The Associated Press is reporting that President Barack Obama will announce an agreement between Cuba and the United States to reopen embassies in each other's capitals after more than five decades. While official embassies have not existed since the 1960s, the two nations have operated diplomatic missions called “interest sections” in each other's capitals under the protection of Switzerland since the 1970s, but these sections do not enjoy the same status as full embassies.
The two countries have reportedly been negotiating the reestablishment of embassies following the historic December announcement that they would move to restore ties after a half-century of animosity. The U.S. embassy in Havana is expected to open in July.
As the International Business Times notes, the United Nations' opinion on whether or not to end the longstanding embargo on Cuba is “overwhelmingly” in favor of ending the trade sanctions; the European Union switched course on its position in the 1990s to support ending the embargo.
This is just one more step toward the re-normalization of relations between the U.S. and Cuba, but it is worth noting that the embargo restricting American trade with Cuba is still in place, as is the Helms-Burton Act that can impose sanctions on international businesses that wish to operate in both nations. There are, in fact, several challenges facing international companies (including hotels) that wish to operate in Cuba.
1. The Embargo and the Helms Burton Act
This goes without saying. The decades-long embargo (called the “blockade” in Cuba) still prevents most U.S.-based trade with the island nation, and the Helms Burton Act from 1996 has prevented many international businesses from operating in both countries for decades. (Some internationally based hotel companies, however, have been able to skirt the rules and open properties in both the U.S. and Cuba.) It will be very difficult for companies to legally operate in both countries until the United States officially lifts the embargo—making this the biggest challenge of all for international companies to overcome.
2. The dual-currency system
Cuba is a nation of two currencies: the CUP (the local currency for Cuban citizens) and the CUC (the “Cuban Convertible Peso” that international visitors can use). The CUC is accepted by businesses that are frequented by foreigners—in other words, many restaurants and shops. But the two-currency system has many drawbacks, especially for international companies that (as required by law) partner with the government. Most notably, the foreign company cannot pay its Cuban workers in CUCs, so international businesses pay the appropriate government agency their workers’ salaries, and the government then pays the workers in CUPs after taking a percentage. The system is confusing and frustrating and widely regarded as inefficient, so the government is already planning to scrap the CUC and make the CUP open to everyone.
3. Government regulations
The CUC/CUP situation is not the only holdup for international businesses looking to operate in Cuba. Government regulations prevent Cuban citizens from forming corporations, and prevent international businesses from purchasing land or forming a business venture with citizens. The only way for an international company to get a foothold in Cuba is to work with the government, which can present bureaucratic challenges.
Cuba's government, while eager to bring in foreign investment, is not interested in supporting foreign investors. That is to say, a foreign enterprise in Cuba has to have an immediate benefit to the Cuban people, rather than merely generating ROI for the international company. International businesses will also need to accept and work with Cuba's strong union system, which protects many of its workers.
4. Cuba’s credit situation
While the embargo is still officially in place, Cuba has been able to trade with the United States on a limited basis. In fact, much of the chicken consumed in the country is imported from U.S. farms. But the concept of credit and lending money is not part of the Cuban culture, and several citizens complained that all imports must be paid for immediately upon delivery—a rule not imposed on other nations, and one that takes up a good portion of the country’s cash flow.
This lack of credit manifests in other ways. Nearly every transaction is cash-only, and few businesses accept credit cards. (According to Cuba’s tourism website, credit cards are accepted when supported by: Transcard, Visa, MasterCard International, Access, International Bancomer, Eurocard, Banamex, Diners Club International, JCB and Carnet, provided they have not been issued by U.S. banks or their subsidiaries, as well as means of payment for national use issued by the International Financial Bank, and by the banks of Credit and Commerce, Metropolitan, Popular de Ahorro and BICSA.)
The challenge of debt and credit has already affected numerous international investors. According to a story published in The Hill earlier this year, there were 400 foreign companies operating in Cuba as minority partners in joint ventures with Cuba’s government in 2000. Today, there are fewer than 200. Reuters claimed that Cuba “failed to make some debt payments on schedule beginning in 2008, and then froze up to $1 billion in the accounts of foreign suppliers by the start of 2009." During the same time, the site reports that CEOs of various foreign companies doing business in Cuba were arrested.
5. The infrastructure
Havana’s infrastructure is in a state of flux. Nearly every street in the central and historic neighborhoods has some kind of improvement project underway. Historic streets paved in old brick are being re-paved with new cobblestones, buildings are covered with scaffolding, and painters are constantly improving facades. All of these projects, of course, will boost the city’s appeal for potential developers—but other improvements are still needed. For example, sewage systems in some areas are so fragile that they cannot handle toilet paper.
Havana’s international airport also needs a renovation in order to accommodate any increase in travelers. The small international departures lounge would need to be revamped to speed up the boarding process, and Wi-Fi would need to be installed to facilitate last-minute communications when travelers face delays or changes in plans. Even in the airport’s single VIP lounge (a bargain at $15 to get in), no Wi-Fi is available. The government, however, does not expect widespread telecommunications improvements until 2018.
Improved telecommunications and internet access would also make it easier for credit cards to be used throughout the country. Few U.S. businesses these days are cash-only, and most international travelers would want the option of using credit cards for guest transactions.
Other improvements could, in theory, happen very quickly once the embargo is lifted. For example, even in some high-end hotels, the public restrooms off the main lobby do not offer soap for guests to use, and toilet paper (if available at all) is dispensed from the main wall rather than available in each stall. With increased access to supplies, this could change rapidly and improve the overall guest experience, bringing it up to an international level.
There are, however, some definite benefits to doing business with Cuba.
1. A growing service sector
As a socialist country in which everyone is equal, Cuba has not had a strong service sector. In restaurants, waiters once would put a water glass on the table while touching the rim—where their guest’s lips would go in just a moment. Foreigners could eat in government-owned restaurants (where the food was, reportedly, not gourmet, and where locals were not allowed), and private companies were kept small by law. The government has eased these restrictions in recent years, leading to a massive rise in the private sector and in standards for both options and quality throughout a range of industries. As private restaurants called “Paladares” open throughout Havana, for example, government-owned eateries are improving both food and service in order to remain competitive. The rising tide is floating all boats, and the cash influx from these private businesses is supporting both the burgeoning middle class and overall infrastructure improvements through standard taxation.
The growing private sector has increased demand for high-end restaurants and hotels, and a new generation of workers are willing to cater to international-level service demands as tourism numbers rise. Workers at the "Paladares"—from chefs to waiters—are trained to provide service on par with what a guest would expect in any restaurant in New York, Paris or London.
2. A strong entrepreneurial spirit
The growth of the private sector in recent years has also given strength to a new generation of Cubans who are looking for niches and are eager to serve changing needs. The country’s first privately owned real estate agency opened recently, for example, and more than 300 categories are available to citizens for private licensure. Foreign partnerships and investment are expected to grow, and workers are eager to learn new skills from international professionals. As new demands evolve, new suppliers are stepping up to fit changing needs—and international businesses can profit from an eager workforce determined to prove their skills to the world at large.