Global Economics

New Cuba Policy Is No Business Home Run


Obama's moves toward Cuba may not mean quick benefits to many U.S. businesses, but long-term advantages in telecom could bring a windfall

Thomas Herzfeld's clients may have been the first to profit from President Barack Obama's decision to ease sanctions on Cuba. In the hours after Washington liberalized rules on visits to Cuba and U.S. telecommunications ventures there, investors flocked to Herzfeld's Caribbean Basin Fund, which invests in companies that could gain from a thaw in U.S.-Cuban relations, and shares jumped by 41%. "There will be a boom in Cuba and throughout the Caribbean" as Havana opens up, Herzfeld says. "The entire country will have to be rebuilt."

His investors may also be among the few to see any quick benefit from the business opening the White House announced on Apr. 13. The Obama initiative permits only Cuban Americans, and not all U.S. residents, to travel to Cuba; and it welcomes the licensing only of telecommunications and a few other companies, rather than a broader array of businesses that Obama might have included. "I'm sure there was a measure of disappointment" among Cuba's leaders, says Anya Landau French, a Cuba expert at the Lexington Institute in Washington. "They probably expected more in terms of engagement."

Havana certainly didn't seem to be overwhelmed. "The measure easing restrictions on trips in and of itself is positive, but minimal," longtime leader Fidel Castro wrote on Apr. 14 in Juventud Rebelde, a daily published by the Communist Party's youth wing. "Many others are needed." It remains to be seen whether Castro's brother Raúl—who took over as President last year—will embrace Obama's gesture by issuing licenses now permitted under U.S. rules to U.S. cell-phone, Internet, and satellite-television companies.

The trade embargo, slapped on Cuba in 1962, has long been the most contentious issue between the two neighbors. Washington hoped it would turn the people against Castro, but Cuba muddled through with a helping hand from Moscow. After that aid dried up, many Cubans could barely put dinner on the table. Then in 2000, Washington allowed U.S. companies to sell limited quantities of meat, grain, and medical equipment to Cuba. Over the years, though, Castro has been able to spin the embargo as evidence of "cruel" U.S. policies that use human suffering as a means of political pressure.

Just a Gesture?

While Cuban exiles in Florida—a key political constituency—have long backed the embargo, their support has waned enough in recent years that Obama managed to win the state despite promises to loosen the restrictions. So some U.S. experts say he could have been bolder: The embargo itself is relatively flexible, allowing the U.S. President to permit a broad range of nonfinancial companies to do business there, says Jake Colvin, a Cuba expert at the National Foreign Trade Council.

One open question is Obama's intentions. Was he simply fulfilling a campaign vow, or perhaps attempting to reduce the heat from the Latin American leaders he is scheduled to meet Apr. 17-19 at a regional summit in Trinidad & Tobago? Or was the move the start of a fuller opening? "We hope he will pursue a new policy based on engagement," says Bill Lane, Washington representative for Caterpillar (CAT), the construction machine-maker.

What's clear is that Cuba today won't offer the kind of opportunities seen in Eastern Europe, the Soviet Union, and China during the 1990s. All of those markets were all-but-untouched by Western companies, creating a scramble for the huge potential profits. Cuba, by contrast, is already open to Europeans and Canadians, who have a head start on the Americans.

Legit Telecom Opportunity

Still, telecommunications could be an exception. Currently, there are just 11 fixed-line phones for every 100 Cubans, and many of those are in offices rather than homes. Even fewer Cubans own mobile phones, cost 50¢-60¢ per minute for calls and a $60 activation charge—in a country where the average monthly wage is just $19. As for the Internet, Cuba has just 11.6 users per 100 inhabitants, compared with 21 in Mexico and 73 in the U.S.

There is some reason to believe that Havana will eventually go along with the telecom offer: Because transactions must be conducted at the official exchange rate of one Cuban peso to a dollar (the black market rate is 23 pesos to a dollar), the government stands to earn a windfall. Still, the Castro regime, which continues to control Internet access strictly, may balk at putting such enabling technology into the hands of millions. The question is how fast and far U.S. politicians are willing to put aside almost five decades of a policy that has gone nowhere—and how willing the Castros are to test-drive a tentative market opening with a new U.S. Administration.

LeVine is a correspondent in BusinessWeek's Washington bureau. Smith is BusinessWeek's Mexico bureau chief.

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