President Obama is making history this week as he visits Cuba, the first sitting president to visit the island in 88 years. The White House has made clear it has high ambitions for the trip. As Obama told the U.S. Embassy staff gathered to greet him: “This is a historic visit and a historic opportunity.”
Indeed. Even more significant than the visit itself is how far U.S.-Cuban relations have come in the past 15 months. Since December 2014, when President Obama and Raul Castro first announced they had begun to normalize relations, the countries’ relationship has advanced in several important ways.
Among the most significant have been rule changes by the Departments of Treasury and Commerce that make it easier for U.S. persons to trade with and travel to Cuba. Since the beginning of the normalization process, these agencies have issued five sets of amendments to the U.S. sanctions regime. Last week, the Treasury’s Office of Foreign Assets Control (OFAC) and Commerce’s Bureau of Industry and Security (BIS) announced the most recent round of changes ahead of Obama’s visit, summarized here. Among other things, these regulations allow U.S. banks to engage in certain Cuba-related transactions, permit people-to-people exchanges, and give greater access to Cuban ports by U.S. vessels. The regulations also permit U.S. “persons” (i.e., entities or individuals subject to U.S. jurisdiction) to establish a business presence in Cuba for permitted economic activities.
These are significant changes, to be sure. But for most U.S. businesses and individuals, Cuba will remain largely off-limits. If you or your business is considering whether to engage with Cuba in 2016, here are a few key considerations to keep in mind. We begin by examining the challenges and conclude with the opportunities.
In the tortured history of U.S.-Cuban relations, the past 15 months have been transformative. But key obstacles have yet to be sorted out. Particularly thorny issues include Cuba’s treatment of dissidents, U.S. claims for expropriated property, and release of political prisoners. After five decades of hostility, repairing trust and establishing cooperation will take time.
Profound and persistent disagreements between the two nations came into full view this week during a joint press conference held by President Obama and Raul Castro in Havana. When a Cuban-American journalist posed a question about the fate of political prisoners in Cuba, Raul Castro categorically denied that any such prisoners existed. The denial came just one day after Castro’s security forces detained more than 180 dissidents on the eve of Obama’s visit. The human rights environment in Cuba will continue to be a “powerful irritant” to improved relations between the two nations, as President Obama acknowledged this week.
The Embargo is Still in Place
The general “embargo” that Congress put in place to restrict trade with Cuba (referred to in Cuba as the “blockade”) is still on the books. Only Congress has the power to amend or repeal that legislation. As a result, most types of economic transactions by U.S. persons in Cuba are still prohibited by a tangled web of laws that includes the Trading With the Enemy Act of 1917, the Foreign Assistance Act of 1961, the Cuban Democracy Act of 1992, the Helms-Burton Act of 1996, and the Trade Sanctions Reform and Export Enhancement Act of 2000.
Even in areas that President Obama has sought to liberalize, such as trade financing, key sectors remain frozen off by the embargo. For example, in OFAC’s January rule changes, it permitted all industries except one to begin extending credit to Cuban buyers: agriculture. This is due to a specific provision in the embargo laws that prohibit trade financing in the agricultural sector. For Midwesterners, this is a particularly unfortunate exclusion, given the significant potential export market that Cuba represents.
The U.S. Sanctions Regime is Complex, Opaque and Can be Harsh
The main administrative regulations implementing the embargo are called the Cuban Assets Control Regulations (CACR) and Export Administration Regulations (EAR). Under these rules, travel or trade with Cuba is prohibited unless you have a license (either general or specific). These rules — buried deep in the Federal Register — are dense and difficult to understand. In some cases, the only way to know whether the activity you are contemplating is legal is to submit a license application to OFAC and BIS and wait to hear back. Recently OFAC and BIS have become more accessible to individuals and businesses, holding informal consultations with those who have questions. Historically, however, it has been difficult to obtain clear and timely guidance from OFAC and BIS. Moreover, penalties for violating the embargo can be steep, including maximum criminal penalties of 10 years in prison, fines of $1,000,000 for corporations and $250,000 for individuals, and other civil penalties including debarment from government contracts.
If you thought the U.S. bureaucracy was bad. . .
Then get ready for the Cuban government. At least when dealing with the U.S. regulators, one can identify the agency responsible for making the decision (usually). Not so in Cuba, where any number of state agencies’ approvals may be required before a project can begin. The U.S. party will be forced to deal with a complex bureaucracy. Because the process is also new to Cubans, navigating it can be difficult. Hopefully, this process will improve with experience.
The delay in getting projects approved by the Cuban government is one of the main reasons why so few companies have signed significant economic deals in Cuba so far. Observers expect that several more deals will likely be announced in the coming days and weeks, including by AT&T, Marriott, Carnival Cruise Lines and others. Time will tell when and whether these investments begin to bear fruit. Once the projects do get up and running, they will have to contend with a legal and political system where notions of due process and property rights are very different than in the U.S.
After 50 Years of Communist Rule and Economic Isolation, Cuba’s Economy is in Tatters
Many in the U.S. are eager to tap into a new market of 11 million people that is just 90 miles from Key West. But one must be realistic about just how big an economic market Cuba represents, with its infrastructure in a state of deep decay (much of which has not been updated since the 1950s) and virtually its entire population living in poverty. Given these constraints, Cuba’s growth potential – at least in the short term – is limited. Raul Castro has introduced certain modest pro-market reforms, and entrepreneurs have started a variety of small businesses. However, it remains to be seen whether these changes will be enough to sustain scalable private enterprise.
The Future is Anyone’s Guess
Uncertainty about the political futures of both nations makes it difficult to project too far in the future. In the U.S., depending on who wins the next presidential election, things could change quickly back to the way they were under the George W. Bush administration. (On the Republican side, candidates Donald Trump and Ted Cruz have each expressed strong opposition to Obama’s policies of normalization.) While their political power has waned, there are still millions of people in south Florida and elsewhere who remain firmly opposed to any opening to Cuba, as long as the Castros or the Communist party is in power.
Of course, on Cuba’s side, cause for uncertainty is even greater. Things seem relatively stable at the moment under Raul Castro. However, Raul Castro has said he plans to step aside in 2018. It is very hard to say what might happen in Cuba over the next 10 years. One can imagine a scenario playing out in Cuba similar to the one ongoing in Venezuela: a strongman dies, chaos ensues, and eventually, large American companies decide their best option is to leave. However, it is also possible to imagine a scenario of gradual liberalization and growth.
In his speech on Wednesday, President Obama invoked a “futuro de esperanza” (future of hope) for Cuba. There are some reasons to be optimistic. Many predict that when Raul Castro relinquishes power in 2018, a younger generation of reform-oriented leaders will succeed him, accelerating the pace of liberalizing reforms that Raul began.
It is also possible that the White House’s strategy for putting Cuban relations on an irreversible path will work. By enlisting so much support for normalized relations on both sides of the political aisle, the Obama administration may make it politically impossible for a future administration to turn back the tide. During Obama’s trip, both Google and Starwood announced that they will soon begin operating in Cuba. Verizon and Sprint already offer roaming service to their U.S. customers while traveling in Cuba. The more business, diplomatic and cultural ties are built between the U.S. and Cuba over the next several months, the harder it will be for leaders of both countries to break those ties and go back to the previous policies.
Here, then, are a list of some of the key opportunities for U.S. businesses and individuals that recent regulatory changes make possible.
Physical or Business Presence in Cuba
In its last two rounds of regulations, OFAC has made clear that U.S. businesses may now establish a business presence in Cuba, for the purpose of conducting permitted economic activities. The most likely way to do this is via a joint venture, due to Cuban foreign investment laws restricting foreign majority ownership of property. Chinese and European companies have been operating joint ventures in Cuba for years, managing assets such as hotels and resorts, with varying degrees of success.
Recently the Obama administration approved one such application for a U.S. company to open a factory in Cuba. The company – owned by two farmers in Alabama – expects to open in 2017, the first time since 1959 that a U.S. company has done so. The factory will produce small tractors for use by Cuban farmers who work in the private sector. The U.S. company is taking advantage of a recent regulatory change by the Obama administration, which makes any sales to the Cuban private sector economy subject to a general license.
The most recent round of regulations permits so-called people-to-people exchanges. Practically speaking, this means that individuals no longer have to travel to Cuba as part of a licensed group. For an individual’s trip to qualify as a people-to-people exchange, her activities in Cuba must include some legitimate purpose other than tourism (e.g., educational, cultural or humanitarian). Exactly how much activity is required to satisfy this criterion is somewhat unclear; is it enough simply to visit a cultural site or museum while in Cuba, or is a more substantive program required?
If the reasons for a person’s travel to Cuba are otherwise permitted by general license, such as certain family visits, journalistic, professional, educational, performance or humanitarian activities, then persons may travel to Cuba without applying for a specific license.
For businesses seeking to carry out permitted economic activities (e.g. sales of commercial aviation or telecom equipment), travel to Cuba is also permitted, including for sales or marketing purposes.
The amendments announced last week authorize U.S. banking institutions to engage in certain Cuban-related transactions that involve Cuban parties, as long as the beneficiaries are not U.S. persons. As important as this is for U.S. banks, it is likely more important for Cuba, which will now be able to access the international banking system in a way it could not before.
U.S. credit and debit cards can also be used in Cuba, and U.S. financial institutions can open correspondent accounts with Cuban counterparts.
Telecom and Telecom-Related Transactions
Telecom and telecom-related transactions will now be subject to a general license. In addition to the previously mentioned roaming networks, AT&T is also expected to enter into a partnership soon with ETECSA, the Cuban telecom company, to develop the country’s telecom infrastructure. Google announced that it will open a new high technology studio in Havana, partnering with a famous Cuban artist known as Kcho. The collaborative studio will offer high internet speeds and the latest Google technology, including virtual reality goggles, laptops and cell phones. Google also hopes to expand internet connectivity in Cuba, a country with one of the lowest rates of access to the internet in the world.
In January, the U.S. and Cuba signed an agreement authorizing up to 110 commercial flights a day to Cuba from any U.S. city. OFAC announced in February that any transactions related to commercial aviation or commercial aviation safety would now be subject to a general license. During a recent teleconference briefing describing the new regulations, an OFAC official underscored the importance of ensuring safe flights for passengers from all countries in U.S.-Cuban airspace. Virtually anything that makes commercial aviation safer for passengers will be considered eligible. Expect for Cuba-U.S. air travel to pick up, too: U.S. commercial airliners are currently competing for the rights to a share of the 110 daily flights to and from Cuba.
Media, Information, Arts & Entertainment (Including Music)
Long favored under the embargo for its cultural and diplomatic significance, these types of transactions will be subject to a general policy of approval. Musical performances, filming of television and movies, and other media and entertainment activity by U.S. persons in Cuba is likely to continue to tick upwards.
Mariel Port; Access by U.S. Vessels and Companies
Last week’s regulations permit U.S. ships to dock in Cuban ports while en route to other destinations, including the Mariel port, an area the Cubans have spent huge resources to develop. The Mariel port area is also a Special Development Zone, meaning that investors can receive significant tax advantages for investments there. Benefits include 10 years of exemption from corporate tax, social security contributions limited at 14 percent, zero customs duties for materials used in the investment, and a one-year exemption from services and wholesale goods, followed by rates capped at 1 percent for each.
The port facility will be dredged to 59 meters, allowing large container ships to dock and unload cargo. Located just 30 miles West of Havana, the Mariel port is equipped with modern facilities, and well-positioned as a hub of economic activity. Already large international companies such as Unilever have announced that they will invest tens of millions of dollars in the new economic development zone.
Case-by-Case Criteria for Determining Whether Transactions are Permitted
For economic activities not subject to a general license, it can be difficult to know what transactions are “permitted” under the new regulations. One core principle is that transactions benefiting the Cuban people will be viewed favorably, while transactions that primarily enrich the Cuban regime will be rejected. This policy reflects the delicate balance inherent in Obama’s policy: how to expand economic opportunity without giving too much away to the Castro regime.
According to the OFAC, illustrative examples of transactions that benefit the Cuban people include: food processing, agricultural production, disaster preparedness, education, public health and sanitation, residential development and construction, public transport and infrastructure-related transactions.
Until recently, all sales to an entity of the Cuban state were prohibited. Under the new regulations, sales to entities or individuals that are part of the Cuban government will be evaluated on a case-by-case basis, again by weighing the benefits to the Cuban people against the harms of enriching the regime.
No Es Fácil
This long list of challenges and opportunities brings to mind the Cubans’ oft-quoted phrase: “No és fácil.” The phrase means literally, “It’s not easy.” Cubans use the phrase to describe the many challenges they face in daily life. The phrase today is as apt today as ever. In Raul Castro’s Cuba, almost nothing is easy, including for U.S. persons eager to explore the frontier island nation.