Doing Business in a Post-Fidel Cuba

President Obama’s historic visit to Cuba in March 2016 drove excitement for businesses considering the market that the island could become. The move made it possible to imagine an end to the U.S. embargo of Cuba (which remains firmly in place) and a consequently sharp improvement in Cuba’s economic conditions.

However, in the subsequent months, Cuba has failed to advance on economic liberalization, encountered a fiscal crisis, watched the U.S. elect a potentially hostile president, and lost its revolutionary leader. It’s no longer clear whether Cuba will see either domestic reforms or greater engagement from the U.S.

Understanding the policies that leaders in the U.S. and Cuba could implement over the next two years will be critical for helping business executives determine the level of urgency around developing their Cuba operation.

A limited business opportunity

First, it is important to remember why Cuba still presents only a limited opportunity for doing business. Cuba faces three overarching challenges: The first is a lack of capital investment, which, in all likelihood, is unsolvable without greater capital inflows to Cuba from the United States, meaning the embargo needs to end. With a limited financial system, Cuba lacks the domestic savings to raise fixed capital investment above the current level of 10% of GDP (half the average of Latin America).

Second, Cuba confronts the difficult task of unburdening its largely stalled state-led economy. With many state-run enterprises dependent on public subsidies, Cuba has attempted to shift workers to the much more agile private sector, but progress continues to be slow.

Finally, Cuba confronts significant difficulties caused by its dual currency system. In order to facilitate transferring subsidies to its public-sector entities, Cuba utilizes two currencies: the convertible Peso (CUC) valued on par with the dollar and fully tradable, and the Cuban Peso (CUP) valued at a rate of 24:1 with the dollar. While useful for exerting economic control, this mechanism serves to undermine the competitiveness of Cuban exports and severely limits the purchasing power of Cuban wage earners.

Without meaningful advancements on these three fronts, new business developments in Cuba will simply not progress. While limited opportunities will exist for companies in select sectors (such as hospitality and telecoms), underlying economic performance will remain flat, much as it has for the last several decades.

An economic crossroads

In April 2016, Cuba held its Seventh Communist Party Congress. At the last Congress, in 2011, Raul Castro had announced plans to introduce new market reforms and attract foreign investment. As such, many Cuba watchers anticipated similar announcements in 2016, potentially including instructions regarding the eventual elimination of the country’s dual currency regime. Instead, only limited new reform measures were announced, and Fidel himself appeared to push back somewhat against the general movement toward greater economic liberalization.

Perhaps more important for an analysis of near-term Cuba policy, this non-event took place in the context of an expanding fiscal crisis for the Cuban government. Having long relied on subsidized oil imports from Venezuela to provide cheap energy and the bulk of its foreign exchange income, Cuba has seen its subsidized oil inflows dwindle as its benefactor has entered into economic collapse. The result has been periodic shutdowns of key public sector companies in Cuba, and blackouts in Cuban neighborhoods.

In this setting, two distinct options are available to Cuban leadership, depending on whether Trump will continue to advance economic and diplomatic engagement with Cuba, or whether he will back away from the country. In the case of the former, Cuba could continue down the path of slow but steady liberalization, and in the case of the latter, it would likely be pushed to retrench while seeking alternate sources of finance. The first scenario would allow for continued development of already existing business ventures and provide greater space for the U.S. to remove the embargo; the second would likely result in limited new opportunities within Cuba and continued economic stagnation.

An unpredictable U.S. President-elect

During the presidential campaign, President-elect Trump said that he would revoke “the deal” with Cuba if he could not get more concessions, such as the release of political prisoners or expanding the scope of approved private sector business activities. Within a month after his election, Trump had already hired two professed “Cuba hardliners” as part of his transition team (Mauricio Clover Corone and Yleem Poblete, who both support maintaining the Cuba embargo), possibly signaling that he intends to hold hard and fast to his campaign rhetoric.

Despite these signs, due to expanding U.S. economic interest on the island, which the Obama administration has worked hard to strengthen before the transition of power in January, it would be difficult for Trump to cancel all of Obama’s policy changes toward Cuba. Rather, it would be easier politically for Trump to seek some symbolic victory over the medium-term (such as securing a win in Cuba for an American business like Google), while largely maintaining Obama’s policy changes. The worst case for businesses interested in Cuba would be if Trump chooses (or is forced) to retrench on Obama’s key economic policy measures, specifically the easing of travel restrictions and the licensing of companies in the telecoms and financial services spaces.

How to know where the economy is heading

With these factors in play, the short-term outlook for Cuba is highly uncertain. In that respect, companies can follow these key events to better track the development of policy both on the island and in the United States.

• Does Trump pull the trigger on Article III of the Libertad Act of 1996 during the first 100 days of his presidency? The Act, passed in 1996 to strengthen the U.S. embargo of Cuba, includes a provision, which, if triggered, makes it possible to set off tens of thousands of lawsuits against the Cuban government for property confiscated following the 1959 revolution. This would make trade with Cuba nearly impossible and likely push back accelerated growth in Cuba by years, if not longer.

• Does Cuba get a new economic benefactor? With Venezuela in free collapse, Cuba is in a position to accept help from a new economic benefactor. Potential support from either Russia or China could stave off near-term economic contraction, while also potentially incentivizing the Trump administration to end to the embargo in order to further engage Cuba and avoid losing influence.
  

• Do the Democrats add Senate seats in the U.S. mid-term elections in November 2018? While there is a significant number of Republicans who support ending the embargo, the Senate would likely require greater Democratic representation to gain sufficient support for ending the embargo.

• Does the new Cuban leader, who takes over in February 2018, accelerate economic reforms? The new government will likely be the first not led by a participant in the 1959 revolution, and it will need to draw a greater portion of its legitimacy by driving economic growth and improving the lives of Cubans. This would potentially push it to accept a greater liberalization of the economy, including permitting greater private activity and eliminating the dual currency system.