In his downtown Havana office, crammed with personal computers and copiers, Felix Sautie is full of ideas for UFO Services, the publishing and marketing conglomerate he heads. The group already acts as matchmaker between foreign and Cuban business partners and provides professional services to foreign companies investing in Cuba. But there's more to come, says Sautie. Through UFO's new U.S.-Cuba phone link via Canada, called Rapidtel, callers are able to dial a Canadian 800 number that bypasses the clogged U.S.-Cuba phone wires--for a stiff $23.50 for three minutes. And a computerized data base on Cuba will soon be available to foreign investors.

UFO and a few dozen companies like it are the latest wrinkle in Fidel Castro's communist revolution. Joint-stock companies, quasiprivate enterprises, and "autonomous" state-owned companies are popping up all over the island. UFO began a few years back when Cuban investors, many with close ties to the Castro regime, put up cash and other assets valued at 1 million pesos. So far, UFO has plowed back its profits of 1 million pesos, officially worth $1 million. In another variation on the theme, Cubanacan, a state company, has wide latitude to make deals with foreign-tourism investors. That's the sector Castro is counting on to help alleviate Cuba's desperate hard-currency shortage.

For Cuban caudillo Fidel Castro, all this is part of a survival strategy. Battered economically by the Soviet bloc's collapse, which cut off vital trade and subsidies, Castro is trying to spur more enterprise and productivity in the inefficient Cuban economy. Along with opening up niches in the economy for private initiative, he is striking quick deals with European, Canadian, and Latin American investors to bring cash, management, and world-marketing connections in everything from tourism to oil exploration. All these links are despite a 32-year U.S. trade embargo.

What Castro is groping for is a precarious balance between his hostility to capitalism and his need for Western partners--and their money. Can he bring back private capital without capitalism? "I don't think it will create a special problem," Castro said in a brief interview at a recent conference for foreign business executives. "Our people know what capitalism meant to our country."

His aim is to open limited parts of the economy to capitalist investment and market mechanisms without unleashing forces such as those that toppled Eastern European governments. Cuba's leaders know "they are running a dangerous game by allowing these companies to come in and show how capitalism works," says Arturo Villar, a Cuban-American researcher who visits Cuba often to do studies for business clients. "But they have no choice."

POLITICAL PRISONERS. Castro's hope is to keep islands of private business isolated from the rest of society. At the same time, he is tightening his political grip by handing out stiff prison terms to advocates of political change. Dissident Elizardo Sanchez derides Castro's moves as "superficial changes to gain time." Even so, Castro is still seen by many Cubans as a nationalist champion against U.S. pressures. Despite widespread hardship and political disillusion, there's no sign of organized opposition.

Still, Castro does need to buy time. The Cuban economy received its latest blow in mid-July, when Moscow failed to renew three decades of oil-for-sugar barter. The Russians had already sharply cut back oil deliveries from their shrinking production. Now, even if Moscow continues to trade with Cuba, it is likely to do so strictly for hard currency--at world market prices.

What's more, shortages of fuel, fertilizer, and spare parts cut Cuba's recent sugar harvest to 6 million tons, the lowest since 1975, and forced factories to shut down, raising unemployment to an estimated 10%. The production cuts have slashed gross domestic product to an estimated $20.3 billion this year, down from $32.8 billion in 1989 (chart). But Smith College economist and Cuba expert Andrew Zimbalist thinks Cuba's economy now may be close to bottoming out--with Castro still in power. Western diplomats in Havana say Cuban officials' confidence is bolstered by every month of survival.

The fast pace of deals with foreign investors is helping to smooth over the crisis. Foreign partners are jumping at the chance to help Cuba explore for oil. France's Total, Brazil's Petrobras, Sweden's Taurus Petroleum, and Canada Northwest Energy, a subsidiary of Canadian mining conglomerate Sherritt Gordon, have already signed contracts or are in negotiations. Sherritt Gordon is also buying Cuban raw nickel and cobalt, worth about $54 million last year, for processing in its Alberta refinery, and it's discussing a $70 million investment in nickel refining in Cuba.

Ottawa encourages such dealings with Cuba as part of Canada's trade-promotion efforts. But a pending bill in the U.S. Congress, introduced by Representative Robert G. Torricelli (D-N.J.), aims to limit trade with Cuba by U.S. companies' foreign subsidiaries. If it passes, it could stir up a nasty dispute with Canada and other trade partners that do business in Cuba.

Acknowledging the success of Cuba's embryonic private economy thus far, the rubber-stamp National Assembly even rewrote the Cuban constitution in mid-July. It now says that the state owns the "fundamental"--not all--means of production. And it gives decentralized state enterprises more autonomy, allowing them to import and export as self-financing enterprises. The revisions "clearly anticipate a gradual expansion of the private sector," says Zimbalist.

The experimentation with market-oriented policies shows up even in such hard-core industries as steelmaking. The Antillana de Acero steel factory near Havana now boasts worker teams and allows more participation from the shop floor. The plant has pared its work force, and salaries of laid-off workers are spread among employees in the form of bonuses for added productivity.

But it's tourism, a big hard-currency earner, that is the major testing ground for capitalist techniques. Hotel managers are allowed to buy from any of the state trading companies, which compete with each other. "The government may have said they're not changing anything, but they are changing," says a foreign partner in a Cuban hotel. "Cuba is open for business."

Castro is also counting on income from the country's extensive health care system and biotechnology industry. "Health tourism" draws in hard-currency patients from the Caribbean, South America, and even Europe. As many as 6,000 foreigners are expected this year for such specialty treatments as night-blindness surgery and orthopedic therapy. For years, Castro has also targeted biotechnology as part of an effort to diversify the island's economy. Three years ago, Havana sold Brazil's Sao Paulo state government $10 million worth of Cuban-developed meningitis-B vaccine to help check an epidemic.

The payoff from such ventures is likely to be modest, though, compared with the free-spending potential of foreign vacationers. Zimbalist estimates that tourist revenues totaled about $400 million in 1991, of which Cuba netted $135 million. If optimistic Cuban projections of 500,000 tourists this year come true, gross revenues could climb to $600 million, for a profit of $200 million.

SERVICE WITH A SMILE. Cubanacan has put up six hotels in partnership with foreign investors since 1990, with more on the way. The 218-room, $18 million Tuxpan, for example, is a 50-50 joint venture with Mexican real estate developer CDC Inmobiliaria and is managed by LTI, a subsidiary of German tourist conglomerate LTU, which flies in charter planeloads of beach-crazy Europeans.

Tuxpan is becoming a showcase for Cuba's emerging new mentality about service and efficiency. Eamonn Donnelly, an Irishman who has managed hotels in Germany, the Canary Islands, and Brazil, says LTI's experience in Cuba has been so good that it's looking for a second hotel to manage. When he first arrived in May, 1991, though, costs were out of control. He set up a middle-management training program, and in staff meetings, he stressed such foreign concepts as budgets, profits, customer service, and cost-cutting. The result was a sharp drop in operating costs and employee turnover.

Some Cubans are taking quickly to the role of entrepreneur--and want more of it. A 32-year-old taxi driver who yearns to open a restaurant says "it's unfair" that foreigners can run businesses and ordinary Cubans can't. A 35-year-old carpenter wants his own shop, and a nightclub administrator wants his own club.

The long-term risk is that Castro may find it difficult to keep capitalism confined to discrete pockets of the economy. Over time, what started out as a survival strategy may lead to more change in the communist system than Castro ever bargained for. But at least for now, the Cuban leader has found a way to ease the economic crisis that threatens his stronghold.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE