Client Alert
Five Things to Know About Cuba
April 04, 2016
By Michael Fitzgerald & Arturo Carrillo
U.S. and Cuba relations have undergone several watershed moments over the past couple of months, marked most recently by President Obama’s historic visit. Licenses are being granted to U.S. business, travel restrictions for U.S. citizens are being loosened, Cubans have more access to U.S. currency and financial institutions, and American industry experts -from the agriculture to the hospitality sector- are meeting with their Cuban counterparts. But does this mean the floodgates to Cuba and U.S. deal making will open soon? Here are five things to know about Cuba.
1. Congress Needs to Act
While it’s encouraging to see some momentum develop, the bottom line is that the trade embargo is still in place. The embargo can only be lifted by an Act of Congress. Because the U.S. is in the middle of an election year, it’s unlikely that there will be any formal action in Congress until a new president is elected. While Hillary Clinton favors normalization, and Donald Trump appears to favor it, but thinks “we should have made a better deal,” republican candidate Ted Cruz, of Cuban-American heritage, is dead set against lifting the ban.
All this is to say that the U.S. presidential election will impact not only the timing, but the success of any Congressional act.
2. Let’s Make a Deal, and Another, and Another…
The U.S. has opened up some narrow pipelines of opportunities in certain sectors, which is likely to result in soon to be inked deals for major telecommunications and hospitality companies with Cuban government-run entities. Once these deals are inked, it may pave the path for other similarly situated companies to follow.
While some hospitality companies have already been granted licenses, it’s important to stress that these licenses are only management licenses. U.S. companies are still not allowed to own or construct hotels in Cuba, which is what they’d ultimately like to do. However, getting these management licenses is an encouraging step in the right direction.
3. The Roads are Paved with Opportunity
Cuba is in dire need of infrastructure development. While the lack of infrastructure may be a concern for some businesses looking to operate in Cuba, other companies see infrastructure as a major opportunity. From hotels, roads, to telecoms, you name it-Cuba needs it. The challenge is that the entire infrastructure is essentially currently owned by the government, so the ownership opportunities available for international players only exist in certain limited areas. Because U.S. companies will likely arrive later than others around the globe, they’ll face fierce competition for these opportunities with countries like China, which has normal diplomatic relations with Cuba.
4. Markets Need to get Savvy
The market in Cuba is at the earliest stage of development, which makes deal making in Cuba a major hurdle. Concepts-such as ownership and collateral- that are critical to deal negotiations - simply don’t exist in Cuba. Related to this challenge, labor will need to be revamped in a way that works for Cuba and for foreign investors as currently the government is in complete control of the labor force as well. Capital markets will not be viable until two to three years from now, and only if things keep moving fast. You could, however, see syndicated bank loans in the short to medium term.
5. What’s Mine is Mine
Another big obstacle to investing is the legacy of confiscation. A mechanism to deal with this will be critical to Cuba’s future business prospects with the U.S. Some means of recompensing funds, similar to what was created in Eastern Europe at the end of Cold War ideally will develop. U.S. companies will also be looking for protections against potential seizures of their assets by the Cuban government.
So what now?
Book Your Travel
It’s much easier for Americans to now legally visit Cuba. Gaining on the ground experience of the culture, the people and the politics will be personally and professionally rewarding. Deal negotiating in Cuba will need to be more careful and more deliberate and understanding the subtleties of how to succeed can be facilitated by a trip, or two or three, to the island.
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Michael Fitzgerald heads the Latin America practice group and Arturo Carrillo is a partner in the Latin America and Corporate practice of global law firm Paul Hastings.