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Destination Cuba: Here’s What Potential Investors Need to Know Now

January 04, 2017

Long held in the grip of Communist restrictions and a decades-long US economic embargo, Cuba is cautiously opening up to markets, technology, and foreign investment, especially following its improved relations with the United States in the last two years.

The Caribbean island nation had remained a virtual no-go zone since the 1960s for most Americans, until President Barack Obama eased travel restrictions, resulting in a sharp increase in the number of tourists. More than 230,000 Americans visited Cuba in the first 11 months of 2016, which is roughly two and a half times the number in 2014, just before US-Cuba relations began to normalize.

More than half a dozen US airlines are now flying into Cuba, and cruise lines have signed deals making the island a new destination. Technology companies also have reached agreements with the Cuban government to increase their presence there.

Earlier this year, the country’s state-run telecom Etecsa installed Wi-Fi in 35 public areas across the island, allowing citizens to surf the web and connect with overseas friends and relatives, according to The Wall Street Journal. About one-fourth of Cuba’s population now has internet access. Cuba is also courting foreign investors, offering partnerships to build hotels, biotech factories, and food-processing plants, among others.

Besides the promise of growth and liberalization, however, Cuba remains hostage to its dismal human-rights record and its restrictive laws on private business and foreign investment. Many US sanctions against Cuba, meanwhile, remain in place. And President-elect Donald Trump has signaled that once he takes office he could reverse measures taken by President Obama to ease restrictions.

“Before considering any business in Cuba, it is important to understand the applicable regulatory rules, and the potential direction of President-elect Trump’s policy on Cuba,” said Carl Valenstein, a Morgan Lewis partner who advises clients on international risk management and other global corporate matters.

Carl, who has worked in a broad array of industries in Latin America, the Caribbean, Europe, Africa, Asia, and the Middle East, recently spoke to us about what companies and potential investors should know about US-Cuba relations, Cuba’s recent steps to open up to the world, and the legal and regulatory realities there.

Morgan Lewis’s Latin America team has advised clients on Cuba-related business issues for decades in the travel, telecom, and life sciences sectors. Foreign lawyers are not allowed to practice in Cuba, and all Cuban lawyers work in state-owned firms. But Morgan Lewis has contacts with local lawyers and accounting firms, and is capable of assisting clients considering investments in Cuba in those industries in which the embargo was relaxed to allow US investment.

What do companies need to know about the US sanctions if they are considering investments in Cuba?

The US sanctions on Cuba are a regulatory minefield. While certain sanctions were liberalized by executive action of President Obama, many remain codified in statute and are unlikely to be modified without concessions by the Cuban government, and it is possible that President-elect Trump may roll back some of the liberalization.

President-elect Trump has been lobbied heavily by many companies benefitting from the change in US policy toward Cuba to maintain the relaxation of the US embargo. So it is also possible that he will strike a compromise in not rolling back the liberalization but rather condition any future liberalization or repeal on concessions by the Cuban government with respect to compensation for US claims for nationalized property and/or the protection of human rights. Raul Castro does not formally relinquish power until 2018, and it remains to be seen whether Raul, following the death of Fidel Castro, or the next generation Cuban government will maintain its current hardline stance on these issues.

What can we expect from the Cuban government with respect to compensation for the nationalization and expropriation of US companies in Cuba, mainly in 1960?

The Cuban government claims that the damage caused by the US embargo to Cuba exceeds the US claims for compensation for nationalizations/expropriations. This position is unacceptable to the US government but it is unclear what amount of compensation and form of payment will be acceptable. The US government is encouraging companies to use their claims privately in negotiations with the Cuban government over future business in Cuba, and certain companies have done this.

With recent improvements in US-Cuba relations and several companies exploring investment opportunities, is Cuba introducing new laws or amending older ones to accommodate potential new foreign investment?

Cuba has amended its foreign investment law in the past few years but it is still restrictive and there remain many Cuban government controls and restrictions. For example, employees cannot be contracted for directly. In certain sectors, such as telecom, the Cuban government has squeezed out foreign investment and the military is a major owner/investor in telecom and other sectors. The history of foreign investment in Cuba has been very mixed but the Cuban government is very interested in attracting more foreign investment from several countries in part because of the recent loss of foreign governmental support to its economy from Brazil and Venezuela.

What are the most common investment opportunities that companies are looking into in Cuba? What are some of the challenges that companies should expect in those sectors?

The travel, hotel, and telecom markets present the greatest opportunities. It is important to recognize that the Cuban government maintains a tight control on 80% to 90% of the market, and certain sectors are not open for foreign investment and/or Cuban government licenses may be required. For example, although certain cruise lines have been granted Cuban licenses to operate, several are still waiting for their licenses and no ferry operators have been granted licenses. The Cuban government—under pressure from Carnival Cruise Line, which was sued in the United States—had to amend its law prohibiting Cuban-Americans from traveling to Cuba by vessel.