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    Should U.S. Companies Hit ‘Pause’ on Doing Business in Cuba?

    Should U.S. Companies Hit ‘Pause’ on Doing Business in Cuba?
    Apr 20, 2017

    President Trump’s government has yet to reveal its hand on the issue of
    reconciliation with Cuba. There had been a lot of progress towards
    greater ties following President’s Obama’s overtures in December 2014:
    Some cooperation agreements were signed – particularly in aviation and
    communications — and Google and Airbnb now have a presence on the island
    nation. But only about two dozen U.S. companies have taken early steps,
    and there has been limited progress on other fronts, such as the
    reconciliation of Cuban-Americans with the Cuban people.

    And while President Trump had supported more economic ties with Cuba in
    the past, just before the presidential election he reversed course. That
    makes it unclear what business should expect going forward.

    The overarching issue is the ongoing U.S. economic embargo, noted
    Cuban-American attorney Gustavo Arnavat at the recent 2017 Wharton Latin
    American Conference. Arnavat, now a senior adviser at the Center for
    Strategic and International Studies, had a front-row seat on U.S.-Cuba
    policy as an advisor to President Obama’s team on the issue. He also
    represented the U.S. in 2009 at the Inter-American Development Bank
    (IDB), the largest provider of development finance in Latin America.

    “It would be crazy for anyone right now to be trying to invest in Cuba,
    even in those areas we can invest, because at any moment, the Trump
    administration may come out and totally reverse what was done
    previously,” he said. Adding further to the uncertainty, Cuban President
    Raul Castro is scheduled to leave office in February 2018, with no clear
    successor in the wings.

    Arnavat took stock of the emerging state of U.S.-Cuban ties in a
    discussion with Knowledge@Wharton at the recent Wharton Latin American
    conference. An edited transcript of the conversation appears below.

    Knowledge@Wharton: It was a historic time in the Winter of 2014 when the
    U.S. government decided that a policy that had been in place for 50
    years was no longer working, and that it was time to rethink how the
    U.S. and Cuba were engaging with one another, and try to normalize
    relationships at whatever level was possible. Could you describe why and
    how you got involved in U.S.-Cuba relations before President Obama’s
    policy shift on December 12, 2014?

    Gustavo Arnavat: The greatest variable contributing to my interest in
    Cuba has to do with the fact that I was born in Cuba. I grew up in a
    very conservative, Republican household in Hialeah, Florida, and there
    wasn’t a day that went by that a family member, or friend or visitor
    didn’t criticize some element of the Cuban revolution or talked about
    Cuba. So, it was impossible for me not to be interested in Cuba and
    U.S.-Cuba relations as I grew up. Later, I came to understand that the
    world was not black and white, and that realization and complexity made
    me even more interested in the topic.

    After law school, I was a lawyer focusing on sovereign finance and
    corporate finance, and eventually went over to investment banking on
    Wall Street. I worked on many deals, but Cuba was never part of that,
    for obvious reasons. Nevertheless, there was always a part of me that
    wanted to be involved, somehow. Eventually, I became involved in several
    projects examining U.S policy toward Cuba, but all of that came to an
    end when I joined the Obama Administration because I was at the IDB, and
    Cuba wasn’t a member of the IDB, and I otherwise wasn’t involved in
    setting Cuba policy while I worked in the Obama Administration.

    Knowledge@Wharton: The major policy shift occurred in December 2014.
    What do you think motivated President Obama to make such a major change?

    Arnavat: The primary reason is that this was something that I think
    President Obama wanted to do for a long time. When he was a senator in
    Illinois, he spoke about the futility of the embargo. At the annual
    luncheon of the Cuban-American National Foundation in Florida in May
    2008, he said that if Cuba began to open up, starting with releasing all
    political prisoners, he would begin a dialogue that could lead to
    normalized relations. This was startling and unprecedented for a
    presidential candidate of either political party. Anyone from Miami
    knows that advocating “normalized” relations and a “dialogue” with the
    Cuban government just 15 or 20 years ago was a very dangerous thing to do.

    He also faced pressure from other Latin American countries, particularly
    in the context of the Summit of the Americas. A number of the countries’
    presidents told President Obama during the Summit in Cartagena, Colombia
    in 2012, that for the next summit (in Panama City in 2015, if Cuba is
    not invited, they were not going to participate. That also weighed on
    the White House

    Related to this, there was a growing consensus in the region – and U.S.
    foreign policy –that the primary issues affecting Latin America were not
    the same ones from 20, 30 or 40 years ago, which chiefly included
    unstable and undemocratic governments, drug trafficking, corruption,
    etc. Instead, the focus has been on trade and economic development
    through integration. If you are the U.S., it’s difficult to make a case
    for global economic integration and certainly regional economic
    integration, when Cuba is prevented from being fully integrated from an
    economic perspective. Finally, President Obama felt that since the
    elections of 2014 were over, he had nothing to lose from a political
    perspective, and the timing was right to do what he wanted to do all along.

    But very little could be done while Alan Gross remained in Cuban
    custody, and the Cubans knew this to be the case. [Editor’s note: Alan
    Gross, a U.S. government contractor employed by the United States Agency
    for International Development (USAID), was arrested in Cuba in 2009.]

    Knowledge@Wharton: What was your reaction to the policy shift and what
    steps did you take?

    Arnavat: I was shocked. After I left the IDB, I became aware of a
    growing number of Cuban Americans, particularly in Miami, who were
    successful lawyers, businesspeople and bankers, who wanted to promote
    engagement between the U.S. and Cuba in order to help the Cuban people
    more directly. We thought, what can we do? How can we try to convince
    the White House to go in a different direction? But we were extremely
    pessimistic because we had witnessed very little interest on the part of
    the White House, especially because of the situation with Gross.

    With the 2016 presidential election on the horizon, we thought U.S.-Cuba
    policy would once again be the victim of domestic political
    considerations. That was despite the fact that Hillary Clinton in her
    book (titled Hard Choices, published in 2014), criticized the embargo in
    a very open way, and in a way that was unexpected. Some of us in
    retrospect thought that was her signal to the White House to encourage
    it to pursue engagement.

    When the announcement was made, the thinking was, we were finally going
    to be able to sit down with the Cubans, and talk to them about all the
    issues that two normal countries should want to engage in, on areas of
    mutual interest. Little did I know that in fact, they had been
    negotiating for about 18 months, but this was an opportunity to test the
    waters and see to what extent it made sense to engage diplomatically and
    commercially in ways that would benefit both countries.

    So a number of us provided the White House with our insights, though few
    of us had very high expectations over the short-term effects of an
    opening toward Cuba, especially with respect to political matters.

    Knowledge@Wharton: How would you assess the progress since the winter of
    2014? Has there been real progress, or as somebody once said, is it a
    triumph of hope over experience?

    Arnavat: I break it down into three buckets. Let’s call the first bucket
    official U.S.-Cuba bilateral relations. The second bucket is commercial
    relations between the U.S. and Cuba. The third is Cuban-American
    reconciliation issues.

    On the official bilateral bucket, a lot has been accomplished. After
    more than 50 years of acrimony between the two countries, diplomatic
    relations were reestablished. Embassies were reopened. As part of that
    process, Cuba was removed from the list of state sponsors of terrorism,
    based on an analysis conducted by the State Department with input from
    our intelligence community. Regular mail service was established between
    the two countries.

    Migration talks were regularized, and they’ve become much more
    substantive and more meaningful. Agreements were entered into with
    respect to cooperation in law enforcement, environmental disasters and
    other areas. I believe close to two dozen such agreements were reached.
    A lot was accomplished given the relationship the two countries had.
    However, I know that Obama Administration officials were frustrated that
    more wasn’t accomplished on the human rights front, although the belief
    is that civil society in general has benefited because of the new policy
    approach.

    On the other hand, the biggest issue is the embargo, which is still in
    place. Another issue relates to property claims that U.S. citizens have
    against Cuba for property that was expropriated in the first few years
    of the revolution. Those have still not been resolved, and they’re far
    from being resolved. Keep in mind, this was the primary reason why the
    U.S. broke off diplomatic relations in the first place. So in that
    sense, very little progress has been made.

    As far as the commercial relationship is concerned, the assessment
    depends on whom you talk to; the Cubans believe that a lot of progress
    was made given that the embargo remains in place. On the bilateral
    front, commercial flights between the U.S. and Cuba were reestablished.
    U.S. Airlines, as part of a process led by the Department of
    Transportation, competed for those routes, and six or seven airlines won
    those routes.

    A number of mobile carriers like AT&T and Verizon have entered into
    roaming agreements with the Cuban government. You may not think that’s a
    big deal, except that before, there were no such roaming agreements and
    it made mobile phone communications very difficult. Airbnb is there,
    which is very helpful for travelers who don’t want to pay for relatively
    expensive hotels in Havana. Google has a presence now, and U.S. cruise
    ships are sailing into Havana and bringing Americans.

    However, a lot more could have been done. One of the missed
    opportunities is in fact that not as many deals were done. That’s bad
    for a number of different reasons. One, U.S. companies have missed out.
    The Cuban people and the Cuban government have missed out on great U.S.
    products and services. While the Trump administration is reviewing the
    policy, instead of having a hundred companies advocating, you only have
    25 or 30 or so going to their congressional representatives and saying,
    look, we have this business now in Cuba.

    When you ask the Cuban government, they will grant that a lot of
    proposals were presented to the Cuban government. The pushback came for
    a variety of reasons. In some cases, the companies were too small or
    were startups. They want to be able to deal with the major players. The
    problem with deals that were proposed by major global corporations was
    that those proposals didn’t necessarily fall into one of the priority
    areas in Cuba’s plan for economic development.

    Then, even with the right kind of company, in a priority area, they
    would site the embargo. They would say that even if we wanted to do
    this, we couldn’t, because there’s no way that U.S. companies could pay
    for a service or the other way around. They are right to an extent,
    because of the continuing restrictions on financial transactions, but
    more important, the way those restrictions and regulations have been
    interpreted by legal counsel and compliance officers at major financial
    institutions around the world, especially in the U.S. They’re very well
    aware that if you run afoul of those regulations, you get hit with a
    multi-billion-dollar fine, as has happened, even recently.

    At the same time, investment conditions in Cuba are very challenging for
    U.S. companies that are not accustomed to working with foreign
    governments in transactions normally involving private sector companies
    as counterparts. But the reality is that doing business in Cuba
    necessarily means doing business with the government, and not all U.S.
    companies are prepared to do that at this point.

    So those are in the first two buckets. In the third bucket, on
    reconciliation, Cuban-Americans are going to play some role, just as
    they have played an important role in shaping U.S.-Cuba policy in the
    past. I know that many Cuban government officials are not comfortable
    with that involvement, but the sooner we can start to engage from that
    perspective and have reconciliation, the better it is both for Cubans in
    the U.S. as well as Cubans on the island. Very little has been done, or
    has occurred, on that front because of the lack of mutual trust.

    Knowledge@Wharton: You’ve just returned from Cuba. Looking at things
    right now, what are the biggest opportunities in Cuba, and what are the
    biggest challenges or the biggest risks?

    Arnavat: Imagine you discovered a country that you didn’t know existed.
    You realize that less than 100 miles away from the U.S. is a country
    that, if it were a U.S. state, would be the eighth-largest in
    population, right after Ohio, for example. It has 11 million people who
    are very well educated, despite all of the challenges in Cuba, and lack
    of resources. It has software engineers, for example, who graduate from
    some of the best technology universities in Cuba, but they’re
    underemployed. A lot of people code quite a bit in Cuba. So from a human
    capital perspective, it’s a country that is enormously resourceful, and
    this presents a huge opportunity for U.S. companies that will invest
    when they are able to do so.

    From a natural resource perspective, it’s a very large Caribbean
    island, so it will be an important destination for tourism, or for
    second homes for Americans, whenever that becomes a possibility. It’s
    got a health care system that is, again, very poorly resourced, but
    there is a high level of training on the part of medical staff there,
    and access to knowledge and technology. Some presidents in Latin America
    from the ALBA countries (the 11-member Bolivarian Alliance for the
    Peoples of Our America), when they get seriously sick, they go to
    Havana. Medical tourism would be of great interest as an area to invest
    in if that were possible.

    It is also a country that has tremendous needs from an infrastructure
    perspective. The roads are quite better than a lot of places I’ve been
    in the Caribbean, and certainly Central America. But it’s a country that
    needs to be rebuilt from the ground up. The question, of course, is
    going to be how do you pay for it? That brings us to the challenges.
    There is no access to capital. It has a legal system that was set up to
    support a socialist economic model, which is anachronistic and foreign
    to U.S. investors. They’re beginning to figure that out, and are
    struggling with how to emerge and how to evolve from that. But even
    those who recognize the need for change don’t want that change to be
    forced on them from abroad. This is an essential point to keep in mind.

    Cubans are increasingly getting comfortable referring to non-state
    employees or entrepreneurs as the private sector, although officially
    it’s called the non-state sector. I am certain that when things do open
    up, and the right incentives are in place, the human capital there is
    going to be such that Cuba is going to be well-placed as a market for
    Americans to investment.

    I’m not sure how independent the judiciary is to resolve disputes
    between, let’s say a foreign company, a foreign investor and an entity
    where the Cuban government may have an interest. So that’s obviously a
    risk for any U.S. company to consider. It’s a risk in any country, but
    especially in a country where the government plays such an important
    role in the running of the society. There is also the political risk
    associated with the fact that [President Raul] Castro is supposed to
    leave office on February 24 of next year, and it’s always unclear as to
    who’s going to take over and in what direction the country will go.

    If you have to put a bet, Cuba is likely to continue on a socialist
    trajectory for an indefinite period of time. You also have the immediate
    risk of the Trump administration in trying to decide what to do. So it
    would be crazy for anyone right now to be trying to invest in Cuba, even
    in those areas we can invest, because at any moment, the Trump
    administration may come out and totally reverse what was done previously.

    Knowledge@Wharton: How do you think U.S. policy towards Cuba will evolve
    under President Trump? You were very complimentary about President
    Obama, very optimistic about reading Hillary Clinton’s book and what she
    said about Cuba. What’s your assessment of what President Trump will do,
    and what that will mean for Cuban-American relations?

    Arnavat: I honestly have no idea. And I don’t think anyone has any idea.
    People in Cuba have no idea. It could go in lots of directions. It seems
    that President Trump is not going to come out any time soon and say
    we’re going to continue to engage without the Cubans making any
    quote-unquote “concessions.”

    Trump has said very little about Cuba in his career. He appeared to
    entertain launching a potential campaign in the 1990s, I believe it was
    in Miami he talked about how he was such a strong supporter of the
    embargo and he would never do business in Cuba while the Castro brothers
    were in place, etc.

    Two years later, as it turns out, he sent a consultant to Cuba — a paid
    consultant, to figure out how to do business in Cuba. Beginning about
    six years ago up until sometime last year, people in the Trump
    organization had visited Cuba, exploring opportunities in golf and
    hotels, hospitality, that sort of thing. So we know that from a
    commercial perspective, he definitely has been interested in doing so.
    And, it makes sense, given his investments in China and other countries
    that don’t adhere to U.S. standards of human rights and democracy.

    When President [Obama] announced the policy shift, on a few occasions,
    [Trump] said that he supported the engagement. One time, I think he was
    in a debate in Miami, a primary, and he said something along the lines
    of, “Come on, folks, it’s been over 50 years. We’ve got to move on.
    We’ve got to try something else.” But then about six weeks before the
    election, he began to tailor his message much more to the conservatives
    and the hardliners in the community. He said, “Unless the Cubans take
    steps to,” and I think he said, “to provide for more political freedoms
    and religious freedoms, then I’m going to reverse everything.” Mike
    Pence said that as well shortly before and maybe after the election.

    But having said that, [Trump’s policies regarding Cuba are] just not
    clear. There are a number of individuals who worked on [Trump’s]
    transition team, who are involved in the administration, who have been
    very focused the last 15-20 years on enforcing the embargo, on
    tightening the embargo, on making life as hard and difficult for the
    Cuban government. Those people are certainly weighing in very heavily on
    the policy. A policy review is ongoing, but it is unclear when they’ll
    be done with that and what the outcome will be. I imagine an important
    consideration will be the change in government that I mentioned previously.

    Knowledge@Wharton: When you met people in Havana, what did you hear from
    them about how they expect relations with the U.S. to shape up?

    Arnavat: Shortly after the announcement of the policy shift, something
    like 97% of the Cuban people expressed they were in favor of the
    engagement, and of reestablishing diplomatic relations, etc. This makes
    sense, because the more Americans that travel to Cuba and invest in
    Cuba, the greater the economic benefits to the Cuban people in general.

    Everyone is concerned that in fact, the policy will reverse, that there
    will be fewer people visiting, fewer people making investments, as a
    result of a decrease in remittances that are used as seed capital to
    start new businesses on the island. Even if you stay at a state-owned
    hotel, you hire private taxis, and you eat in private restaurants that
    are allowed under Cuban law. So a lot of people who are private
    individuals are in fact benefitting because of the increase in travel
    between the U.S. and Cuba. And they’re very concerned about that not
    occurring

    Source: Should U.S. Companies Hit ‘Pause’ on Doing Business in Cuba? –
    Knowledge@Wharton
    knowledge.wharton.upenn.edu/article/why-business-should-hit-pause-on-new-u-s-cuba-ties/