Obama to Castros: Gimme Shelter…

April 3, 2016

Havana, March 28, 2016: It was not exactly a warm embrace. After a perfunctory handshake concluding their joint news conference in Havana on March 21, Cuban President Raul Castro tried to raise the left hand of visiting U.S. President Barack Obama in a double salute for the cameras. But Obama demurred, leaving his hand flopping limply in Castro’s octogenarian grasp.

Despite the high-wattage smiles, the awkwardness of the fumbled clinch aptly symbolizes how the United States and Cuba are struggling to consummate a mutually-satisfying commercial and investment relationship after Obama’s ground-breaking normalization of ties launched in December 2014.

On the surface, there are signs of progress. U.S. cruise giant Carnival Corporation, and Starwood Hotels and Resorts announced operations on the island, following earlier pioneers such as Stonegate Bank and online lodging booker Airbnb. Google also revealed it is offering to help Cuba build a Broadband Internet network. And who could deny the pungent, epocal optimism at the island’s first ever Rolling Stones concert last Friday? Yet as Obama seeks to cement his legacy, the Castro brothers are offering little in return. U.S. courtship remains unrequited.

Few would deny that Obama’s historic visit with his family reflected the sea-change in U.S. policy towards Cuba, with the former Cold War foes now sitting down and discussing (though not agreeing on many) a wide range of bilateral and global issues, through the medium of fully-fledged embassies re-established in their respective capitals.

But despite a flurry of visits to Cuba by several hundred American company CEOs, representatives and lawyers over the last 15 months, all keen to woo Cuban partners and clinch trade and investment opportunities, the number of concrete business deals signed so far still barely add up to a dozen.

Obama administration officials, anxious to build an irreversible momentum to one of the outgoing president’s most cherished would-be legacies, have worked hard to use his executive authority to punch holes in travel, trade and finance sanctions on Cuba enshrined in the long-running U.S. embargo against the island, which can only be lifted by Congress. Obama has made clear he wants the Cuba embargo fully ended, but this is unlikely to occur under his watch, with the Republican-dominated Congress paralyzed.

Some observers like to say the waves (four so far) of Cuba sanctions amendments introduced by the Treasury and Commerce Departments have left the embargo looking like “Swiss cheese”, opening up multiple avenues and loopholes through which US companies can do business.

But U.S. executives are finding it hard to sniff out and commit to clear opportunities among the remaining tangle of embargo legislation, which is now so sliced and diced that it requires complex legal interpretations to carve them out.

U.S. officials acknowledge the difficulties. Alex Lee, Deputy Assistant Secretary for South America and Cuba, in October compared the challenge facing U.S. business executives to “playing Rubik’s Cube”, indicating they need all the dexterity of their legal and compliance teams to navigate the sanctions labyrinth.

Another U.S. official, speaking off the record, admitted that while the relaxations of the sanctions regulations undoubtedly opened up more possibilities of doing business with Cuba, they also meant “more risk and more questions”.

At a recent U.S.-Cuba Corporate Counsel Summit in New York, compliance experts said that the most recent U.S. relaxations on trade and financing, covered by broad concepts like “Support for the Cuban People”, did not always exempt companies from the need to seek specific licenses from the Treasury Department’s Office of Foreign Assets Control (OFAC) or Commerce’s Bureau of Industry and Security (BIS). The recommended default position: better to consult.

“There is a lot of paranoia, some of it self-imposed,” commented one of the summit speakers, Edward Rubinoff of Akin Gump Strauss Hauer and Feld LLP, referring to concerns that American banks still have about financing for Cuba.

The State Department’s Lee, speaking at a similar event in New York for CEOs, was keen to stress that the accumulated amendments did indeed permit a “range of economic activities” between the United States and Cuba. But Lee, who calls himself a “diplomatic plumber” of the U.S.-Cuba initiative, at the same time conceded: “We all know the embargo is a very real restriction. We are in constant debate with our lawyers as to how far we can go.”

If the administration itself needs help in understanding what can or cannot be done amid the multi-layered embargo legislation, the companies themselves can hardly be expected to know.

This, of course, is just one side of the equation. As the country manager of a major accounting firm working in Cuba put it: “Whatever hoops you had to jump through in the U.S., the hoops you are going to have to jump through in Cuba are probably more!”

While welcoming the embargo relaxations introduced by the Obama administration, Cuban officials from President Castro downwards insist uniformly that normalization of relations will only be possible with a full lifting of the embargo. Most visiting U.S. executives get a hearing from some level of officialdom in Havana but there is no special red carpet.

The challenges facing foreign investors in Cuba are already well documented, from the approval delays, limited ownership possibilities and debt and default risks, to the restrictive hiring practices and the dangers of pairing with a dominant state partner which controls the market, the workforce, prices and, in Cuba’s tightly controlled one-party communist system, the legal and security system.

From Fidel Castro’s earlier reluctant opening to overseas (non-U.S.) capital in the 1990s, driven by the disintegration of the island’s Soviet sponsor and benefactor, some investors’ success stories have emerged (e.g. Spain’s Melia Hotels or Canada’s Sherritt International). But there have also been a slew of cautionary tales, some involving the sudden detentions of foreign businessmen on vague suspicions of espionage or alleged economic crimes.

While expectations of irreversible detente, fanned by Obama’s historic visit to Cuba, remain high, it is far from clear whether the upcoming Congress of the Cuban Communist Party in mid-April will match US rapprochement moves with far-reaching political and economic reforms that can make Cuba’s centralized statist economy a more welcoming environment.

Even Cuban insiders offer little guidance. Asked when Cuba’s government might fix the dual currency conundrum (seen as a major obstacle to economic efficiency and transparency), Juan Triana, one of the island’s best-known economists, could only answer: “I really don’t know.”

Meanwhile there is also unpredictability on the U.S. side. The eventual winner of the November U.S. presidential elections may not press the Cuba engagement with the same single-minded enthusiasm as Obama – and if a Republican, may even reverse it.

Business in Cuba is still for the brave. By all means have faith, but keep your feet on the ground and your lawyers and compliance officers close at hand.