Cuba Policy Shift Forces U.S. Businesses to Hit the Brakes

Trade Policy Cuba Policy Shift Forces U.S. Businesses to Hit the Brakes

Cuba Policy Shift Forces U.S. Businesses to Hit the Brakes • American companies were quick to announce business plans in Cuba under Obama • Now companies are taking a wait-and-see approach to impending Trump regulations • Cuba lobbying efforts on the rise amid uncertainty

By Andrew Wallender

Companies from American Airlines to Paypal to Caterpillar eagerly announced their intent to operate in Cuba after President Barack Obama said the U.S. would normalize relations with that country.

Many such plans have stagnated, been cut back, or scrapped altogether, however, less than two years after the announcement.

The situation might become even more complicated for businesses operating or hoping to operate in Cuba now that President Donald Trump has announced a policy shift in U.S.-Cuba

relations. Those companies await guidance as new regulations are drafted, prolonging uncertainty on Cuban policy.

“The thing is that everything’s in pause right now,” Cuba Study Group Executive Director Andrew Otazo told Bloomberg BNA. “It all depends on how the regulations are written. So it’s actually a very hairy proposition.”

Marriott Hotels, which has one hotel open in Cuba and another in the works, is just one of a number of companies hitting pause as they await regulations to better understand how operations will be affected.

The hotel chain’s “current and planned operations in Cuba may depend on related forthcoming regulations,” according to company statement released following Trump’s policy announcement.

No, Scratch That Trump clarified his administration’s approach in a speech June 16 in Miami’s Little Havana neighborhood.

“Effective immediately, I am canceling the last administration’s completely one-sided deal with Cuba,” Trump announced at the event.

But the reality is more complicated.

Diplomatic relations with Cuba remain in place, as does Obama’s termination of the wet-foot, dry-foot policy, which allowed Cubans reaching the U.S. to seek residency.

Trump’s policy change makes it harder for Americans to visit Cuba. Americans could arrange self-directed, individual travel for non-academic educational purposes under Obama regulations, although U.S. law bans American tourism to Cuba. But not under Trump’s revised policies.

A major goal for the Trump administration is to restrict the spending of U.S. companies with establishments controlled by the Cuban military monopoly, Grupo de Administración Empresarial (GAESA).

GAESA companies account for a majority of the business revenue in Cuba, according to a 2015 Bloomberg Markets report. Almost all the retail chains in Cuba are owned by GAESA, as are dozens of hotels, restaurants, and gasoline stations.

“You cannot do substantial business in Cuba unless you’re in touch with the Castro family, the Castro dynasty,” Center for a Free Cuba Executive Director Frank Calzon told Bloomberg BNA. The tight control the Cuban government has over Cuban business has meant that the presence of U.S. companies in Cuba has led to minimal benefits to the Cuban people, Calzon said.

The decision to focus on GAESA is a setback for Marriott-owned Starwood Hotels, which operates the only American-run hotel in Cuba. Though Starwood maintains the hotel, it is actually owned by Gaviota, a Cuban tourism group which is a subentity of GAESA.

New Rules in September?

The next shoe to drop will be the upcoming regulations from the administration on how business can be conducted by the U.S. with Cuban companies. It remains unclear whether new regulations will exempt previous contracts.

The Treasury Department’s Office of Foreign Assets Control and the Commerce Department’s Bureau of Industry and Security are drafting the new policy. Regulations are expected in September, although they have no mandatory due date, U.S.-Cuba Trade and Economic Council President John Kavulich told Bloomberg BNA. The Treasury and Commerce departments did not respond to requests for comment.

Cuba’s airports and cruise ship terminals are not controlled by GAESA, although the group controls the country’s marinas, according to a Reuters report.

Airbnb properties, which are operated by private citizens rather than the government, will likely skirt around new regulations and remain an option for travelers, according to Otazo.

Americans seeking to travel to the island could have a hard time navigating which companies are GAESA and which aren’t. The State Department will publish a list of prohibited businesses that Americans cannot engage with, according to a Treasury fact sheet. But navigating hundreds of prohibited businesses will make travel to Cuba tricky, even with a list, Kavulich said.

Treasury signaled in late July that the list of prohibited businesses may be larger than thought initially.

The agency released an updated fact sheet on Trump’s Cuba announcement at the end of July and expanded the scope of prohibitions to subentities of prohibited entities. The inclusion of subentities may have far-reaching consequences, Kavulich said.

That means that American interest in traveling to Cuba, already low, may dip lower. And that’s bad news for the travel and hospitality industry, which has been quick to establish a presence in Cuba.

Send Me to Havana The anticipated rush of U.S. travelers to Cuba never quite materialized after Obama’s détente with the country. Nearly every airline that initially announced plans to expand into Cuba cut back service or eliminated it entirely.

Spirit Airlines spokesman Paul Berry said few travelers were flying the carrier’s flights to Cuba, making the route unsustainable.

“We gave it six months to see what would happen, but then it was clear that there is not a wide interest in flying to Cuba,” Berry said. “We wanted it to work. It just didn’t.”

Spirit Airlines, Silver Airlines, and Frontier Airlines have all completely cut service to Cuba.

American Airlines and JetBlue Airways have reduced service or cut capacity since breaking into the Cuban market.

Despite capacity and service reductions, JetBlue, American, and Delta Airlines requested approval from the Department of Transportation in April for additional flights to Havana, which appears a more profitable market than other destinations on the island. Alaska Airlines also flies to Cuba with a daily non-stop flight from Los Angeles.

A spokeswoman for Alaska Airlines, which offers the only service to Cuba from the West Coast, said that the Seattle-based airline is happy with the “service ramp-up so far, and we’re seeing good momentum going forward.”

American Airlines declined additional comment beyond a short Q&A posted in a June 22 company newsletter, which said American will “continually evaluate our network to ensure we are maximizing our profitability while matching supply with demand, and Cuba is no exception.”

Despite the lower-than-anticipated interest in flights to Cuba, cruises are attracting more travelers than airlines, according to Otazo. He said Norwegian Cruise Line and Carnival Cruise Line have been ramping up voyages to the island, as have a number of smaller cruise lines.

Carnival cruises will be unaffected by Trump’s shift in policy, as passengers qualify for travel under the 12 forms of travel approved by the U.S. government, Carnival Corp. confirmed in a statement to Bloomberg BNA. In fact, Carnival is seeking approval to expand its cruise offerings in Cuba. Carnival currently has trips to Cuba scheduled through May 2018 on both its Carnival Cruise Line and Holland American Line. It is seeking approval to expand Cuba offerings to its other cruise line holdings.

“Our experience in Cuba this past year has been extremely positive,” the Carnival statement read.

Additional approvals may be a hard sell for an administration that is cracking down on travel to Cuba, though.

U.S. government agencies were quick to respond to businesses during the Obama era because there was a general climate of cooperation with Cuba, according to Tomas Bilbao, the managing director of consulting firm Avila Strategies and former executive director of the Cuba Study Group.

“Don’t underestimate the importance of a change in rhetoric,” Bilbao told Bloomberg BNA.

Great Anticipation, Greater Disappointment Only about 50 U.S. companies are operating in Cuba, most of which offer services to travelers, Kavulich said.

It’s not for lack of trying that American companies have a small presence in the Cuban market.

The problem lies in the fact that the Obama and Castro governments didn’t take more concrete steps in passing legislation and that companies did not lobby harder for change, Kavulich said.

“We couldn’t deliver on legislation, we couldn’t deliver on regulation, we couldn’t deliver on policy,” Kavulich said. “The big stuff that companies needed.”

Obama simply created “a crack in the door” to operate around the U.S. embargo, a business lobbyist with experience in U.S.-Cuba policy told Bloomberg BNA. The approach meant that companies were primarily left to pursue business through licensing deals, as Starwood Hotels did with their property in Havana.

Cleber LLC, an Alabama-based company that produces small farm tractors, tried to go beyond a licensing deal. The business spent months pursuing plans to open a manufacturing plant in Cuba’s Mariel Special Economic Development Plan.

The company received U.S. approval and Obama even touted the business during his 2016 visit to Cuba as “the first U.S. company to build a factory here in more than 50 years.” But Cuba in November declined the company’s request to build a factory.

Cuban authorities told Cleber that its tractor technology was too low-tech, but Cleber co-founder Horace Clemmons told Bloomberg BNA that he believes Cuba didn’t want to allow a U.S. company to establish a manufacturing plant on the island while the embargo stands.

“That would have been a major concession that the Cubans would have made without the embargo lifted,” Clemmons said of his company’s plans to open a factory. He later added, “I have consistently said that we’re never going to be successful until the embargo is lifted.”

The U.S. government encouraged companies to pursue business opportunities in Cuba while the embargo was in place. Former Small Business Administration (SBA) Administrator Maria Contreras-Sweet accompanied Obama on his March 2016 trip to the island and returned in June 2016 to discuss opportunities for entrepreneurship in Cuba.

Contreras-Sweet even encouraged entrepreneurs to consider SBA loans to engage in the Cuban market, according to an August 2016 Fortune article. It is unclear whether any loans were taken out from the SBA for the purpose of Cuban business plans. The SBA declined comment, and Contreras-Sweet couldn’t be reached for comment.

U.S. financial firms also found it challenging to establish a presence in Cuba. Paypal-owned remittance provider Xoom and online payment company Stripe both announced plans to expand into Cuba in 2016. But Cuba isn’t currently listed as a supported country for either company.

Both Paypal and Stripe didn’t reply to requests for comment.

Western Union has allowed money transfers to Cuba from the U.S. since 1999 and expanded to allow money transfers worldwide to Cuba in 2016. Western Union doesn’t expect new

regulations to affect the sending of remittances, according to a statement issued to Bloomberg BNA.

Time to Speak Up The pending U.S. regulations on Cuba paired with Congress’s lack of action on Cuba reform will likely spur an uptick in Cuba lobbying, Otazo said.

Engage Cuba, one of the leading lobbying groups on Cuba policy, retained a secondary lobbying firm in the days leading up to Trump’s Cuba policy announcement, according to lobbying disclosure forms. Total lobbying spending by Engage Cuba increased from $50,000 in the first quarter of 2017 to $80,000 in the second quarter.

Even smaller organizations with a stake in Cuba are upping lobbying efforts following Trump’s clarity on Cuba.

The New York-based Roswell Park Cancer Institute partnered with Cuba’s Center for Molecular Immunology to begin a clinical trial of an immunotherapy vaccine in January. Roswell Park hired law firm Akin Gump in March, raising lobbying spending from $20,000 in the first quarter of 2017 to $90,000 in the second quarter.

A spokeswoman for Roswell Park said no new regulations have yet taken effect that affect the clinical trial.

“We’ve retained Akin Gump because of their expertise in international law and in U.S.–Cuba relations in particular,” spokeswoman Annie Deck-Miller said. “Their guidance keeps us up-todate and also helps us to inform lawmakers about our work to develop promising cancer therapies.”

At least 90 second quarter 2017 lobbying reports listed Cuba as a lobbying issue, according to a Bloomberg BNA analysis of lobbying disclosure forms. Organizations lobbying on Cuba included Marriott, American Airlines, and Airbnb.

That number is up from the first quarter of 2017 when about 80 lobbying reports listed Cuba as a specific lobbying issue.

Otazo said companies and lobbying firms were taking a wait-and-see approach the first months of Trump’s presidency. “They didn’t want to antagonize the Trump administration as they were going through the policy review,” Otazo said.

The U.S. Chamber of Commerce, which is home to the U.S.-Cuba Business Council, declined to be interviewed for this piece.

The inability of lobbying firms during the Obama administration to deliver on substantial regulation, policy, and legislation and the sudden ramp up in lobbying under Trump is “appalling,” Kavulich said.

“U.S. companies should be doing the advocacy or the lobbying directly.” Lobbying the Commerce Department, Treasury Department, National Security Council, and National Economic Council probably would lead to the best returns, Kavulich added.

At least 11 bills proposing easing relations with Cuba have been introduced in both chambers of Congress since January. None of the bills has left committee.

One bill introduced in May by Sen. Jeff Flake (R-Ariz.) has 54 co-sponsors, suggesting it could have the needed support in the Senate, although there has been no committee action to date.

Flake’s Freedom for Americans to Travel to Cuba Act of 2017 would allow Americans to travel to Cuba and conduct transactions on the island using U.S. financial institutions.

Step Forward or Backward?

Reaction to Trump’s policy announcement on Cuba remains mixed.

Calzon said the president’s action is a step in the right direction because it enforces current laws.

“What could be said is the policy of the [former] president on Cuba went around American law, and I don’t think that’s a good principle,” Calzon said. “What we would like is the Cuban policy and any other foreign policy to be based on the law.”

Any shift in Cuban trade and travel regulations should be undertaken by Congress, Calzon said.

Businesses are quick to point out, however, that the best way to bring about lasting change in Cuba is to have a U.S. presence in the country.

“More engagement is better than less,” a business lobbyist who works on Cuban trade issues told Bloomberg BNA. “Getting in and being able to influence on the ground is usually more effective than walking away.”

Some analysts said they worry that foreign companies from the European Union to China are establishing a foothold in Cuba, while U.S. businesses remain entangled by U.S. government regulations.

It takes just one foreign company in Cuba to disrupt an industry and the prospect of a U.S. firm winning the Cuban government’s approval, Bilbao said. He added that Trump’s policies will likely hurt U.S. companies.

“I think it’s ill-conceived, I think it’s naïve, and I think it’s counterproductive, especially for an administration that claims to be bringing back American jobs,” Bilbao said.

By Andrew Wallender To contact the reporter on this story: Andrew Wallender in Washington at awallender@bna.com To contact the editor responsible for this story: Jerome Ashton at jashton@bna.com