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Most experts see US normalization with Cuba - here represented by capital Havana - as a long and complex process. (Photo: Wharton)
Wednesday, May 4, 2016
Perspectives

Cuba-US Business Outlook: Three Scenarios


Three scenarios for U.S. business relations with Cuba.

LATINVEX SPECIAL
Knowledge@Wharton

On December 17, 2014, President Barack Obama announced his intention to normalize relations with Cuba. Since that time there have been a number of changes in U.S. policy and regulations affecting trade, investment and travel. To provide business leaders with the latest developments, Knowledge@Wharton has just released a fully updated and revised edition of The Road to Cuba, an ebook that has earned a 2016 Independent Publisher Book Award. n the following excerpt from the book, three scenarios are presented for how US-Cuba relations could unfold.

U.S. President Barack Obama’s December 17, 2014, move to normalize relations with Cuba was a bold bet that introduced a historic opportunity for communication, trade and investment between the two close neighbors after more than half a century of Cold War–inspired enmity. Underpinning the bet is the belief that direct engagement, including a proposed lifting of the US economic embargo against Cuba, will open up the Communist-ruled island to greater economic and political freedom than continuing the old policy of isolation.

Experts, observers, and even the main protagonists have all sought to calm the high expectations and warn that it could take years to achieve full-fledged neighborly relations. “It’s unrealistic to believe that a relationship that was inimical for 54 years will be one of friendship and warmth in just a year or two,” said Pedro A. Freyre, an attorney with the Miami-based law firm Akerman LLP, which advises U.S. businesses interested in Cuba.

The biggest question on the US side is how quickly the multilayered and legally codified U.S. embargo against the island can be dismantled to allow free flows of trade, capital, and credit, as well as tourists. This requires the cooperation of the U.S Congress, whose Republican majority is no friend to outgoing President Obama.

In the last State of the Union address of his tenure, on January 12, 2016, Obama urged Congress to lift the embargo, but few believe that this can happen before the new president takes office in early 2017. Whether it happens at all may also depend on who wins the November 2016 US presidential election. (…)

On the Cuban side, the biggest unknown is whether Raúl Castro and the Communist Party leadership, both military and civil, really want to fully embrace the United States as a trading and investment partner. Doing so involves making complete peace with the “Yankee imperialist enemy” of decades — a radical rejiggering of an ideological DNA that used “anti-imperialism” as a successful rallying cry both internally and internationally.

Although much remains to be clarified, it is possible to sketch out three possible ways in which the process could unfold: the “Slow-Motion” scenario, the “Steady Movement on a Middle Road” scenario, or the “Big Bang” scenario.

 

The third scenario — of a “big bang” embrace — seems the least likely, given the political realities of both countries. The second scenario of steady, growing engagement between the U.S. and Cuba seems achievable, unless political developments hold back the process or derail it.

The “Slow-Motion” Scenario

Political mistrust hinders the process on both sides, although full embassies are in place and Cuba has been removed from the U.S. list of state sponsors of terrorism. A Republican-dominated Congress is dragging its feet over lifting the embargo, limiting the president’s ability to move the normalization forward. Raúl Castro’s Cuban administration also creates obstacles to the process by making political demands and continuing to prosecute dissidents and restrict the flow of information, trade and investment from the U.S.

Few significant business opportunities for U.S. companies have been created to date beyond small openings in travel and telecommunications, and Cuba continues to seek alliances with more politically compatible allies such as China and Russia (and ailing Venezuela).

Obama can do little more to advance the normalization process before he hands over the presidency in early 2017. In Cuba, no significant political or economic change will take place before Raúl Castro’s announced departure in early 2018. A handpicked successor, perhaps a Castro scion, seems likely to maintain the island’s one-party Communist system. In this scenario, fresh diplomatic spats and quarrels could set back the process.

The “Steady Movement on a Middle Road” Scenario

In this scenario, bilateral relations improve steadily, travel and trade restrictions for Americans are eased further, and air and ferry links are established, leading to an increase in tourism, air and sea travel, and telecommunications between the two countries. Business booms in these sectors, and U.S. cruise lines and ferries begin service to Cuba. Many executives of U.S. companies engage in fact-finding exploratory visits to Cuba, meet government and private contacts and identify areas of interest. Congress modifies embargo sanctions to allow more U.S. exports to Cuba, including the provision of credit, and to allow more Cuban imports. Financial and banking links are developed.

Cuba does not abandon its socialist political and economic model but allows more space for political dissent and private enterprise, while maintaining Communist Party dominance. By the end of Obama’s presidency, relations have improved and seem headed for further improvement, although the U.S. is still only one in Cuba’s diversified range of global trading partners. Some groundbreaking memorandums of understanding are signed by major U.S. corporations for investment projects in Cuba. Cuba rejoins the Inter-American Development Bank and opens dialogues with the IMF and the World Bank.

The “Big Bang” Scenario

Congress lifts the U.S. embargo and travel ban in 2016 in this scenario, and Americans flock to Cuba, leading to a surge in tourism. Normal trade and financial links are quickly reestablished, leading to a boom in bilateral trade that makes the U.S. Cuba’s leading commercial partner. Major U.S. corporations announce big investment projects in Cuba’s oil and gas, manufacturing, nickel mining, agriculture and biotechnology industries. Compensation claims posed by both sides are resolved through major U.S. financing and investment deals involving the affected lands and properties.

Fidel Castro dies, marking the end of an era on the island, and President Raúl Castro steps down before or in 2018, handing power over to a pragmatic civilian leadership that announces a transition to a multiparty system that will include free elections. Political persecution of dissidents ends and thousands of Cuban exiles return home. The new Cuban government announces plans to privatize loss-making state companies. Obama hands over the presidency in early 2017 with the clear legacy of a changed Cuba once again a friendly neighbor of the U.S., and U.S. companies look set to play a key role in the island’s economic future.

Staying the Course

President Obama’s policy shift toward Cuba is undoubtedly a potential game changer for U.S.-Cuban relations. The immediate challenge facing U.S. businesses is to exploit existing openings and position themselves for the bigger opportunities that could come in the future. “My advice would be to travel [to Cuba], start shaking hands and develop a relationship,” says Cuban American businessman Hugo Cancio, who left Cuba in 1980 as a 16-year-old refugee and is now pursuing interests in media and telecom projects on the island.

Despite widespread support for the normalization in both nations, few expect some kind of immediate “big bang” reconciliation across the Straits of Florida, either in terms of the U.S. embargo’s being completely and quickly lifted at a stroke or Cuba abandoning its single-party Communist system to embrace Western-style capitalism and multiparty democracy. “We should not confuse reality with wishful thinking or expressions of goodwill,” Cuban Foreign Minister Bruno Rodriguez cautioned in October 2015 at the United Nations.

Most experts see normalization as a long and complex process that will involve tough diplomatic wrangling and trade negotiations, political battles and strains in both countries, and hitches and setbacks of varying magnitude. “But I think it will advance,” says Emilio Morales, of the Miami-based Havana Consulting Group.

Although many see openings for quick wins and short-term opportunities, especially in the travel, tourism, transportation, and telecom fields and related services, U.S. investors interested in developing major on-the-ground projects in Cuba need to take a longer-term view and be ready for bumps on the road — just as in other frontier or emerging markets in Latin America or Africa.

“You have to engage in very in-depth research. You need to get the facts on what’s there in Cuba today.… You need to get boots on the ground and do the due diligence that anyone would do in any emerging economy,” says Tres Mares Group CEO Faquiry Diaz Cala.

Excerpted from The Road to Cuba: The Opportunities and Risks for US Business, Updated and Revised Edition, by Knowledge@Wharton, copyright 2016.

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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