Cuba: chipping away at the embargo

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President Obama’s visit to Cuba this week has encouraged renewed speculation on the opening of investment opportunities for U.S. investors, despite the repeated caution in most news reports that high level political events are fast outpacing economic change (and certainly political change) on the island. Yet the Cuban government has made much more progress than the U.S. in eliminating legal obstacles to investment (more to come on this). The changes that have happened so far in the U.S., like the lifting of the travel ban, are cosmetic, in light of the edifice of prohibitions embodied in the legislation that constitutes the embargo. This post looks into some aspects of the embargo and the context for its repeal. A later post will look at investment opportunities in energy.

The Embargo

The economic sanctions against Cuba began two years after the fall of the Batista regime to the revolutionary forces of Fidel Castro, and grew over time to preclude a wider range of economic activities and require a stricter set of conditions to be met for sanctions to be lifted. Currently there are multiple statutes that constitute the embargo, with the most important dating from the 1990s (Cuban Democracy Act of 1992 and Helms-Burton Act of 1996), when restrictions were extended to non-U.S. nationals, and legislation explicitly forbade lifting the embargo in the absence of specific changes in Cuba.

The reach of this legislation is breath-taking. The Helms-Burton Act, for example, imposes 24 conditions for a transition government in Cuba to be recognized as such by the U.S. government, among them, that it include neither Fidel nor Raul Castro, that it make public assurances regarding the return of property confiscated to the U.S., and that it dissolve the Department of State Security in the Cuban Ministry of the Interior. Title IV of the Act also extends restrictions already imposed on foreign subsidiaries of U.S. companies in the Act of 1992 to include all persons who “traffic” in confiscated Cuban property, which is understood as anyone who:

“(i) sells, transfers, distributes, dispenses, brokers, manages, or otherwise disposes of confiscated property, or purchases, leases, receives, possesses, obtains control of, manages, uses, or otherwise acquires or holds an interest in confiscated property, (ii) engages in a commercial activity using or otherwise benefiting from confiscated property, or…” (Title IV, Sec. 4).

These are some serious sticking points. Companies seeking to restore hotels or build on property once expropriated may think twice at breaking the law and then inheriting a legal battle. The situation with the claims is complex, and increasingly so as the claims get inherited by multiple relatives with conflicting interests. There are some creative solutions to this problem floating around in the form of investors seeking to buy claims for resale or pooling into investment funds (see very interesting article in Slate), but resolution through these channels would still require nods of approval from the State Department, the SEC, and the Office of Foreign Assets Control (OFAC) of the Treasury Department, which enforces the embargo on Cuba.

Circumventing Helms-Burton, rather than repealing it, has so far been the path chosen, and precedent may pave the way for more deals. Three major U.S. companies (AT&T, Starwood and Marriott) were seeking to sign deals during Obama’s visit and made so public; they are all circumventing the embargo by acquiring special authorization by OFAC and other agencies to do business in Cuba. There is even an expropriation claim for USD 51 million against a property being purchased by Starwood, which presumably the two governments are seeking to resolve.

Other countries have also found ways of doing business with Cuba. In response to the extraterritorial extension of the embargo in the 1990s, many countries, including Mexico, Canada and the EU and its member states, passed measures to block the effect of U.S. sanctions on Cuba. These measures explicitly forbid compliance with the U.S. embargo and fine companies that do so. For example, the Mexican government fined a hotel for not accepting Cuban guests in response to the embargo. The U.S. government, in turn, has barred individuals that manage corporations that do business in Cuba from entering the country. And the beat goes on.

Overall, I would report decreasing patience in the U.S. and abroad with the labyrinth of restrictions imposed by the embargo.

A changing Republican Party

Repeal of the embargo hinges on the will of the Republicans, many of whom are in favor of turning a new page on the subject. Examples include Texas governor Greg Abbott, who was the second governor to visit the island sniffing for economic opportunity (the first being Gov. Cuomo of New York); the Republican dominated Senate that voted to lift some of the restrictions on travel; and, perhaps most surprisingly, the introduction of a bill “Cuba Trade Act of 2015” by Sen. Moran (R-KS) followed by a twin bill in the House, sponsored by Rep. Emmett (R-MN) and co-sponsored by Sen. Boozman (R-AR), to essentially repeal the embargo. While the bills died in committee (like most legislative bills) they are a bellwether of changing attitudes towards Cuba within the Republican party.

The old guard is mostly responsible for preventing change, both in Cuba, with the continuity of the brothers in power, and in the U.S., where Republican Reps. like Ileana Ros-Lehtinen and Mario Diaz-Balart, insist on a take-no-prisoners policy towards Cuba. A poll carried out by Florida International University in 2014 among Cuban-Americans in Miami-Dade county showed an overwhelming majority in favor of lifting travel restrictions and reestablishing diplomatic and business relations with Cuba. Unlike the representatives mentioned above, or the presidential hopefuls Marco Rubio and Ted Cruz, who represent the first wave of migrants from Cuba after 1959, the younger, more recent, migrants are not interested in settling the score with the Castros, but in improving conditions for the relatives they left behind and their ability to return to the island. It may take awhile for voter preferences to percolate up the party structure; at present, no one who openly rejects the embargo and promises to eliminate it could get elected in Miami. But eventually someone will seek to profit from changing preferences at the constituent level and eliminate the last obstacles to normalization of relations with Cuba.

 

For the latest details on changes to the embargo and what U.S. citizens are and are not allowed to do in relation to Cuba, see this and this documents from the Treasury Department.

 

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