Investing in Cuba: a tantalizing and troublesome proposition


Daniel Sachs, in Forbes


HOUSTON – For an estrangement that lasted 54 years, the resumption of diplomatic relations between the US and Cuba happened rather quickly. Just seven months elapsed between Barack Obama’s December announcement of a change in US policy and the opening of a US embassy in Havana last month. Of course, the two countries won’t enjoy anything resembling normal relations until the US Congress repeals the trade embargo against Cuba. That niggling detail continues to temper the ambitions of many US companies hoping to capitalize on a new market. But while major investment opportunities for US businesses will remain off the table for the time being, warming relations have produced some tangible, if limited, opportunities for companies looking to enter what was until very recently a closed economy for Americans.


Several sectors could see immediate benefits from the Obama administration’s revisions to the Cuban Assets Control Regulations and Export Administration Regulations. One potential boon sector is travel. Although general tourism for US citizens remains prohibited under the embargo, Americans can now book online travel directly with US airlines and travel agents if traveling to the Island for one of a number of authorized reasons. This replaces the previous system of making bookings through government-authorized agencies. Cheapair now offers charter flights from Orlando and New York to Havana, allowing travelers to book travel online for the first time. Online accommodation rental firm Airbnb has moved into the Cuban market, though its opportunities are likely to be limited in the immediate term - 95% of Cubans do not have access to the internet to advertise their properties, and although they are now technically allowed to buy and sell property, the vast majority of Cubans still do not own their own houses. Carnival Cruises announced earlier in July that it will operate a service to Cuba in 2016, though its passengers will be volunteers and authorized educational visitors as opposed to tourists.


The US banking sector also stands to gain from the easing of sanctions. The April removal of Cuba from the US State Sponsors of Terrorism list built on the easing of the Cuban Assets Control Regulations and Export Administration Regulations and allows for the limited involvement of US banks in the Cuban market. US financial institutions can enroll merchants and process credit and debit card transactions for travel-related and certain other transactions in Cuba. Although Americans traveling to Cuba are now allowed to use US credit and debit cards, the country’s infrastructure will take a while to upgrade to the point that local acceptance of such transactions becomes widespread across the island. In addition, a US bank is now permitted to establish a correspondent account at a Cuban bank or foreign bank located in Cuba to facilitate the processing of authorized transactions.


The easing of sanctions also has implications for US telecommunications firms looking to invest in Cuba, with the sale of some specific personal communications equipment and services now permitted. Additionally, US companies are permitted to work on projects to improve Cuba’s outdated internet and telecom infrastructure. In February, New Jersey-based IDT Corp announced that it had reached an agreement with Empresa de Telecomunicaciones de Cuba (ETECSA), the island’s national telecom provider, to exchange international long-distance traffic (previously banned). IDT will also be able to sell its interconnection service to other US carriers that provide service to Cuba. However, opportunities are limited by the lack of internet penetration, and the cost remains prohibitive despite a recent discount in state-determined rates. It is also unclear how committed the government is to the liberalization of the sector given political sensitivities surrounding greater internet access. Netflix recently announced that it was entering the Cuban market, garnering much fanfare. However, this move seems nothing more than symbolic at this stage - most internet service in Cuba is dial-up and therefore only good for email and basic web surfing.


Other industries have had what was until recently a largely aspirational interest in Cuba piqued by the developments. These include agribusiness, construction and pharmaceuticals. These sectors will likely have to wait until the lifting of the embargo to make serious inroads. The much touted USD 900 million Mariel Free Trade Zone remains inoperative for the time being.


American investors will not be able to access wider opportunities in Cuba unless Congress repeals the Helms Burton act that strengthened the embargo in 1996. Repeal seems unlikely in the next two to three years, largely as a result of domestic political opposition from a Republican-led Congress. Key figures within the party heavily opposed the recent rapprochement. The upcoming presidential election is likely to further entrench these positions, particularly as Republicans look to avoid unsettling the Cuban American population in Florida - a key electoral demographic in a pivotal battleground state.


Longer-term prospects are far more positive. Most polls show a strong majority of Americans, even within the Cuban-American population, support not only the restoration of diplomatic ties but also the lifting of the embargo. Many younger Cuban Americans born in the US do not have the same animosity for the Castros as their parents and see the embargo largely as a geopolitical relic in need of revision. Obama’s actions appear to have set in motion an unstoppable momentum offset only by time.


However, investors should not allow their anticipation of opportunities in Cuba to overshadow the considerable challenges that will likely persist much longer than the embargo. Cuba’s infrastructure is deficient, even by the standards of it’s Caribbean neighbors. Roads are in a state of constant disrepair and power outages are common. Banking infrastructure is extremely weak, with a dearth of ATMs, particularly outside of Havana, while the vast majority of local businesses do not have the capability to handle US credit and debit cards. Public-sector corruption is rampant, a particular problem given that most investment opportunities are only available through a local joint venture with a state-owned entity.


A lack of judicial independence represents another red flag for potential investors. In an environment that is rife with corruption risk, this is a particular concern - last year a Canadian automotive executive and two associates were sentenced by a Cuban court in 2014 to 15 years in prison on corruption-related charges. The individual’s lawyers argued that he had been denied access to due process and he was later released. Nonetheless, the case highlights the litany of concerns for investors, including contractual risks, rampant corruption and state interference. Outstanding property claims for Cuban Americans also bring about significant property rights concerns for investors in the longer term.


Opportunity seekers in Cuba -whether seeking to capitalize on the immediate opportunities generated by the easing of sanctions or those eyeing longer-term opportunities- must carefully plan their entry into the market. Cuba will remain a high-risk market for the foreseeable future, and any successful venture will require astute risk mitigation measures. A number of leading multinationals from banking giants to major agribusiness and food companies have created Cuba strategy teams and are even involved in lobbying Congress to ease trade restrictions. Some are consulting their counterparts from Europe, Canada and Latin America who have long had a market presence on the island. They are also traveling to Cuba on trade missions to cultivate relationships with key business figures and politicians and better understand the investment opportunities. In April, New York Governor Andrew Cuomo led a trade delegation to Havana that included companies such as JetBlue, MasterCard and Pfizer.


Such efforts can help facilitate entry in a new market, but they are no substitute for detailed assessments of key local stakeholders. By developing power maps of relevant government and state-owned enterprises, companies can gain better insight into individuals’ connections and their capability to influence proposed investments - positively or negatively. Similarly, investors should carry out due diligence of potential local partners, including executives in state-owned entities; preferably conducted by well-placed advisors with extensive experience conducting investigations in the territory.


These kinds of investigations can help inform a broader assessment of the political and operational threats to a potential investment. Such reviews often include detailed scenario planning, including an assessment of the likely implications of different political eventualities for the investment opportunities. It is this kind of planning that helps companies fully appreciate the risk-reward potential in a challenging new market.


Of course, so long as the embargo remains in place, any pre-market entry planning must involve attorneys who can navigate the complexities of the trade embargo prohibitions and help avoid violations. Many major US law firms are now hiring Cuba expert lawyers, and some Miami-based firms are operating full domestic Cuba practices. A number of international firms who have long had a presence in Havana are also capitalizing on the growing demand.


They and other Cuba watchers recognize that regardless of the pace with which US restrictions recede, Cuba will remain a difficult environment in which to do business. And anyone looking to set up shop there will surely need help.



Cubanálisis - El Think-Tank