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The Road to Cuba: Three Scenarios for U.S. Business Relations

The Road to Cuba: Three Scenarios for U.S. Business Relations
Apr 26, 2016

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.

In the following excerpt from the book, three scenarios are presented
for how U.S.-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, with some contenders strongly support lifting
the embargo, while others oppose this move and Obama’s Cuba policy.

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.

“Obama urged Congress to lift the embargo, but few believe that this can
happen before the new president takes office in early 2017.”

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.

“The immediate challenge facing US businesses is to exploit existing
openings and position themselves for the bigger opportunities that could
come in the future.”

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.

“US 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.”

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
www.knowledgeatwharton.com/books/library/road-to-cuba/?&utm_medium=referral&utm_source=kw&utm_campaign=%2520road-to-cuba-rev&utm_content=pr

Source: The Road to Cuba: Three Scenarios for U.S. Business Relations –
Knowledge@Wharton
knowledge.wharton.upenn.edu/article/the-road-to-cuba-three-scenarios-for-u-s-business-relations/

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