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US Secretary of State John Kerry at the flag raising ceremony at the new US embassy in Havana, Cuba. (Photo: US State Department)
Wednesday, August 19, 2015
Perspectives

US-Cuba Thaw: What’s Next?


What are the next steps in the U.S.-Cuba thaw?

LATINVEX SPECIAL
Knowledge@Wharton

The reopening of the U.S. and Cuban embassies in Washington, D.C., and Havana marks a major milestone after President Barack Obama last December announced his plans to normalize ties between the two countries. Cuban tourism, banking and telecommunications would be among the first to experience gains, followed by easier access for Cuba to multilateral lending institutions to raise money for infrastructure investments, according to experts.

A day after the embassies reopened, Florida-based Stonegate Bank signed a correspondent banking deal with Banco Internacional de Comercio, a Havana-based bank. San Francisco-based online lodging marketplace Airbnb offered free week-long stays in Cuba to celebrate the opening of the embassies. JetBlue recently launched flights between New York City’s JFK Airport and Havana. Sports teams are also capitalizing on the new relationship between the two countries. Last month, the New York Cosmos, a minor league soccer team, played an exhibition match in Cuba, and the Princeton University track and field team undertook a nine-day trip to the country.

Expectations are now building for President Obama to visit Cuba, and his administration has said it would evaluate a possibility of that happening next January. “Obama would need to visit Cuba before leaving office to seal what he began,” said Faquiry Diaz Cala, president and CEO of Tres Mares Group in Miami and an investor in venture capital and private equity funds across Latin America and the U.S. Cuba has faced 54 years of a U.S. trade and investment embargo, the scrapping of which is widely seen as the final frontier for fully normalized ties.

According to Gustavo Arnavat, senior advisor at the Center for Strategic and International Studies, a Washington, D.C.-based think tank, “The Cuban government needs dollars because [its ally] Venezuela has been affected by its own civil strife and the decline in oil prices. Cuba today needs to begin relying on a new trade partner — a new partner that can provide the capital that the economy needs.”

Diaz Cala and Arnavat spoke about the next priorities facing the U.S. and Cuba as the two countries continue to rebuild their relationship during the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111.

THE DOLLAR CHASE

According to Arnavat, Cuba’s capital needs are the highest in infrastructure, energy and housing. “To that end, the first thing the Cuban government needs is a relaxing of travel restrictions to have American tourists come and spend their dollars on the island, and the second is access to the international financial and monetary markets,” he said.

Arnavat noted that Cuba has hired French economist and former International Monetary Fund managing director Dominique Strauss-Kahn to begin negotiations with the Paris Club on their debt. The Paris Club is an informal group of creditor nations. “What we are beginning to see is movement [for Cuba] to join the international financial system,” he said.

Multilateral lending organizations have said they are ready to provide Cuba lines of credit, Arnavat added. He referred to the CAF-Development Bank of Latin America as one that has been looking at the opportunities in Cuba. The U.S. embargo currently makes it “very difficult” for Cuba to access multilateral lending institutions, he explained.

Stonegate Bank’s deal with a Cuban bank could encourage other U.S. banks to enter Cuba as well. “A number of U.S. banks are looking to do this,” said Arnavat, who is also a former Obama Administration official. “This will allow for greater commerce between the two countries as opposed to doing payments through a third country,” which is the way those payments are currently put through.

“The bigger deal is that [Stonegate’s move could] pave the way for American credit cards to be used in Cuba,” added Diaz Cala. A gateway company can charge credit cards and pay Stonegate; Stonegate in turn would deposit the dollars into the Havana bank, which would distribute funds to merchants that allow the charges to go through, he explained.

A GROWING AGENDA

Easier travel to Cuba is a focus of one of two bills now making their way in the U.S. Congress, Arnavat noted. The bill would allow Americans to travel to Cuba as tourists, which is currently prohibited. The other bill “attacks the embargo comprehensively,” he said, adding that it would be difficult to pass the bill with the presidential elections coming up next year.

Other issues on which negotiations are underway between the U.S. and Cuba include property claims by businesses in both countries, said Arnavat. Obama is unlikely to achieve a full lifting of the embargo before he leaves office, but he will try to promote commercial linkages, he added.

Diaz Cala agreed and said he expected several executive actions from the Obama regime “that would put different holes in the embargo and what is available for both American business and the American people … in this engagement with the Cubans.”

TELECOM NEEDS

Diaz Cala noted that along with relaxing travel restrictions, investments in Cuba’s telecom infrastructure are a high priority. “American tourists would expect to have access to the Internet [and] some roaming on their mobile phones,” he said. With today’s technology, Cuba could leapfrog legacy systems and build out a new telecom infrastructure sooner than one may imagine, he added.

Cala offered examples of how that telecom revolution in Cuba might occur.

“[Imagine] if Google works out a deal with the Cuban government to provide infrastructure, provide a fiber cable between Havana and the U.S.,” he said. “If Facebook is able to get into the island and provide through its Internet.org free Internet, we may actually be very surprised as to what Cuban ingenuity and the Cuban knowledge economy are able to accomplish and leapfrog legacy systems.”

Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the Wharton School of the University of Pennsylvania.

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