Long path ahead for full normalization of US-Cuba relations

On December 17, 2014, President Barack Obama announced that the United States was pursuing the reestablishment of diplomatic relations between the U.S. and Cuba for the first time in over five decades. While the negotiations are still ongoing, it is expected that they will lead to the reduction of certain economic sanctions and financial restrictions, though not to an end of the U.S. trade embargo.

What does this mean for multinationals?

Non-U.S.-based multinationals stand to benefit from a relaxation of U.S. sanctions on companies doing business in Cuba, while U.S. multinationals will be allowed to export residential construction materials, agricultural equipment, and a limited range of products aimed at boosting small business development in Cuba. Exports to Cuba are already allowed for an assortment of agricultural and pharmaceutical products, with current exports to Cuba from the U.S. valued at over US$3 billion.

However, multinationals should temper their expectations. While Cuba’s potential is significant, there are still major roadblocks to investing in the market, in particular the U.S. trade embargo. Despite the fact that the Obama administration would like to lift the embargo, the U.S. congress would have to pass legislation dismantling previous legislation that tightly restricts trade in the absence of significant democratic reforms in Cuba. Given Republican control over congress and the vociferous opposition to President Obama’s measures from Cuban-American legislators, the prospects for lifting the embargo over the next two years are slim.

The other major roadblock is the Cuban government’s stifling control over its country’s economy, and the significant operational and financial risks that accompany it. While recent reforms have provided modest liberalization of the Cuban economy, these measures have had limited success in jumpstarting growth, or making more investments palatable for companies willing to pursue joint ventures with the Cuban government, which remains the only way for most multinationals to invest there. Venezuela’s recent economic troubles will also negatively impact Cuba’s prospects over the next couple of years, given Cuba’s dependence on subsidized oil and other financial support from Venezuela.

That said, Cuba’s potential as a growth market for multinationals over the medium to long term shouldn’t be ignored. This is a country that, if economic reforms gather pace, offers a largely underpenetrated market of 11 million people that could prove to be one of the more rewarding bets multinationals can make in Latin America over the next decade. As such, multinationals should monitor the following over the coming months and years:

  • Progress in face-to-face meetings between U.S. and Cuban officials: The movement toward normalization of relations between the two countries remains in its earliest phase, and further negotiations should be expected through the last two years of Obama’s presidency. Further progress in the discussions will be necessary in order to build enough momentum to further lift economic sanctions

  • Pushback from the U.S. congress against the normalization of relations: Opposition against the reconciliation between Cuba and the United States remains strong in the U.S. congress, and opponents of the President’s policies are already formulating measures to block the president from implementing the rapprochement, including denying funds for building an embassy in Havana, refusing to vote for an ambassador, and refusing any attempt to further lift travel restrictions and economic sanctions

  • Progress on economic reforms in Cuba: President Raul Castro has pursued a series of economic reforms since 2010 that have sought to reduce the role of the state in the economy, including pushing 40% of the workforce to the private sector by next year, and relaxing restrictions on small businesses. These measures have had a limited impact on boosting economic growth however, and further reforms, particularly those aimed at attracting foreign direct investment and cutting widespread subsidies, will be necessary

  • Evolving economic crisis in Venezuela: The deteriorating economic situation in Venezuela, which has been severely compounded by the prolonged fall in oil prices, will put heavy pressure on the Cuban government to push forward additional economic reforms and maintain momentum toward greater reconciliation with the United States, which may lead to further concessions on the political as well as economic front

  • Eventual political transition in Cuba: President Raul Castro plans to retire in 2018, with Vice-president Miguel Diaz-Canel the designated successor. How this transition is handled will be vital for Cuba-U.S. relations to continue the path toward full normalization

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