Lifted embargo only the beginning of a long road for Cuba

March 23, 2015

In the early part of the 20th century, Cuba was a popular tourist destination for Americans who loved the country’s rich culture, tropical climate and passionate music and dance. With its blend of African, European and native Taino cultures, Cuba was a truly unique place, the likes of which many Americans had never seen before.

Everything changed with the 1953 to 1959 Cuban Revolution and the installation of a communist government under Fidel Castro. The United States, already in the middle of the Cold War with the former Soviet Union, denounced the new government and imposed an embargo on Cuba, which heightened after events such as the Cuban Missile Crisis and the Bay of Pigs. The embargo was updated several times and applied to exports – except for food and medicine – and most imports. It even forbid foreign subsidies of United States companies from trading with Cuba.

Since mid-December 2014, however, everything has changed again. For the first time in the 54 years since the embargo was introduced, the United States Government is undertaking an active effort to loosen restrictions and allow expanded United States travel, trade and financial activities with the island nation.

United States Treasury Secretary Jacob Lew commended the plan in a 15 January 2015 Reuters article. ‘Today’s announcement takes us one step closer to replacing out-of-date policies that were not working and puts in place a policy that helps promote political and economic freedom for the Cuban people,’ he says.

Opportunities and challenges

There are many areas of business that could expand into Cuba with the loosening of the embargo. In an article that was published on the website of the Wharton School of the University of Pennsylvania on 14 January 2015, management professor Mauro F Guillén noted that, while tourism is the most obvious industry that could undergo expansion, there are several other areas that could see growth.

‘Anything related to services –including financial services — is an obvious area of collaboration,’ Guillén says. ‘But let’s not forget that, over the past 20 years, Cuba has become quite active in the healthcare field and even in biotech. [And] there are other parts of the economy that people are not thinking about now where there could be an increase in collaboration.’

But expanding into Cuba would bring a new set of challenges. In the same business school of Penn University interview, former Obama administration official and former United States executive director at the Inter-American Development Bank Gustavo Arnavat noted that legal and regulatory issues could interfere and slow down the expansion process: ‘There are potential impediments on the United States side, but let’s not forget that Cuba has its own legal system, which imposes limitations on foreign investment and the kind of economic activities in which the Cuban people can engage.’

In 1992, shortly after the fall of the Soviet Union and the reduction in financial support from Russia, Cuba amended its constitution to enable legislation that would attract investment from foreign business. Many businesses from Mexico, Europe and Canada came into Cuba but achieved mixed results, mostly due to the Cuban Government’s slow work in amending its legal and regulatory rules in response to the needs of foreign investors. More than 300 measures were later introduced to act as incentives and further open the economy to foreign enterprises.

‘While all of these changes are significant in that they are directionally positive toward the development of a market economy, the Cuban Government has thus far taken a go-slow approach,’ says Arnavat. ‘So, while changes will have to take place on the United States side in order to permit greater investment on the part of United States individuals and corporations, the Cuban Government will have to make changes as well to facilitate investment in economically attractive sectors and to provide investors with access to a legal system that adequately protects them.’

There are many other factors that could contribute to difficulties in doing business in Cuba. The main concern is that, having never done business in the country before, most companies are simply uninformed. Therefore, conducting due diligence could be a problem, as there is so much we don’t know. (For example, would it be easy to obtain a corporate registry? Is there a legal database to check for lawsuits? How reliable is the local media in terms of negative press?)

Overwhelming government control in business is another issue that could deter foreign investment. According to an interview on Russell Bedford with Andy S Gomez, an associate provost at the University of Miami and senior fellow at the University of Miami’s Institute for Cuban-American Studies, ‘Sixty five percent of the economy is controlled by the military. So anyone looking to invest is going to have to deal with these people. To put it into context, they have only approved seven joint ventures in two years and in each case the government made sure it controls 51 percent of each venture.’

In addition, most trade involves the state in some way so extensive background checks would need to be conducted to see who is involved and who the business dealings benefit.

Finally, the most troubling issue is that foreign investors can’t directly hire the workers they need. On the Spanish-language website Miscelaneas de Cuba, University of Miami investigator Jose Azel notes that foreign companies need to negotiate with the Ministry of Labour, giving it information about the number and qualifications of the employees required. The Ministry will then provide the company with the workers. The foreign company pays the Ministry which, in turn, pays the workers – keeping about 90 percent of their salaries. This requires not only direct contact with the government, but essentially giving it money.

Lessons learned

Country specialists point to Myanmar as a good example of what transitioning into Cuba may be like. In a 22 December 2014 post on Bloomberg Business, it is noted that, despite Myanmar opening its doors to foreign investment in 2012, there are still many restrictions in place. These restrictions include banning individuals and companies from the United States from investing in or doing business with those who have links to the Myanmar military’s repression of the democracy movement. Extensive background checks are therefore required to be absolutely sure of the identity of business partners.

The Bloomberg Business article provides the example of Norwegian telecommunications company Telenor ASA, which in 2013 won one of two licences to provide mobile services to customers in Myanmar. The telco ran into several problems when it came to building towers and antennas – which required gaining access to thousands of small land plots and rooftops throughout the country – including land-rights issues, the lack of a national property database, and inefficiency in processing applications.

‘Any company considering investing in a newly opened economy needs to weigh the availability of land, tax situation and rules on foreign investment that may vary from sector to sector and the choice of equity partner,’ says Yangon-based John W Hancock Associates founder John Hancock. ‘You have to do your homework, the risk analysis, and decide what level of risk you are prepared to accept.’

 

Despite the optimism garnered by this new chapter in ties between the United States and Cuba, it is likely to be too soon for many organisations to consider the possibilities. While President Obama has requested a lift on the sanctions, only Congress has the ability to fully lift restrictions. As of now, United States businesses will need to reach an agreement with Cuban authorities before doing business in the nation.

While countries such as Myanmar, China and Vietnam can serve as examples of what to expect, only time will really tell what risks – and opportunities – present themselves when conducting business in Cuba.

 

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