Knowledge@Wharton - Obamas Cuba Visit: Are Big Changes Ahead?
President Obama’s trip to Cuba with his family would have been unthinkable as little as two years ago. But he will arrive there on Sunday, becoming the first U.S. president to visit the island since 1928. And the U.S. business community views the trip as a sign that major breakthroughs are imminent for Americans looking to more freely visit and invest there.
Speaking at the 2nd Cuba Opportunity Summit, held March 17 at Nasdaq Marketsite in New York, Alex Lee, deputy assistant secretary for South America and Cuba at the U.S. Department of State, said of the President’s historic visit: “We really hope that it’s going to jumpstart a higher tempo in this relationship.” The summit was organized by Knowledge@Wharton, The Lauder Institute and Momentum.
In the days leading up to Obama’s Cuba trip, the U.S. government announced a new round of rules that further relax the American embargo against Cuba. The regulations are the fifth set of changes announced since Obama confirmed the re-establishment of diplomatic relations with Cuba in December 2014, though only action by Congress can lift the embargo completely.
Among the new rules: Individual Americans will be allowed to travel to Cuba for “people-to-people” visits, instead of having to visit with groups that met Treasury Department guidelines for 12 approved travel categories.
U.S. banks are now able to process payments to and from Cuba, and non-immigrant Cubans who come into the U.S. can now be paid salaries. In addition, Cubans will now be able to open bank accounts in the U.S.
“We really hope that it’s going to jumpstart a higher tempo in this relationship.” –Alex Lee
“Essentially, we have removed all barriers on the use of the dollar; that was one of the Cuban government’s number-one requests to us repeatedly,” Lee noted. “Now Cuba can use the U.S. financial system to receive or pay for things that don’t necessarily have a U.S. nexus.”
Whereas initial attempts to loosen the embargo were done in a “vacuum of ignorance,” Lee said, the most recent set of changes “represent a significant down payment” on trying to allow investors to act on exceptions to the embargo. “The embargo is a very real restriction in our discussions,” he added. “We’re in constant debate with our lawyers as to how far we can go.”
The U.S. government’s regulatory focus has been primarily on Cuba’s nascent private sector, which is somewhat at odds with the island’s state-dominated and controlled economy.
“The Cuban government frequently says that this relationship will not really ever be normal as long as the embargo exists,” Lee said. “And we say that this relationship will never truly be normal as long as you keep … imprisoning people who are exercising their freedom of speech or assembly, or articulating a different vision of how to structure society, as long as they do it peacefully.”
Lee cautioned that, embargo aside, many challenges still exist to doing business in Cuba. Even if a firm is able to get the proper approvals on the U.S. side, it would still have to get approval from the Cubans. In addition, foreign firms must hire employees through a state-owned agency, which can impede companies’ ability to “take a long-term approach to recruitment, training and instilling loyalty” in the local staff.
“The state has so many administrative roadblocks; it’s a very top-down bureaucratic administrative structure,” Lee noted. “Any U.S. commercial project would have to be considered by a council of ministers — that is the equivalent of asking the U.S. cabinet to sit and pass judgment on a major business deal.”
He added that the market is further constrained by the low income of most Cubans, who make on average about $25 a month. “There isn’t much purchasing power in Cuba,” Lee said.
A New Cuba
A New Cuba
Among the challenges that the State Department is currently grappling with is issuing licenses for hotel franchises to set up operations on the island. Although Lee did not name any names, The Wall Street Journalearlier this week reported that Starwood and Marriott, along with AT&T, were hoping to complete deals to begin doing business in Cuba.
“This is the first I’ve heard of a possible general opening to the U.S. tourism sector on the supply side,” said Richard Feinberg, a senior fellow at the Brookings Institution. “I know demand is coming in; more and more tourists are coming, and the problem is where are they going to sleep? Havana hotels are full. If the U.S is going to work on the supply side for lodging, that makes very, very good sense.”
Feinberg said it’s also notable that Starwood, which includes the Hyatt and Hilton chains, is one of the chains rumored to be interested because it is among the nearly 6,000 businesses and individuals to register a claim of lost property in Cuba after the 1959 Revolution. The total value of the claims is an estimated $1.9 billion; Starwood’s claim is about $50 million, inherited when it acquired International Telephone and Telegraph Corp.
“Are they effectively bargaining that off for entry into the market?” Feinberg asked. “That would be a beginning for the settlement of all U.S. claims.”
“Havana hotels are full. If the U.S is going to work on the supply side for lodging, that makes very, very good sense.” –Richard Feinberg
The settlement of lost property claims should be done this year before Obama leaves office, Feinberg said. “It’s not that technically difficult; it’s politically difficult,” he noted. “If the main goal is to continue to push forward, what could be better than a settlement of all 6,000 claims? It would feel like the past is behind us, and now we can move forward.”
It’s important for Obama to “lay out a vision for the future which the U.S. and Cuba can work to get to in the long run,” Feinberg noted. “I’ve interviewed millennials on the island, and they feel in 10 years there will be a new Cuba, in which people such as themselves will be able to exercise their professions and talents, and where there will be a much more open economy. Cuba will be a more normal country in which businesses and people and ideas move back and forth.”
Major Announcements Ahead?
Frank Del Rio, president and CEO of Norwegian Cruise Line, left Cuba with his parents when he was seven years old. In the past year, he traveled there twice, visiting relatives he hadn’t seen in decades. By the end of 2016, he hopes to sail one of his cruise ships into the harbor in Havana.
“I know a lot of deals haven’t been announced, but that doesn’t mean a lot of deals aren’t in the oven, baking,” Del Rio said. “Nothing happened for 56 years and we expected things to change overnight; nothing changes overnight. But I think we’re on the cusp of some major announcements.”
The recent loosening of regulations makes it easier for Del Rio’s plan to come to fruition, but he noted that Cuba still lacks significant infrastructure for doing business and accommodating tourism. “Havana can accommodate one good size vessel, 2,000 passengers, and one smaller, more boutique type vessel,” he noted. “It will be a long, long time before Cuba supersedes the region; for now, it’s helping to increase interest in the Caribbean.”
Glenn Fogel, executive vice president and head of worldwide strategy and planning for Priceline, noted that the company’s head of public relations was supposed to visit Cuba next week — but got bumped from her hotel room to make way for Obama’s delegation. The company has all the licenses it needs to do business in the U.S. and Cuba through its booking.com subsidiary, but currently has no allocation of rooms from hotels.
“The demand right now is much more than supply,” he said. “We’re hoping we’ll soon have that first booking.”
Cuba currently has about 3.5 million visitors a year, “but a lot more people want to go there,” Fogel said. He often hears U.S. tourists say they want to go before the country’s character is “ruined” by an influx of commercial development and overseas franchises. But Fogel says those concerns are mostly unfounded. “It would take forever to build up to anything that will even resemble Miami.”
He also noted that even though there is significant interest in developing the tourism sector, it’s up to the Cuban government to decide on a strategy for welcoming visitors.
“I think we have to be so careful. Every step, every word, every move is potentially something that can derail a very positive and noble process.” –Carlos Gutierrez
“Some countries have said that they don’t want to be overrun with tourists…. Others say they want to go with a mass market approach,” Fogel said. “It’s the Cuban government’s country; they get to decide how they want to develop it.”
Though he also expected there to be some significant announcements as part of Obama’s trip, Carlos Gutierrez, former Secretary of Commerce under President George W. Bush, noted that such developments aren’t needed for it to be considered a success.
“If the President goes down there and the Cuban people see him sit down with Raul Castro, and the Secretary of State sits down with the Minister of Foreign Affairs and they understand each other a little bit better, and that’s all they achieve, I think that’s going to be a good trip,” said Gutierrez, who is also a former chief executive of Kellogg and current co-chairman of the Albright Stonebridge Group.
Gutierrez dismissed complaints that “nothing” has happened since Obama’s December announcement, noting that Cuba’s economy is undergoing historic change with or without U.S. investment. “My sense is that they recognize that the economic model needs to change…. I don’t want to compare it to a game, but I think we’re only in the first inning,” he said. “This is a process that has just begun, and it’s long-term.”
He expected that Obama’s address to the Cuban people next week will touch on the United States’ role in Cuban history, along with conceptual plans for the future. “He’s going to talk about hope, and he’s going to have a message for young people,” said Gutierrez, who was born in Cuba and left with his parents in 1960. “He may mention [democracy]. If he doesn’t mention it in his speech, I’m sure he will mention it behind closed doors. A big part of why this process is so popular is that even though we don’t agree on everything, those things we don’t agree on, we can talk about.”
Like many Cuban-Americans and U.S. Republicans, Gutierrez was initially critical of Obama’s efforts to re-open relations. “That’s what I learned at the dinner table … and there’s a certain convenience in being given talking points for the rest of your life,” he said. “But I realized that more and more I was having trouble reconciling my gut with my talking points.”
While his greatest hope is prosperity for Cuba, Gutierrez said he worries that something will happen to reverse the progress that has been made in the renewed relationship with the U.S. “I think we have to be so careful. Every step, every word, every move is potentially something that can derail a very positive and noble process.”
This article is reprinted with permission from Knowledge@Wharton.
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