says. Rough translation: until Castro gets his country up and running again, he will use capitalist tools to survive. ``But,'' he insists, ``without renouncing our ideals!'' The way out is proving a difficult road for Castro's most loyal minions, since it requires discarding--temporarily, they assure themselves--several pillars of Cuba's socialist dogma. The old Central Planning Board, which piloted the state-directed economy, has been abolished. Last year the government claims to have cut the budget deficit 72% by slashing its bloated work force, eliminating dozens of subsidies and imposing price increases on such things as cigars, alcohol and electricity. These measures do not sit well with party stalwarts. ``We made these changes not because we like it, but because we had to,'' laments Communist Party official Jose Arbesu. ``The point of no return would be to put all production in private hands. But we are not going to do it.''

Cuban Americans and conservative politicians in Washington insist that keeping the trade embargo firmly in place will hasten Castro's demise. But this line of thinking ignores the bedrock of loyalty that many ordinary Cubans feel for Castro, whose revolution has provided every adult citizen with free health care, education and a social-welfare net. Castro has long profited by laying the blame for Cuba's economic troubles on the U.S. Resentment of the embargo--particularly when U.S. sanctions against Vietnam have been lifted--only reinforces a fierce pride. Cubans are nationalists even more than they are socialists or incipient capitalists, and pressuring them from the outside makes even more unlikely the full-scale rebellion that Cuban Americans would like to ignite.

The biggest impact of the U.S. economic restrictions is the damage they inflict on American businesses. For many foreign firms now attempting to establish a foothold in Cuba, the embargo represents a golden opportunity to do business without U.S. competition. One example is mining. By the end of last year, the Cubans had signed joint-venture exploration deals for nickel, gold, silver, copper, lead and zinc with a number of Canadian and Australian companies. ``A company of our ilk would never have the opportunity if we had to compete with American capital,'' said Frank Smeenk, president of Canada's MacDonald Mines Exploration Ltd., as he celebrated the good news on drilling results with a Cuban minister.

While Smeenk and others make money, American businessmen can only sit back and salivate. American economists estimate that when the embargo is finally lifted, U.S. business could total as much as $1 billion in the first year alone. ``The people in Miami have the best intentions, but the time has come to change,'' says Dwayne Andreas, head of Archer Daniels Midland. ``The U.S. is missing hundreds of business opportunities, and we'll probably be locked out of Cuba for half a century.''

It is a testament to the size of the prize that, despite the risks, an increasing number of Americans are sneaking into Havana with the hope of working out arrangements under the table. According to Cuba's Ministry of Foreign Investment and Economic Cooperation, representatives of more than 100 U.S. corporations have visited the island in the past year with hopes of doing business in a postembargo Cuba. At least 26 American firms signed nonbinding letters of intent in tourism, medicine and biotechnology. ``We're upset that we're not getting a piece of the action,'' declares a frustrated investor from Arizona who was spotted in the Hotel Nacional investigating opportunities in marinas and real estate. ``Why not us?''

Eager to help pave the way, a handful of savvy consultants from New York City, Washington and Miami jet in monthly to maintain relations with Cuban officials for American companies shy of openly violating U.S. law. Other firms simply take the risk themselves. Executives from such companies as Hyatt, Marriott, Merck and Eli Lilly have been seen around Havana. One Western diplomat in Cuba laughs at the increasingly flagrant violations, even by exiles in Miami who have spent 30 years condemning Castro. ``The U.S. embargo is a sieve,'' he says. ``Even Cuban Americans are coming here to look at business opportunities.'' No one, except perhaps those in Castro's inner circle, knows how far the old revolutionary is prepared to allow economic changes to go. Insiders say there is a lack of consensus in the government. The guiding philosophy seems to be to avoid any move that might threaten the social order and the political status quo. Castro appears resistant to any but the most modest concessions, and while a well-honed instinct for survival may drive him and his closest associates further into dalliance with free enterprise, they have not shown an intellectual acceptance of the superiority of market forces. Without an independent source of income, the Cuban regime will have to continue grudgingly to open up the economy, but the moves will be fitful and reverses inevitable.

Yet even as he flirts with capitalism, Castro continues to insist that communism is alive and well in Cuba. ``I'm still a communist,'' he declared, when asked if he thought his experiment with Marx had been a failure. ``I am proud to be one. Why do I have to renege on my principles? I have no choice but to continue being a communist.'' It is an intrepid defense of an idea whose time has passed.

--Reported by Cathy Booth/Havana, with other bureaus

-QUOTE-

``We were forced to make these changes--not because we like it, but because we had to.''

"Tourism sets up a stark contrast to the gritty reality Cubans contend with."

With reporting by CATHY BOOTH/HAVANA, WITH OTHER BUREAUS