Latin America

Cuba-US ties improve, but businesses still face obstacles

The sun sets over Havana on the evening before the U.S. officially reopens their embassy after 54 years.
Justin Solomon | CNBC

In 1959, one of the first official acts of a young Fidel Castro was to nationalize private property that resulted in the mass expulsion of foreign companies from Cuba. Fast forward to five decades later, where a diplomatic thaw is underway between the island and the world's largest economy, but businesses are still in the dock awaiting opportunities to profit from the evolving détente.

With Barack Obama preparing to become the first U.S. president in decades to visit the nation this month, the economic blockade — which can only be lifted by Congress — remains in force. That suggests American companies are unlikely to reap the benefits of the new relationship between the two countries — at least not right away, even as the White House has eased restrictions on travel and remittances.

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Recent moves by the U.S. to normalize relations with Cuba haven't opened the floodgates for foreign investment, and observers say domestic Cuban businesses are still adapting to the new reality. Beginning in 2010, the island saw a boom in start-ups, which have increased from 150,000 to more than 500,000 in the last five years, according to Cuban government data.

That being said, the state of Cuban entrepreneurs, or "cuentapropistas," as they are called, remains "incipient" due to being suppressed by the Communist government, said Ted Henken, an author and professor at Baruch College in New York.

Owning a business in Cuba is a "struggle," Henken, a sociologist who has written extensively on the Cuban economy, told CNBC in a recent interview.

'Suiting the needs of Cuban community'

The government really needs to consider going deeper and faster … people are getting frustrated and immigrating.
Ted Henken
Author and Sociologist

A few businesses have found limited success working within the barriers erected by the Cuban government. Airbnb managed to crack the Cuban market following normalized relations by listing rentals in the country, and has managed to navigate successfully the payment problems vendors and consumers often encounter.

"Through intermediaries, we are able to deposit funds into many of our Cuban hosts' bank accounts," Jordi Torres Mallol, regional director at Airbnb Latin America, told CNBC in a recent interview.

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"For hosts who aren't able to accept funds this way, we have partnered with a third party to remit payments in the manner that our Cuban hosts select, including door-to-door delivery of payments," Torres said, with Airbnb insisting such payments are "authorized transactions" despite the ban on dollar-denominated transactions in Cuba.

"As [the] banking infrastructure in Cuba evolves, we will reevaluate our payment procedures to suit the needs of our Cuban host community," Airbnb added.

Migration crisis in the background

American cars cruise the streets of Havana.
Justin Solomon | CNBC

The U.S.-Cuba Trade and Economic Council points out that since December 2014 — when Obama first announced measures to restore diplomatic ties with Cuba — the Cuban government has not yet moved to lift restrictions that would facilitate freer trade and commerce with and within the island's borders. These include letting U.S. companies export directly to the country, authorizing credit card use on the more than 10,000 points of sale in Cuba, and letting U.S. companies establish an operational presence on the island, the council says.

The latter point is of particular interest to American multinational corporations, which by most indications are eager to do business on the island. Telecommunications companies like IDT have already struck deals with Cuba's national telecom provider to handle international calls to the country.

Baruch's Henken said that Cuba's "centralized state-socialist economic system" destroyed key financial institutions, payment and financing systems, which is impeding Cubans from fully participating in e-commerce, hampered its already limited technological reach — and sparked a mass exodus of Cubans trying to reach the U.S.

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Ironically, Cuban migration has reached crisis proportions despite the promise of a new relationship with its decadeslong antagonist. According to Pew Research, the number of Cubans who entered the U.S. after December 2014 spiked a dramatic 78 percent in a year, with thousands more currently streaming across Central America and Mexico to enter the U.S.

"While there's been significant progress, it hasn't been sufficient," Henken noted. "The government really needs to consider going deeper and faster … people are getting frustrated and immigrating."

The former General Electric offices in Havana, where workers are building a new school.
Justin Solomon | CNBC

The Cuban government's inertia on key issues pertaining to domestic freedom has given ammunition to critics such as New Jersey Democratic Sen. Bob Menendez, a Cuban-American who has sharply criticized the Obama administration's normalization efforts.

"We've seen multiple steps that have shifted leverage to the Castro regime: Travel, finance and commerce regulations have been eased, Cuba has been removed from the State Sponsors of Terrorism list and an embassy has opened, Menendez said in a recent statement. "However, since these sweeping changes started in December 2014, Cubans have been beaten, arrested and repressed at higher rates than ever before."

Organizations such as Amnesty International have faulted Cuba for its restrictions on journalists and political opponents of the government — points that Menendez argued should be on the table in discussions over U.S.-Cuba relations.

"To this day, we have not seen one substantial step toward transparent democratic elections, improved human rights, freedom of assembly or the ability to form independent political parties and trade unions in Cuba," the senator added.

With those factors in the background, cuentapropistas face struggles trying to tap the free market. Although self-employment licenses have exploded in growth over the last few years, critics say that skilled workers are widely monitored by the government and encounter barriers to cracking the entrepreneur market.

However, optimism over the boom in cuentapropistas still remains high. Observers such as Hugo Cancio, president and CEO of Fuego Enterprises, said last year that "businesses are flourishing, and people are now seeking new opportunities."

One of those avenues of opportunity is the Internet. Finding free WiFi hotspots in the United States may only be a Starbucks or a local cafe away, but for Cubans, it can cost as much as 10 percent of their monthly salary to access Wi-Fi for an hour.

Recently, the Cuban governments halved usage charges to $2 an hour — still a sizable chunk of the average Cuban salary of $20 a month.

"Wi-Fi hotspots have become quite a phenomenon in Cuba, partly because it's new and also because it's public," Henken told CNBC.