Cuba - Coming in From the Cold

David Jessop, Director of the Cuba Initiative, looks at the trade and investment opportunities emerging from the changing relationship between Cuba and the US.

Last December, US President Barack Obama and Cuban President Raul Castro dropped a bombshell and since then everyone has been trying to work out where the pieces will land. When they announced the steps towards ‘normalising relations’ stock markets rose, politicians complained and Cubans celebrated on the streets. Now, almost four months on, analysts have a better idea of how this will impact businesses and investors.

"We can’t expect a deal immediately yet the medium-term prospects look good…"

Since last December the pace of change has been rapid. The US and Cuba have held two bilateral meetings which have rapidly expanded the dialogue.  So far the talks suggest that US companies could – eventually – gain access to wide-ranging parts of the Cuban economy.

The measures will make it easier for US exporters to sell goods in Cuba and vice versa; many more US citizens will be able to travel to Cuba; there would be tri-lateral talks initiated involving the US, Mexico and Cuba on the delimitation of maritime boundaries in the Gulf of Mexico, an area where significant oil reserves are likely to be found; US institutions will be permitted to open correspondent accounts at Cuban financial institutions; and US credit and debit cards will be permitted for use by travellers to Cuba. There was also a boon for US telecoms companies, which will eventually be allowed to improve the telecommunications and internet infrastructure linking the US and Cuba.

But it’s not just US companies that could benefit. The US has also revoked Cuba’s designation as a state sponsor of terrorism. This label has all but frozen many European investment and trade deals with Cuba as big international banks with US exposure faced swingeing fines if transactions contravened US rules.

Of course reversing half-century of diplomatic standoff has not been all plain-sailing. On the American side it’s important to note that the White House move to improve relations still doesn’t affect the trade embargo, which was made law by the Helms Burton Act of 1996. With the Republicans, who traditionally take a tougher line against Cuba, enjoying full control of Congress, it’s unlikely that Obama will be able to change that legislation in his presidency.

On the Cuban side, Castro has made clear that the process of full normalisation will be slow as long as the US embargo exists. Another sticking point is GuantanamoBay, which was leased to the US before the revolution, but has since been deemed an illegal occupation by Cuban authorities.

These types of hurdles make it clear that we can’t expect a deal immediately. Yet the medium-term prospects look good. On February 7th, talks between the two sides established a series of working groups to tackle some of these issues. They will also look at some of the thorny social issues, which can ultimately impact investments, such as human rights, marine protected areas and the prevention of migration fraud.

A window of opportunity

In practical terms for business this means that the window of opportunity to be able to invest and sell without US competition may be closing fast. At a recent event for British business organised by the Foreign and Commonwealth Office, the Minister of State, Hugh Swire, suggested that companies should act quickly to explore and enter the market. Although it’s difficult to forecast a time horizon for significant change in the US relationship, it may well be rapid. Many commentators suggest a timeframe of between two and five years, noting that most of the major US lobby groups are already active in Congress and are seeking to have the embargo loosened if not eventually removed.

So far British firms have been slow to seize the opportunity. Levels of UK-Cuba trade are very low with the UK exports to Cuba hitting £22million in 2013, down from £25million in 2012. Imports are slightly higher, hitting £105million in 2013, up from £33million in 2012. But that could be about to change. The Cuba Initiative (www.cuba-initiative.org), a bilateral body Chaired in the UK by Lord Hutton, a former Cabinet Minister led a high level investment mission to Cuba on April 27th 2015. It follows from a visit by Minister Swire last November the first by a British Minister for more than a decade.

Those UK businesses and investors that manage to establish a foothold in Cuba before the arrival of US interests should benefit from a general rise in asset prices when a flood of American money arrives.

A mix of sectors

Despite its Communist rhetoric Cuba’s government is welcoming foreign investors with open arms.  The adoption of Cuba’s new Foreign Investment Law last March, which establishes foreign investment as a priority for the future development of Cuba, allows foreign investment in all sectors except education, health and the armed forces and offers a variety of tax exemptions to overseas companies.

Cuba is placing emphasis on economic development zones starting with the 400 sq km zone at Mariel, outside Havana. This $900million, Brazilian-financed project involves a major new port, transhipment and logistics centre and associated special economic development zone. It is only about 90 miles from the United States and is adjacent to many of the major east-west global shipping lanes.  As such it forms an important part of the Government’s plans to create new joint ventures with foreign companies.

There are also many other opportunities for direct investment. One promising area is renewable energy, which includes wind, biomass, photovoltaic solar, hydropower and biogas. Indeed British firm, Havana Energy, is already involved in biomass projects in Cuba. Another area that should interest UK plc is mining, where there are considerable deposits of iron, nickel, gold, silver, zinc, lead, and cobalt. Oil companies will also be interested in Cuba’s ongoing search for hydrocarbons, which involves onshore and offshore basins. Anyone who has visited Cuba will now that transport infrastructure is also an area where there is lots to be done. Upcoming projects include a marina and port construction, railways and urban transport. One sector that is already established is tourism, and there are plans for new hotels, real estate developments and golf courses. British pharmaceutical firms may want to take a look at biotechnology both in relation to commercialisation and building plant for the production of medicines. The final sector worth noting is Cuban agribusiness, which desperately needs modernisation. Opportunities in this sector include commercialisation of sugar pork, beef and soya.

The scale of the opening for foreign investors is huge, though newcomers must be prepared for a lengthy process. It is a market which requires time, the need to build-up trust and a recognition that decisions are usually collegiate rather than made by an individual.

So what’s Cuba’s economy like?

The Cuban economy is expected to grow by 4% in 2015, rebounding from weak 2014 when it grew just 1.4%. This growth will be driven by infrastructure investment, a resurgent manufacturing sector and energy efficiency gains.

In 2013 Cuba imported over $13billion of goods and is heavily reliant on imports of food, oil, machinery and chemicals, with much of its imports coming from Venezuela and China. That, said the country is keen to diversify its economic relations and to build closer trade and investment links with Europe.  As far as exports are concerned Cuba exported over $6billion of goods in 2013 including sugar, tobacco, coffee and minerals such as nickel.