Close, but No Cigar: Flags Up but Cuba Offers No Returns Yet

July 22, 2015

The hoisting of Cuba’s flag over the communist-ruled island’s fully-fledged embassy in Washington this week marks an early milestone in President Barack Obama’s move to shift U.S. policy towards a former Cold War foe from estrangement to engagement. A similar flag-raising ceremony planned next month at the U.S. embassy on Havana’s seafront will complete the initial superficial diplomatic protocols of the “normalization” of relations announced by Obama last December.

This has been the easy part. Unfortunately for would-be U.S. investors in Cuba, large chunks of the edifices of enmity erected by the two neighbours over five decades are still firmly in place, including the largely intact U.S. economic embargo on Cuba and a Cuban political and economic system that was created as a defiant antithesis to U.S.-style Western capitalism. Reconfiguring these will take a lot more political will than converting already functioning diplomatic interests sections into formal embassies.

The multi-layered U.S. embargo, a tangle of punitive laws that restricts direct flows of U.S. funds and capital to the island and conditions normal relations on the establishment of multi-party democracy there, remains a complex Gordian Knot challenging Obama’s legacy-seeking sword. Stripping away its main sanctions requires the acquiescence of a Republican-dominated U.S. Congress that seems loathe to co-operate with the Democratic U.S. president on any policy issue, international or domestic.

In their historic meeting in Washington on July 20, U.S. Secretary of State John Kerry and Cuban Foreign Minister Bruno Rodriguez seemed to be reading from the same politely restrained playbook when they expressed cautious hopes for better ties, while warning this process could be “long and complex”.

The symmetry of the diplomatic dance ends there. After more than half a century of reciprocal hostility, the moves to “normalize” ties between the global leader of the capitalist world and its most resilient leftist critic have looked anything but reciprocal. Arguing the United States should not be a “prisoner of the past”, Obama has done almost all the running so far with his unilateral about-turn in policy that has removed Cuba from the U.S. list of state sponsors of terrorism and aims to end the embargo.

The months since Obama’s December 17 announcement have seen a surge in U.S. business and media interest in rediscovering what was a long forbidden fruit hanging 90 miles from U.S. shores. This has included a spasm of much-hyped and romanticized American re-acquaintance with Cuba’s steamily exotic charms – the crumbling architecture, the iconic cigars and rum and the 1950s cars.

But the reality is that while Obama has stirred a hornets’ nest of domestic criticism from opponents with his lop-sided rapprochement, Cuba has offered little to justify hopes for significant change on its side.

In fact, Cuban President Raul Castro and his Communist Party government, identified by Washington up until the end of last year as one of the most repressive and dysfunctional regimes in the world, are openly celebrating just what little they have had to do to obtain full U.S. diplomatic recognition.

“We’re going to have diplomatic relations with the United States without having ceded one iota of our principles,” said Cuban former spy Gerardo Hernandez, freed with colleagues from a U.S. jail in December, in comments reported July 18 by the Communist Party daily Granma.

Among the “principles” being steadfastly maintained by the Cuban leadership is that internal political opponents, long pilloried by Havana as “mercenaries” of the U.S. foe, should be diligently persecuted: human rights observers have reported no let-up in detentions and harassment of dissidents on the island since December. Ordinary Cubans genuinely welcome Obama’s moves to improve relations but seem more skeptical about whether to expect reforms from their government that will better their lives.

There are signs too the new relations lack real trust and transparency. Despite Obama’s declaration in April that the U.S. was no longer “in the business of regime change” regarding Cuba, U.S. officials have defended the new policy of engagement as the most likely, through some sort of inevitable osmosis, to prise open Cuba’s system to “universal human rights and freedoms” and a free-market economy.

Small wonder then that Cuba’s leadership, while happily welcoming all U.S. concessions and pressing hard for more, may view Obama’s siren song of “normalization” with some suspicion. “You have to appreciate the words of the president… but you have to see what happens in practice,” Gustavo Machin, the Cuban Foreign Ministry’s deputy director for U.S. affairs, said on July 16 in Havana.

U.S. officials could say the same about the tepid tinkering with Cuba’s state-dominated economy undertaken so far by Raul Castro, who at least appears more pragmatic and less viscerally anti-American than his elder brother and predecessor Fidel. Raul has given more room to Cuba’s fledgling private sector of self-employed entrepreneurs, but it is still tightly controlled by a Havana government mistrustful of anything that offers Cubans independence from the state, whether economic or political.

It is in this murky atmosphere of mutual wariness and diplomatic double-talk that U.S. companies and investors are scoping out a Cuban market which by all measures still poses considerable risk.

Early U.S. trail-blazers – from MasterCard and Netflix to cruise line Carnival, online accommodation booker Airbnb and a growing group of travel providers – are already testing what can and cannot be done in Cuba. More will follow, in tourism, transport, entertainment and telecommunications, as well as financial services and food exports, which offer the most likely quick-win opportunities.

But even without U.S. participation, Cuba’s experience with foreign investment over the last quarter of a century has been mixed. Only a few companies – such as Canada’s Sherritt in the nickel sector, or Spain’s Sol Melia group in hotel management – seem to have been able to report clear success, while the field is littered with failed or truncated ventures, victims of a challenging business environment marked by often intrusive official bureaucracy, “Big Brother” government partners, restrictive labor practices and debt and payment problems. In periodic liquidity crises, the Cubans have not been shy to freeze foreign investors’ bank accounts. There are cautionary tales too of foreign executives having assets seized and going to jail over vague accusations of corruption, economic crimes and spying.

The Cubans acknowledge they want foreign investment to bolster a sluggish economy, but have made clear they intend to pick and choose their partners carefully to complement their socialist economic model, according to who can provide most in financing, capital and technology. U.S. companies, still hamstrung by the embargo’s block on U.S. funds and credit flows, face competition from existing allies of Cuba such as Brazil, China, Russia and Venezuela, which have been willing to offer generous government to government trade terms and project financing, not to mention other foreign investors from Europe, Canada and Latin America who already have gained a foothold in the Cuban economy.

Cuba’s 2014 updated Foreign Investment Law and its Mariel port-free trade zone offer pockets of opportunity for U.S. companies to explore, although it may be a while yet before American banks and major U.S. retailers and manufacturers set up shop on the streets of Cuban cities. Unlocking U.S. credit and financing will be key, and Obama may be able to advance this by using his executive powers to chip away more existing sanctions, without Congress approval for a full lifting of the embargo.

Restoring diplomatic relations is just a start. The real hard work will be dismantling the enduring wall of mistrust to allow a free neighbourly flow of trade and business. And of information and ideas.