On July 20, 2015, diplomatic relations were officially restored between the U.S. and Cuba. Since that date, a number of significant political events have taken place. First, the U.S. reopened its embassy in Cuba on August 14, 2015. Next, on January 26, 2016, offices of the U.S. Departments of the Treasury and Commerce announced new amendments to the Cuban Assets Control Regulations and Export Administration Regulations. These amendments removed “existing restrictions on payment and financing terms for authorized exports and reexports to Cuba of items other than agricultural items or commodities,” and established “a case-by-case licensing policy for exports and reexports of items to meet the needs of the Cuban people, including those made to Cuban state-owned enterprises.” Additionally, these amendments “further facilitate travel to Cuba for authorized purposes by allowing blocked space, code-sharing, and leasing arrangements with Cuban airlines, authorizing additional travel-related and other transactions directly incident to the temporary sojourn of aircraft and vessels, and authorizing additional transactions related to professional meetings and other events, disaster preparedness and response projects, and information and informational materials, including transactions incident to professional media or artist productions in Cuba.” Finally, on March 21, 2016, President Barack Obama was the first sitting U.S. President to visit Cuba since the 1959 revolution, in which Fidel Castro overthrew Fulgencio Batista. This revolution ultimately led to the U.S. severing diplomatic relations in 1961 and President John F. Kennedy imposing a trade embargo between the U.S. and Cuba, which remains in effect today.
Noteworthy developments involving some U.S. construction companies and equipment manufacturers have occurred following the restoration of diplomatic relations. For example, the U.S. recently approved the construction of the first U.S.-operated factory in Cuba since the revolution. Specifically, “a two-man company from Alabama” has been authorized “to build a plant assembling as many as 1,000 small tractors a year for sale to private farmers in Cuba.” While the plant initially “will assemble commercially available components into a durable and easy-to-maintain 25-horsepower tractor selling for less than $10,000,” the two men “have plans to produce excavators, backhoes, trench-diggers and forklifts, equipment that’s badly needed across Cuba, where virtually all the infrastructure is crumbling after years of neglect and mismanagement and a lack of cash that the government blames on the embargo.” In addition, on April 7, 2016, for the first time, a number of U.S. companies participated in Havana’s 11th International Construction Fair, evidencing interest on the part of these companies to conduct business in Cuba.
However, even though the U.S. is relaxing some restrictions on the trade embargo with Cuba, U.S. construction companies and equipment manufacturers will not have the opportunity to conduct significant business in Cuba until the trade embargo is fully lifted. While President Obama has announced his desire for this to occur, only the U.S. Congress has such power. As of this time, there has been no indication when the U.S. Congress might take such action.
If the trade embargo is fully lifted, “Cuban demand for construction and agricultural machinery is likely to provide U.S. producers of such machinery with significant export opportunities in the near term.” Accordingly, on February 10, 2016, Caterpillar Inc. announced the selection of Rimco as its dealer for Cuba. According to Philip Kelliher, vice president with responsibility for the Americas & Europe Distribution Services Division, “Cuba needs access to the types of products that Caterpillar makes and, upon easing of trade restrictions, we look forward to providing the equipment needed to contribute to the building of Cuba’s infrastructure. This momentous announcement is part of our preparations in anticipation of the United States lifting its 55-year-old trade embargo on Cuba.”
Cuba is also counting on significant increases in tourism as restrictions on U.S. citizens traveling there are eased further. As such, it has “plans to expand its tourism industry and revitalize urban core areas, which will require significant construction of buildings and underlying infrastructure, as well as conservation of historic structures and neighborhoods.” Also, Cuba’s airports and seaports will require significant upgrades to accommodate any increased tourism. Due to the close proximity of these two countries, it is believed U.S. construction companies could strongly compete for a significant number of these vast revitalization opportunities in Cuba following Congress’ lifting of the trade embargo.
Nevertheless, even when the day comes when U.S. construction companies and equipment manufacturers are free to fully conduct business in Cuba, it is expected that they will “face major obstacles, which would include a multi-layered bureaucracy, an unpredictable legal system and a highly regimented labor market.”
First, conducting business or “starting up a company in Cuba means collaborating with the Cuban government and restrictions on how you hire workers. The foreign investment law allows for 100 percent foreign-owned companies, but the tax treatment, approval process and other restrictions means that it’s not practical. Most companies with foreign capital are 49/51 percent joint ventures with the government having control.”
Second, under Cuba’s 2014 Foreign Investment Act, “most business disputes must be settled in Cuban courts, although clauses stipulating international arbitration can be inserted in contracts if desired.’’ According to Jaime Suchlicki, director of the Institute for Cuban and Cuban-American Studies at the University of Miami, the “legal system offers no protection to foreign investors.” He also contends that there is “no independent judiciary.” Moreover, “trials and legal proceedings are conducted in secret.” According to Ted Piccone, senior fellow in foreign policy at the Brookings Institution, “there’s no transparency in the Cuban system, so it’s really hard for investors to know what they’re walking into.” It is also believed by some that “state control means the government can apply laws arbitrarily, based on political considerations.” It should also be noted that U.S. companies seeking to venture into Cuba “need to be especially aware of the perils of violating the U.S. Foreign Corrupt Practices Act, which makes it illegal for a U.S. company or individual to make payments to foreign officials to obtain business,” since Cuban officials control the economy.
Third, companies are precluded from hiring their own workers in Cuba. Rather, a “government employment agency dictates who works in foreign businesses and at what wage.” Cuba has a dual-currency system which include both convertible pesos (CUCs), “which can be exchanged for dollars but cannot be exchanged outside the island,” and national pesos, “which can’t be converted and are worth 1/25th of a CUC, for local use.” According to Jaime Suchlicki, the “agency also receives the workers’ salaries in CUCs and pays the workers a fraction of that amount in national pesos.” It is estimated that Cubans, on average, make approximately $20 per month.
Despite the many obstacles and risks likely to be encountered when conducting business in Cuba, multi-billion dollar opportunities for U.S. construction companies and equipment manufacturers just may exist a mere 90 miles away from Florida (specifically, from the Southernmost Point of the Continental U.S.). However, until the trade embargo is fully lifted by Congress, for most of these companies, the wait to be a part of a potential construction boom in Cuba must continue.
In the meantime, CSK will continue to monitor developments in these regards and will provide future updates as warranted.