The Challenges of Doing Business in Cuba
This article is part of our Trends 2016 coverage.
Fewer than 100 miles of ocean separate the U.S. and Cuba, but the nations have spent the last five decades in different worlds. Ever since John F. Kennedy signed Presidential Proclamation 3447 on Feb. 3, 1962, declaring “an embargo upon all trade” in response to Cuba nationalizing U.S.-owned Cuban oil refineries without compensation, Americans have been effectively blocked from doing business in the country.
That’s finally changing. On Dec. 17, 2014, President Obama announced plans to renew diplomatic relations, pledging to ease trade and financial restrictions. In July, both countries reopened embassies, and already a handful of U.S. companies, including Verizon, Netflix and Airbnb, have expanded into the Cuban market.
But don’t light those celebratory cigars just yet. As of this writing, the Cuban trade embargo is still in force. While rules have relaxed for some imports, travel and telecommunications services, most U.S. firms will not be free to set up shop in Cuba until Congress lifts the embargo, which insiders say is unlikely to happen before Obama leaves office in early 2017.
If and when the U.S. embargo is no more, Americans will face a Cuban government operating on its own unique terms.
“Cuba at the governmental level remains committed to a socialist system. That has many, many implications for how business can be conducted,” says Eric Leenson, president of SOL Economics, which strives to nurture socially responsible enterprise across the Americas. “From a Cuban perspective, they’re not transitioning from socialism to capitalism. What they’re doing is what they call ‘updating’ their socialist system so that it’s more viable. A large part of that means allowing for more private enterprise activities.”
Leenson says U.S. businesses mulling entry must learn to function within a socialist framework. That means adapting to strict legislative controls. President Raúl Castro has in recent years taken unprecedented steps to encourage international investment, including steep tax cuts, but while it is now legal for foreign companies to own 100 percent of Cuban-based companies, the market remains dominated by ventures that unite overseas firms with the Cuban government—and in virtually every case, the government seeks a 51 percent ownership stake.
“This stuff is in a state of flux to some extent, because Cubans realize that if their economy is going to start working more sustainably, they need foreign investment. But there’s incredible red tape,” Leenson says.
The complexities don’t end there. While Cuba is greenfield territory for U.S. entrepreneurs, their counterparts from Canada, Europe, Latin America, Israel and China have not been bound by the same embargo restrictions; many are already doing business in Cuba and will fight to protect their interests. Also, the Cuban infrastructure desperately needs improvement: The ground transportation system requires major repairs and upgrades, and an antiquated electrical grid poses enormous problems.
Of course, one entrepreneur’s minefield is another’s gold mine. “If you can find a way to get a contract to build infrastructure or low-income housing, these are multibillion-dollar opportunities,” says Mike Periu, the son of Cuban immigrants and president of Proximo, a Miami-based provider of finance and technology education and training services. “But it’s likely the Cuban government is going to take these opportunities, because that’s what they do. I’ve never seen them just give a big opportunity to a Chinese company or Russian company.”
Even the Cuban population presents challenges. Periu says most of the 11 million citizens will welcome an influx of U.S. capital, products and services but notes that state workers earn an average of $20 per month. Only 3 million Cubans own mobile phones, and few outside the government have access to broadband, limiting the potential to build digital businesses.
Still another dilemma: “You have teachers, lawyers, doctors and engineers who have studied at Cuban universities, but many of them don’t necessarily have practical expertise, because the engineer hasn’t actually built a bridge, or the architect hasn’t built a building,” Periu says. “It could be a challenge. I don’t want to sugarcoat this.”
Yet despite the red flags, Periu and Leenson agree that savvy U.S. entrepreneurs can succeed in the Cuban market, provided they proceed with caution. “You need to go in and take a thorough look at what’s going on,” Leenson says. “Don’t romanticize what the opportunities are. Don’t go in like a bull in a china shop with the idea that ‘At any cost, we’re going to make it happen this way.’ That might work in other countries, but I don’t think it will be successful in Cuba. Get the lay of the land, and meet professionals and people in the area of interest that you’re in. I think this can be possible.”