U.S.-Cuba Relations: What Will Be the Next Stage?

When the Allies won a crucial victory at El Alamein during World War II, many thought that it meant they would soon defeat the Nazis for good. But British Prime Minister Winston Churchill countered with a different observation in a 1942 address. “This is not the end,” Churchill said. “It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

A similar realization has developed for U.S. businesses hoping to break into the Cuban market. In the 10 months since President Barack Obama announced plans to normalize relations with Cuba, more has changed than in the previous five decades: Cuba was removed from the U.S. list of state sponsors of terrorism; the U.S. reopened its embassy in Havana, the Cubans did the same in Washington, and the U.S. implemented a number of new rules to ease restrictions on American firms doing business on the island.

“This is the new normal, and isn’t that a wonderful feeling?” said Pedro A. Freyre, partner and chair of the international practice at Miami-based law firm Akerman LLP. “It doesn’t mean all the issues have been resolved. We are dealing with two very different political systems and economic systems — that’s the reality. But now we can work from an atmosphere of normalcy instead of being adversaries Twitter .”

But as Freyre and other speakers pointed out at the recent U.S.-Cuba Corporate Counsel and Cuba Finance, Infrastructure and Investment summits in New York, there is ample work left to be done, and many economic and political unknowns on both sides of the Straits of Florida. The conferences were organized by Knowledge@Wharton, The Lauder Institute, Tres Mares investment firm in Miami, and Momentum Event Group.

The current environment creates a unique challenge for U.S. businesses that would like to do business in Cuba. While firms have more freedom to plan and pursue opportunities than ever, they also face significant roadblocks — most notably the U.S. embargo and uncertainty over when (or if) it will be lifted, as the President grapples with an unfriendly Republican-controlled Congress and prepares to leave office in 2016.

There are also questions over how the two countries will deal with claims by U.S. residents and businesses on property that was seized by the Cuban government in the 1960s; uncertainty over how far or in what direction the Cuban government is willing to go in opening up its largely state-run economy to development, and unfamiliarity with the Cuban mindset for doing business.

“We are dealing with two very different political systems and economic systems — that’s the reality. But now we can work from an atmosphere of normalcy instead of being adversaries.”–Pedro A. Freyre

“You do not resolve 54 years of confrontation in five months,” noted Freyre, who was born in Havana and left for the U.S. with his parents in 1960 following the Cuban Revolution that brought the current Communist regime to the country.

Among the notable forward movements in the past year, according to Freyre: Home sharing site Airbnb is now operating in Cuba; the Discovery Channel is airing Cuban Chrome, a reality series shot on the island; long distance calls to the U.S. and roaming services are now available, and Florida-based Stonegate bank has signed a deal that allows it to handle financial transactions with Cuba.

A Sense of Urgency

However, Freyre added that yet to come are an agreement that would restore airline service between the two nations; a continued pushing of Obama’s executive authority to ease regulations for doing business in Cuba, and legislative action on the embargo.

“We need to build on success,” Freyre noted. “When we accomplish something in a given area, we need to define it and we need to build on it. We need to have a sense of urgency — we’re coming up on an election year. My sense is that the toothpaste is out of the tube and it can’t be put back in, but there are people who want to put it back on both sides.”

For Cuba to become more viable for investment, the Cuban government also needs to move forward on a number of issues, including its dual currency system, lack of Internet access and a need for bureaucratic streamlining. “There have to be clear rules of the game for investment,” Freyre said. “The Cuban government has to build more employment bases. Will they establish small and medium-sized enterprises? There are also questions about expansion of the private sector, the issue of private property, labor law reform, electoral reform.”

But it’s not clear that the Cuban government feels a sense of urgency to act on many of these issues, said John. S. Kavulich, president of the U.S.-Cuba Trade and Economic Council. Though the government agreed to reestablish diplomatic relations with the U.S., there is plenty Cuban leadership hasn’t agreed to — including confirming itineraries for commercial vessels, allowing Cuban entrepreneurs to buy or lease goods directly from U.S. firms and establishing Internet services.

“They haven’t been responding in a timely manner to inquiries from U.S. companies — they are absolutely overwhelmed,” Kavulich noted. “But even auto replies to e-mails … that would be a good step.”

He added that the Cuban government has actually decreased food and agricultural purchases from the U.S. “If anything seems counterintuitive, it’s that. They established the relationship — wouldn’t you want to reward Obama? They haven’t.” Nearly 11 months have passed since the reestablishment of relations, “with no demonstration of urgency by the government of Cuba,” he continued, noting that the Cuban government has made clear that before a completely normalized relationship can exist, the issue of “between $100 billion and $1 trillion” in reparations for seized property needs to be settled and Guantanamo Bay must be returned to Cuba, among other issues. “What the U.S. sees as pressure with a smile is perceived by the government of Cuba as weakness,” Kavulich noted.

Moreover, he said, Cuban President Raul Castro is “unlikely to see the necessity of quid pro quo” with the Americans, while Obama is unlikely to walk back any of the changes the U.S. government has already made. “Cuba recognizes that Obama’s desire to visit Havana is greater than the host country’s belief that the visit is required to further its global interest,” Kavulich said.

The Cuban government has instead used the changes that have taken place in the relationship with the U.S. to market itself to the world, Kavulich noted. “The Cuban government is very skillful at using all of this to go to Spain, Germany, France, Brazil [and say,] ‘Look at all these companies that have been down here, or [are] in The New York Times saying they want to be here or have come and visited. You better hurry up … or there isn’t going to be any room left because the Americans are going to take everything. But the reality is, the Cubans are not going to allow that.”

“They haven’t been responding in a timely manner to inquiries from U.S. companies — they are absolutely overwhelmed.”–John S. Kavulich

Kavulich added that it is unlikely that any legislation will be enacted in the U.S. until the new president takes office. “It’s important to understand that there is a lot more aspirational thinking than practical analysis going on,” he said. “Everyone needs to take a proverbial deep breath — or three or four — and understand what Cuba is. Cuba should not be oversold or undersold; it should be sold for what it is.”

What Cuba likely isn’t, observers at the conferences noted, is an economy hurtling toward capitalism. “The Cubans updating their systems — and they started that process well before regulations changed in the U.S. — doesn’t necessarily mean they’re going to go to capitalism,” said Uriel Mendieta, a partner at law firm Hunton & Williams LLP. “It means they’re going to try different things.”

Even if the embargo were to be lifted next year or the year after, “it doesn’t mean listed U.S. companies would be opening shops all over Cuba,” Mendieta added. “I don’t think that’s realistic. Cuba is trying to balance a socialistic model and basically maintain wage parity and struggling to do that with all the new money coming in.”

According to Pamela Falk, an expert on Cuban foreign policy, the Cuban government is faced with the challenge of figuring out “how they get a piece of what we all want to give them — business.” Falk is former staff director of the subcommittee on Western Hemisphere Affairs for the U.S. House of Representatives International Affairs Committee.

Further Reform

Following a year of whirlwind change in U.S.-Cuba relations, the near future will see much more incremental developments, according to Ed Rubinoff, a partner at international law firm Akin Gump Strauss Hauer & Feld LLP.

While the executive branch of the U.S. government doesn’t have the power to lift the entire embargo — which after the passage of the Helms-Burton Act in 1996 prohibited recognition of a government that included the Castros and endorsed the implementation of a democratically elected government there — there is more flexibility on altering or refining it, Rubinoff said.

“There is some concern about provoking Congress too much and being accused of overstepping the boundaries of legislative authority,” he noted. “The changes that may happen may be fairly limited, substituting engagement for isolation and … providing economic and other opportunities for ordinary Cuban citizens.”

Restrictions on individual travel have been relaxed about as much as they can be, Rubinoff said, though a civil aviation treaty and regularly scheduled flights between the two countries would make travel easier for those who are able to make the trip.

While Stonegate will handle U.S. banking transactions in Cuba, there is “no reciprocity; Cubans can’t open up corresponding accounts in the U.S.,” which might be a constraint on future banking relationships, Rubinoff said.

“The Cubans updating their systems … doesn’t necessarily mean they’re going to go to capitalism.”–Uriel Mendieta

The politics behind the U.S. relationship with Cuba is different from the Democrats vs. Republicans dynamic that has characterized most other issues in Congress, Rubinoff said. There is support on both sides of the aisle for strengthening the Cuba relationship, he noted, though Republican leadership “has been pretty uniformly opposed to change — but now that leadership may be changing” with Ohio Rep. John Boehner leaving his post as Speaker of the House.

“There is a dispute over whether advocates should push for a full or partial lifting of the embargo,” Rubinoff added. “The prospects for a full lift are probably limited; as we get further into the election cycle, the chances of that happening are fairly slim, though there are some prospects for partial relief.”

‘Win-win Scenarios’

Beginning in 1964, the Foreign Claims Settlement Commission (FCSC) — an independent arm of the U.S. Justice Department — has registered more than 5,000 certified American claims from individuals, families and corporations of lost property in Cuba. The claims total about $1.9 billion in 1960s dollars, meaning they’re worth about $7 billion today applying an annual 6% interest rate set by the FCSC.

Freyre noted that there are a number of challenges involved in finding some resolution for those claims. Though there is a methodology of compensation already on the books in Cuban law, “the issue then becomes, what is the method? … It’s unrealistic to believe that the Freyre family comes back from Coral Gables to our houses in Cuba, which are now occupied by Cubans born after the revolution who have lived in those houses for their whole lives,” he says. “It’s also unrealistic that the Cuban government pulls out of its pocket to compensate us.”

What would be realistic, he added, would be to give Cuban-Americans the opportunity to have “first right of refusal” to capitalize corporations that were taken over by the Cuban government, or to rebuild and reactivate mills or factories that have been inactive. “Cuba needs to think about this and figure out a way to build a win-win situation,” Freyre said.

For solutions to many of these issues, Freyre and others at the conferences said the governments in both countries could look to average citizens and to the business and personal relationships that have existed for decades between people in the U.S. and people in Cuba.

“Cuba is one nation living in two countries,” Freyre noted. “The Cuban nation, which is by definition the Cuban people, live on two sides of the Strait. That relationship has never stopped through [the last] 54 years.”

U.S.-Cuba Relations: What ‘Big Steps’ in Diplomacy Mean for Business

In the U.S., Cuba has been on the list of states that sponsor terrorism since 1982 — a distinction it has shared with Iran, Sudan and Syria. In the wake of President Obama’s move to re-establish diplomatic relations with Cuba and lift a 54-year trade embargo, the Communist nation has been pressing the U.S. to take it off the list, and for good reason: Companies doing business with nations on the list face steep fines. In June 2014, BNP Paribas was fined a record $8.9 billion for hiding U.S. dollar transactions with Cuba, Sudan and Iran.

However, at the April 1 Cuba Opportunity Summit, held at the Nasdaq MarketSite in New York, the lead U.S. negotiator for talks in the normalization of relations with Cuba said that the government’s review of Cuba’s appearance on the list should be completed well before the President’s deadline of June.

“It’s in advanced stages,” Roberta Jacobson, assistant secretary of state for western hemisphere affairs, told the audience at the summit, which was organized by Knowledge@Wharton, Wharton’s Lauder Institute and Momentum Event Group. While Jacobson expects the review process to be completed “well ahead of the deadline,” she also cautioned that “there’s been no determination, no conclusion yet. We can’t prejudge the outcome.”

The rapprochement with Cuba also comes as China steps up its investments in Latin America. Indeed, China is one of Cuba’s largest trading partners. It is a major importer of Cuba’s sugar; it has opened hotels in Cuba, and many Chinese tourists visit the Caribbean country every year. The European Union is also a big trading partner with Cuba, the largest island in the Caribbean, with 11 million people and a 2012 GDP of $71 billion, according to the U.N.

“We are the first to acknowledge our own shortcomings, [but] Americans have the right to speak out about those shortcomings.”–Roberta Jacobson

Jacobson has led the U.S. delegation in three rounds of talks thus far with Cuba over normalizing relations, following President Barack Obama’s announcement last December that the U.S. would radically change a half-century of isolationist policies born out of the Cold War. The President has said that these policies, which include a sweeping trade embargo that has been criticized by other nations on humanitarian grounds, have not worked to change the Communist government in Cuba nor give its citizens more freedom.

Jacobson said talks are progressing, and Obama’s sanctions last month against seven Venezuelans for human rights violations did not have a “major impact” on U.S.-Cuba talks. The two sides have met on the issue of human rights, but discussions have centered more on “methodology and form” instead of “substantive” conversations, she noted. One hindrance is that the U.S.’s concept of human rights and international obligations differs from the Cubans’ definition.

Jacobson pointed out that the U.S. believes freedom of speech, of the press and assembly are universal rights. As for the Cubans’ criticism that the U.S. has committed human rights violations as well, “our response to that has never been defensive. Quite the contrary,” Jacobson said. “We are the first to acknowledge our own shortcomings, [but] Americans have the right to speak out about those shortcomings and to seek remedies.”

‘Big Steps’

According to Jacobson, while the U.S. and Cuba are making seemingly small changes, they actually are big steps for two governments that have not talked for half a century. “After 50 plus years of a great deal of distrust and lack of confidence, we have made a great deal of progress Twitter ,” she said.

The first step is the reopening of embassies, which would be a visible sign of thawing relations. The U.S. already has its U.S. Interests Section Havana office in Cuba, and there is the Cuban Interests Section in Washington that effectively functions as Cuba’s embassy. The goal is to reopen the embassies in time for the start of the Summit of the Americas in Panama on April 10, which Obama and Cuban President Raul Castro are expected to attend in what would be a very rare meeting between a U.S. president and a Cuban leader.

“The commercial opportunity is probably more limited in the near term, frankly.”–Stefan Selig

However, Jacobson cautioned that re-establishing diplomatic relations remains a “very small part” of a normalization process that will take years. It is a “first step on a much longer road,” she said. But such initial overtures are a necessity. “You have to engage even with people you don’t agree with if you want to get to a point where you can bring about change.”

One big hurdle for Obama is hostility from both parties in the U.S. Congress. When Jacobson testified in a February 4 hearing before the House Foreign Affairs Committee, lawmakers complained that they were not consulted about the change in U.S. policy. Several said the U.S. is rewarding Cuba without seeing political reforms and argued that it is time to apply pressure because the country’s main benefactor, Venezuela, is struggling economically due to falling oil prices. Instead, they said, Obama is giving Cuba a lifeline. Jacobson responded that the existing Cuban embargo has been a major “irritant” for U.S. allies in Latin America and Europe, and its removal would boost relations.

Stefan Selig, under secretary of commerce for international trade, clarified that the easing in U.S. restrictions for travel, remittances and sale of commercial telecommunications equipment to Cuba are not designed to get around the U.S. embargo. “They are not measures to lift the trade embargo codified by law,” he said in an earlier session at the same conference. Instead, they are first steps to encourage Cuba to take the right path towards a market-based economy.

Cuba does want the U.S. to lift its trade embargo — commercial, financial and economic sanctions set out in a series of statutes that will take an act of Congress to change. Notably, the Helms-Burton Act of 1996 codifies the embargo in law and penalizes foreign countries doing business with Cuba that involve the use of confiscated U.S. property. In the 1960s, Cuba nationalized U.S. refineries and other assets after they stopped processing crude oil from the former Soviet Union during the Cold War. The U.S. retaliated by imposing an embargo.

“The destination is a democratic and prosperous Cuba.”–Stefan Selig

No ‘Economic Miracle’

Convincing Congress to lift the embargo today remains a daunting challenge. But Jacobson said there has been a flurry of activity that has not been seen before. She noted that there are three bills in the Senate that aim to chip away at statutes enforcing the embargo. “There’s a great deal of interest in looking at these issues.”

But even if the embargo were lifted, Cuba’s underdeveloped economy and infrastructure would limit U.S. business opportunities on the island. The Communist nation has a decimated manufacturing sector, a slack labor market and poor telecommunications infrastructure, among other problems. For instance, there is only one undersea telecom cable connecting Cuba with the rest of the world. “There’s a lot of infrastructure work that has to be done,” Selig said.

Moreover, the market is small with a population about the size of Ohio and citizens who make an average of $20 a month, Selig pointed out. Few Cubans have access to the Internet — mainly through 90 Internet cafes, which charges $4.50 an hour. Cuba also must move towards a market-based economy, set up an independent judiciary that can hear claims from foreigners and become more hospitable to outside investment. “The commercial opportunity is probably more limited in the near term, frankly,” Selig said. “The Cuban people are going to need a lot of help.”

Selig added that companies should not be under any illusions that there is “some economic miracle that’s going to happen.” Rather, it is an opportunity for the U.S. government to spark a move to more freedom and prosperity for Cuba. He noted that similar economic moves have created positive change in other centrist governments, such as Vietnam, and more generally trade agreements have lifted environmental and labor standards in countries that signed on.

If Cuba moves towards a market-based system, it could join other nations in the region whose economies have improved over recent decades, including Mexico, Chile, Colombia and Peru. “This is going to be a long road; this is going to be complicated, but we shouldn’t lose sight of what we’re doing here,” Selig said. “The destination is a democratic and prosperous Cuba.”

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