Should U.S. Companies Hit ‘Pause’ on Doing Business in Cuba?

Should U.S. Companies Hit 'Pause' on Doing Business in Cuba?
Apr 20, 2017

President Trump's government has yet to reveal its hand on the issue of
reconciliation with Cuba. There had been a lot of progress towards
greater ties following President's Obama's overtures in December 2014:
Some cooperation agreements were signed – particularly in aviation and
communications — and Google and Airbnb now have a presence on the island
nation. But only about two dozen U.S. companies have taken early steps,
and there has been limited progress on other fronts, such as the
reconciliation of Cuban-Americans with the Cuban people.

And while President Trump had supported more economic ties with Cuba in
the past, just before the presidential election he reversed course. That
makes it unclear what business should expect going forward.

The overarching issue is the ongoing U.S. economic embargo, noted
Cuban-American attorney Gustavo Arnavat at the recent 2017 Wharton Latin
American Conference. Arnavat, now a senior adviser at the Center for
Strategic and International Studies, had a front-row seat on U.S.-Cuba
policy as an advisor to President Obama's team on the issue. He also
represented the U.S. in 2009 at the Inter-American Development Bank
(IDB), the largest provider of development finance in Latin America.

"It would be crazy for anyone right now to be trying to invest in Cuba,
even in those areas we can invest, because at any moment, the Trump
administration may come out and totally reverse what was done
previously," he said. Adding further to the uncertainty, Cuban President
Raul Castro is scheduled to leave office in February 2018, with no clear
successor in the wings.

Arnavat took stock of the emerging state of U.S.-Cuban ties in a
discussion with Knowledge@Wharton at the recent Wharton Latin American
conference. An edited transcript of the conversation appears below.

Knowledge@Wharton: It was a historic time in the Winter of 2014 when the
U.S. government decided that a policy that had been in place for 50
years was no longer working, and that it was time to rethink how the
U.S. and Cuba were engaging with one another, and try to normalize
relationships at whatever level was possible. Could you describe why and
how you got involved in U.S.-Cuba relations before President Obama's
policy shift on December 12, 2014?

Gustavo Arnavat: The greatest variable contributing to my interest in
Cuba has to do with the fact that I was born in Cuba. I grew up in a
very conservative, Republican household in Hialeah, Florida, and there
wasn't a day that went by that a family member, or friend or visitor
didn't criticize some element of the Cuban revolution or talked about
Cuba. So, it was impossible for me not to be interested in Cuba and
U.S.-Cuba relations as I grew up. Later, I came to understand that the
world was not black and white, and that realization and complexity made
me even more interested in the topic.

After law school, I was a lawyer focusing on sovereign finance and
corporate finance, and eventually went over to investment banking on
Wall Street. I worked on many deals, but Cuba was never part of that,
for obvious reasons. Nevertheless, there was always a part of me that
wanted to be involved, somehow. Eventually, I became involved in several
projects examining U.S policy toward Cuba, but all of that came to an
end when I joined the Obama Administration because I was at the IDB, and
Cuba wasn't a member of the IDB, and I otherwise wasn't involved in
setting Cuba policy while I worked in the Obama Administration.

Knowledge@Wharton: The major policy shift occurred in December 2014.
What do you think motivated President Obama to make such a major change?

Arnavat: The primary reason is that this was something that I think
President Obama wanted to do for a long time. When he was a senator in
Illinois, he spoke about the futility of the embargo. At the annual
luncheon of the Cuban-American National Foundation in Florida in May
2008, he said that if Cuba began to open up, starting with releasing all
political prisoners, he would begin a dialogue that could lead to
normalized relations. This was startling and unprecedented for a
presidential candidate of either political party. Anyone from Miami
knows that advocating "normalized" relations and a "dialogue" with the
Cuban government just 15 or 20 years ago was a very dangerous thing to do.

He also faced pressure from other Latin American countries, particularly
in the context of the Summit of the Americas. A number of the countries'
presidents told President Obama during the Summit in Cartagena, Colombia
in 2012, that for the next summit (in Panama City in 2015, if Cuba is
not invited, they were not going to participate. That also weighed on
the White House

Related to this, there was a growing consensus in the region – and U.S.
foreign policy –that the primary issues affecting Latin America were not
the same ones from 20, 30 or 40 years ago, which chiefly included
unstable and undemocratic governments, drug trafficking, corruption,
etc. Instead, the focus has been on trade and economic development
through integration. If you are the U.S., it's difficult to make a case
for global economic integration and certainly regional economic
integration, when Cuba is prevented from being fully integrated from an
economic perspective. Finally, President Obama felt that since the
elections of 2014 were over, he had nothing to lose from a political
perspective, and the timing was right to do what he wanted to do all along.

But very little could be done while Alan Gross remained in Cuban
custody, and the Cubans knew this to be the case. [Editor's note: Alan
Gross, a U.S. government contractor employed by the United States Agency
for International Development (USAID), was arrested in Cuba in 2009.]

Knowledge@Wharton: What was your reaction to the policy shift and what
steps did you take?

Arnavat: I was shocked. After I left the IDB, I became aware of a
growing number of Cuban Americans, particularly in Miami, who were
successful lawyers, businesspeople and bankers, who wanted to promote
engagement between the U.S. and Cuba in order to help the Cuban people
more directly. We thought, what can we do? How can we try to convince
the White House to go in a different direction? But we were extremely
pessimistic because we had witnessed very little interest on the part of
the White House, especially because of the situation with Gross.

With the 2016 presidential election on the horizon, we thought U.S.-Cuba
policy would once again be the victim of domestic political
considerations. That was despite the fact that Hillary Clinton in her
book (titled Hard Choices, published in 2014), criticized the embargo in
a very open way, and in a way that was unexpected. Some of us in
retrospect thought that was her signal to the White House to encourage
it to pursue engagement.

When the announcement was made, the thinking was, we were finally going
to be able to sit down with the Cubans, and talk to them about all the
issues that two normal countries should want to engage in, on areas of
mutual interest. Little did I know that in fact, they had been
negotiating for about 18 months, but this was an opportunity to test the
waters and see to what extent it made sense to engage diplomatically and
commercially in ways that would benefit both countries.

So a number of us provided the White House with our insights, though few
of us had very high expectations over the short-term effects of an
opening toward Cuba, especially with respect to political matters.

Knowledge@Wharton: How would you assess the progress since the winter of
2014? Has there been real progress, or as somebody once said, is it a
triumph of hope over experience?

Arnavat: I break it down into three buckets. Let's call the first bucket
official U.S.-Cuba bilateral relations. The second bucket is commercial
relations between the U.S. and Cuba. The third is Cuban-American
reconciliation issues.

On the official bilateral bucket, a lot has been accomplished. After
more than 50 years of acrimony between the two countries, diplomatic
relations were reestablished. Embassies were reopened. As part of that
process, Cuba was removed from the list of state sponsors of terrorism,
based on an analysis conducted by the State Department with input from
our intelligence community. Regular mail service was established between
the two countries.

Migration talks were regularized, and they've become much more
substantive and more meaningful. Agreements were entered into with
respect to cooperation in law enforcement, environmental disasters and
other areas. I believe close to two dozen such agreements were reached.
A lot was accomplished given the relationship the two countries had.
However, I know that Obama Administration officials were frustrated that
more wasn't accomplished on the human rights front, although the belief
is that civil society in general has benefited because of the new policy
approach.

On the other hand, the biggest issue is the embargo, which is still in
place. Another issue relates to property claims that U.S. citizens have
against Cuba for property that was expropriated in the first few years
of the revolution. Those have still not been resolved, and they're far
from being resolved. Keep in mind, this was the primary reason why the
U.S. broke off diplomatic relations in the first place. So in that
sense, very little progress has been made.

As far as the commercial relationship is concerned, the assessment
depends on whom you talk to; the Cubans believe that a lot of progress
was made given that the embargo remains in place. On the bilateral
front, commercial flights between the U.S. and Cuba were reestablished.
U.S. Airlines, as part of a process led by the Department of
Transportation, competed for those routes, and six or seven airlines won
those routes.

A number of mobile carriers like AT&T and Verizon have entered into
roaming agreements with the Cuban government. You may not think that's a
big deal, except that before, there were no such roaming agreements and
it made mobile phone communications very difficult. Airbnb is there,
which is very helpful for travelers who don't want to pay for relatively
expensive hotels in Havana. Google has a presence now, and U.S. cruise
ships are sailing into Havana and bringing Americans.

However, a lot more could have been done. One of the missed
opportunities is in fact that not as many deals were done. That's bad
for a number of different reasons. One, U.S. companies have missed out.
The Cuban people and the Cuban government have missed out on great U.S.
products and services. While the Trump administration is reviewing the
policy, instead of having a hundred companies advocating, you only have
25 or 30 or so going to their congressional representatives and saying,
look, we have this business now in Cuba.

When you ask the Cuban government, they will grant that a lot of
proposals were presented to the Cuban government. The pushback came for
a variety of reasons. In some cases, the companies were too small or
were startups. They want to be able to deal with the major players. The
problem with deals that were proposed by major global corporations was
that those proposals didn't necessarily fall into one of the priority
areas in Cuba's plan for economic development.

Then, even with the right kind of company, in a priority area, they
would site the embargo. They would say that even if we wanted to do
this, we couldn't, because there's no way that U.S. companies could pay
for a service or the other way around. They are right to an extent,
because of the continuing restrictions on financial transactions, but
more important, the way those restrictions and regulations have been
interpreted by legal counsel and compliance officers at major financial
institutions around the world, especially in the U.S. They're very well
aware that if you run afoul of those regulations, you get hit with a
multi-billion-dollar fine, as has happened, even recently.

At the same time, investment conditions in Cuba are very challenging for
U.S. companies that are not accustomed to working with foreign
governments in transactions normally involving private sector companies
as counterparts. But the reality is that doing business in Cuba
necessarily means doing business with the government, and not all U.S.
companies are prepared to do that at this point.

So those are in the first two buckets. In the third bucket, on
reconciliation, Cuban-Americans are going to play some role, just as
they have played an important role in shaping U.S.-Cuba policy in the
past. I know that many Cuban government officials are not comfortable
with that involvement, but the sooner we can start to engage from that
perspective and have reconciliation, the better it is both for Cubans in
the U.S. as well as Cubans on the island. Very little has been done, or
has occurred, on that front because of the lack of mutual trust.

Knowledge@Wharton: You've just returned from Cuba. Looking at things
right now, what are the biggest opportunities in Cuba, and what are the
biggest challenges or the biggest risks?

Arnavat: Imagine you discovered a country that you didn't know existed.
You realize that less than 100 miles away from the U.S. is a country
that, if it were a U.S. state, would be the eighth-largest in
population, right after Ohio, for example. It has 11 million people who
are very well educated, despite all of the challenges in Cuba, and lack
of resources. It has software engineers, for example, who graduate from
some of the best technology universities in Cuba, but they're
underemployed. A lot of people code quite a bit in Cuba. So from a human
capital perspective, it's a country that is enormously resourceful, and
this presents a huge opportunity for U.S. companies that will invest
when they are able to do so.

From a natural resource perspective, it's a very large Caribbean
island, so it will be an important destination for tourism, or for
second homes for Americans, whenever that becomes a possibility. It's
got a health care system that is, again, very poorly resourced, but
there is a high level of training on the part of medical staff there,
and access to knowledge and technology. Some presidents in Latin America
from the ALBA countries (the 11-member Bolivarian Alliance for the
Peoples of Our America), when they get seriously sick, they go to
Havana. Medical tourism would be of great interest as an area to invest
in if that were possible.

It is also a country that has tremendous needs from an infrastructure
perspective. The roads are quite better than a lot of places I've been
in the Caribbean, and certainly Central America. But it's a country that
needs to be rebuilt from the ground up. The question, of course, is
going to be how do you pay for it? That brings us to the challenges.
There is no access to capital. It has a legal system that was set up to
support a socialist economic model, which is anachronistic and foreign
to U.S. investors. They're beginning to figure that out, and are
struggling with how to emerge and how to evolve from that. But even
those who recognize the need for change don't want that change to be
forced on them from abroad. This is an essential point to keep in mind.

Cubans are increasingly getting comfortable referring to non-state
employees or entrepreneurs as the private sector, although officially
it's called the non-state sector. I am certain that when things do open
up, and the right incentives are in place, the human capital there is
going to be such that Cuba is going to be well-placed as a market for
Americans to investment.

I'm not sure how independent the judiciary is to resolve disputes
between, let's say a foreign company, a foreign investor and an entity
where the Cuban government may have an interest. So that's obviously a
risk for any U.S. company to consider. It's a risk in any country, but
especially in a country where the government plays such an important
role in the running of the society. There is also the political risk
associated with the fact that [President Raul] Castro is supposed to
leave office on February 24 of next year, and it's always unclear as to
who's going to take over and in what direction the country will go.

If you have to put a bet, Cuba is likely to continue on a socialist
trajectory for an indefinite period of time. You also have the immediate
risk of the Trump administration in trying to decide what to do. So it
would be crazy for anyone right now to be trying to invest in Cuba, even
in those areas we can invest, because at any moment, the Trump
administration may come out and totally reverse what was done previously.

Knowledge@Wharton: How do you think U.S. policy towards Cuba will evolve
under President Trump? You were very complimentary about President
Obama, very optimistic about reading Hillary Clinton's book and what she
said about Cuba. What's your assessment of what President Trump will do,
and what that will mean for Cuban-American relations?

Arnavat: I honestly have no idea. And I don't think anyone has any idea.
People in Cuba have no idea. It could go in lots of directions. It seems
that President Trump is not going to come out any time soon and say
we're going to continue to engage without the Cubans making any
quote-unquote "concessions."

Trump has said very little about Cuba in his career. He appeared to
entertain launching a potential campaign in the 1990s, I believe it was
in Miami he talked about how he was such a strong supporter of the
embargo and he would never do business in Cuba while the Castro brothers
were in place, etc.

Two years later, as it turns out, he sent a consultant to Cuba — a paid
consultant, to figure out how to do business in Cuba. Beginning about
six years ago up until sometime last year, people in the Trump
organization had visited Cuba, exploring opportunities in golf and
hotels, hospitality, that sort of thing. So we know that from a
commercial perspective, he definitely has been interested in doing so.
And, it makes sense, given his investments in China and other countries
that don't adhere to U.S. standards of human rights and democracy.

When President [Obama] announced the policy shift, on a few occasions,
[Trump] said that he supported the engagement. One time, I think he was
in a debate in Miami, a primary, and he said something along the lines
of, "Come on, folks, it's been over 50 years. We've got to move on.
We've got to try something else." But then about six weeks before the
election, he began to tailor his message much more to the conservatives
and the hardliners in the community. He said, "Unless the Cubans take
steps to," and I think he said, "to provide for more political freedoms
and religious freedoms, then I'm going to reverse everything." Mike
Pence said that as well shortly before and maybe after the election.

But having said that, [Trump's policies regarding Cuba are] just not
clear. There are a number of individuals who worked on [Trump's]
transition team, who are involved in the administration, who have been
very focused the last 15-20 years on enforcing the embargo, on
tightening the embargo, on making life as hard and difficult for the
Cuban government. Those people are certainly weighing in very heavily on
the policy. A policy review is ongoing, but it is unclear when they'll
be done with that and what the outcome will be. I imagine an important
consideration will be the change in government that I mentioned previously.

Knowledge@Wharton: When you met people in Havana, what did you hear from
them about how they expect relations with the U.S. to shape up?

Arnavat: Shortly after the announcement of the policy shift, something
like 97% of the Cuban people expressed they were in favor of the
engagement, and of reestablishing diplomatic relations, etc. This makes
sense, because the more Americans that travel to Cuba and invest in
Cuba, the greater the economic benefits to the Cuban people in general.

Everyone is concerned that in fact, the policy will reverse, that there
will be fewer people visiting, fewer people making investments, as a
result of a decrease in remittances that are used as seed capital to
start new businesses on the island. Even if you stay at a state-owned
hotel, you hire private taxis, and you eat in private restaurants that
are allowed under Cuban law. So a lot of people who are private
individuals are in fact benefitting because of the increase in travel
between the U.S. and Cuba. And they're very concerned about that not
occurring

Source: Should U.S. Companies Hit 'Pause' on Doing Business in Cuba? -
Knowledge@Wharton -
http://knowledge.wharton.upenn.edu/article/why-business-should-hit-pause-on-new-u-s-cuba-ties/