Fantasy Island

This week’s surprise rapprochement with Cuba raises tantalizing prospects for U.S. companies: the decades-long American embargo could be lifted, giving the firms access they haven’t seen since Fidel Castro unceremoniously kicked them out and nationalized everything from oil to rum more than 50 years ago. It also raises a difficult question: will Cuban strongman Raul Castro invite the companies back on terms they can actually live with?

The changes President Barack Obama announced Wednesday create openings for specific industries, including agriculture, telecommunications, and construction equipment. The administration also made several changes that will make the process of doing business with Cuba a little less cumbersome. Travel restrictions were loosened, banks have the go-ahead to make direct connections to Cuban banks and travelers to the island can bring back up to $400 worth of local goods (though only $100 of that can be cigars and rum). Only $359 million worth of U.S. goods were exported to Cuba last year.

The potential for more travelers to Cuba has peaked the interest of U.S. tourism companies and more goods flowing back and forth could open an opportunity for shipping companies like UPS and FedEx. While the future is still uncertain, the diplomatic breakthrough gave U.S. executives something to think about on Thursday and many are contemplating what the Cuba market might offer. Major League Baseball teams, meanwhile, are salivating at the prospect of raiding the island for potential new superstars.

But those are still island fantasies for now — none of the changes take effect until the rules are officially changed, which regulators say will happen in the “coming weeks.”

While the normalization of relations with Cuba is a dramatic diplomatic breakthrough, a return to anything resembling business as usual may be much harder to achieve. The first hurdle will be dismantling the embargo, which bans Americans from traveling to the island or doing business with Cubans except under specific exemptions. The Obama administration needs the help of Congress to do that, and that appears unlikely with Republicans controlling both the House and the Senate for the first time in years. Some powerful lawmakers from both parties are already threatening to undo the limited changes the president made under his executive authority and block funds to build a new embassy in Havana.

Even if the embargo is lifted, the Castro government is unlikely to loosen the reins on the largely state-controlled economy unless it sees a political advantage to the change. That, in practice, could mean U.S. companies are allowed to enter Cuba under U.S. law, but Castro refuses to lift the restrictions and bureaucratic red tape that would still make it hard to do business in Cuba.

“There’s far more sizzle than there is steak,” said John Kavulich, senior policy advisor with the US Cuba Trade and Economic Council. “It’s only going to go as far as the Cuban government feels it is not going to be disruptive and no further,” said Kavulich.

In March, Cuba’s General Assembly passed a new law to encourage foreign investment. Some observers were initially encouraged by Castro’s acknowledgement of the need for outsiders to invest in his country. A recent solicitation from the Cuban government suggests officials see potential for foreigners to enter a wide array of sectors from pharmaceuticals to construction, but most of the projects require foreign companies to pair up with Cuban companies in joint ventures.

The opportunities outlined in the 168-page document are intriguing. Cuba needs a plant to make glass bottles, an instant dry yeast factory, and an enterprise to produce 70.5 million gallons of buffalo milk to make mozzarella. The government is seeking a $430 million investment in a cement plant in Holguin province. An investor with $9.5 million could get in on the business of transporting hotel workers and other tourism employees to and from their jobs.

Economist Richard Feinberg noted in a blog post that the investment document “offers fascinating insights into the current distressed state of the Cuban economy.” But so far it hasn’t resulted in any deals. Feinberg, who is a UC San Diego professor and Brookings fellow, was traveling in Cuba this week and did not respond to requests for further comment.

U.S. investors will be watching to see whether the Cuban government opens up the country in earnest, by allowing foreign companies to propose and execute their own projects, or continues to take the same top-down approach.

Cuba’s beleaguered economy will be another limiting factor for U.S. businesses – Cubans simply don’t have a lot of money to spend. The average person makes about $20 a month. And the Cuban government still has final say over what those consumers will be allowed to buy.

“The U.S. government can only influence so much, but I think what they’re trying to do is get rid of at least the U.S. barriers to private firms going into that space,” said Nelson Dong, a trade lawyer with law firm Dorsey & Whitney in Seattle.

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