Havana Calling

On January 15, the U.S. Treasury Department announced a significant easing of the 54-year-old embargo on Cuba, implementing U.S. President Barack Obama’s landmark policy shift toward the island. As part of the change, the Office of Foreign Assets Control (OFAC) amended regulations allowing some U.S. businesses to enter the Cuban market. Among the many new rules, the dramatic loosening of restrictions on telecommunications investment has the greatest potential to accelerate the growth of civil society in Cuba. The revised telecom regulations can empower reform-minded elements in the country and promote political change by lessening sector dependence on the Castro regime. At the same time, the new regulations provide U.S. companies with immediate economic opportunities, so long as they are willing to bear the administrative and bureaucratic burdens of conducting business on the island. U.S. firms’ increased involvement in the country—while not free of business risks—could pay political dividends by promoting the development of market and political reforms.

DIALING ABROAD

It was no accident that Obama targeted Cuban citizens’ access to the Internet and other telecommunications services: Cuba has one of the lowest levels of Internet penetration in the world. According to the International Telecommunication Union, only 25 percent of Cubans have access to the Web, and those connections are slow and often monitored by the government. Meanwhile, Cuban telecom penetration rates are the lowest in Latin America: ETECSA, Cuba’s sole telephone company, serves only 18 percent of Cubans—a lower percentage than war-torn Afghanistan. Increasing Internet access will have economic and political benefits for the Cuban people, as Internet connectivity can drive long-term economic development by facilitating efficient information distribution, lowering transaction costs, and reducing barriers to entry for entrepreneurs. According to the World Bank, there is a 1.3 percent rise in economic growth for every ten-percentage-point increase in a country’s high-speed Internet connections.

Cuba’s underserved and largely untapped communications market is an enticing opportunity for U.S. companies. The U.S. Treasury and Commerce Departments’ regulatory amendments expand upon previous permissions granted to U.S. companies that provide telecommunications and Internet services, as well as those working on Cuban infrastructure projects. The revised rules clarify old ambiguities: former regulations prohibited any investment in the Cuban domestic telecommunications network but also authorized the provision of services that linked third-party nations to the island. Owing partly to the difficulty of determining when third-party services were terminated within Cuba, U.S. telecom and IT companies avoided the country altogether. Although telecommunications companies are now permitted to conduct transactions that establish mechanisms for commercial telecom services on the island, a patchwork of other U.S. restrictions remains in place. Several decades’ worth of overlapping sanctions may still deter some U.S. firms from entering Cuban markets in the first place, as doing business in a country subject to some sanctions—even if said sanctions are unrelated to the sector in question—increases the risk of running afoul of U.S. law, resulting in hundreds of millions of dollars in fines.

Most U.S. businesses do not have experience operating in Cuba, since the country has been the subject of a comprehensive American trade embargo for over five decades. Learning how to operate in Cuban markets—including understanding the bureaucracy, the consumer base, and the two national currencies used, among other factors—presents significant challenges that may deter many U.S. firms from seeking business opportunities there. Some American companies may also have to play catch-up with European, Asian, and North American competitors that have taken advantage of the embargo to gain a foothold in Cuba. For example, Canadian mining companies have decades-long relationships with the Cuban government for the extraction of metals, while European telecommunications giants have partnered with the government for many years to run ETECSA. 

EXPANDING CUBA’S BANDWIDTH

Developing Cuba’s telecommunications sector could lead to significant economic expansion and increased information flow into the country. And there are a number of steps the Obama administration can take to help the chances for success.

To spur growth and lessen industry fears, OFAC could go further in encouraging telecommunications companies to do business in Cuba. In particular, OFAC could issue guidance to clarify that U.S. telecommunications companies will not be punished if they unintentionally violate U.S. sanctions on Cuba while trying to engage in permitted activities. Likewise, OFAC could clarify that U.S. Internet and telecom operators are permitted to fund new Cuban small businesses, acting as franchisees and resellers of telecom, IT services, and equipment. New regulations now allow for the establishment of stores directly owned by U.S. telecom companies to sell goods and services but are less clear on whether franchising or subcontracting to Cubans is permitted.

The U.S. Treasury can also do more to guide companies that are considering investing in Cuba but are struggling to determine what activities are now possible. Although the new regulations are instructive, it is often difficult to pinpoint how the prohibitions apply to particular deals and transactions. Setting up an OFAC hot line dedicated to Cuba-related issues would go a long way in establishing an open channel between U.S. firms and the regulators charged with interpreting the new rules. Conference calls akin to the “Direct Line” program set up by the State Department to enable U.S. businesses to engage directly with ambassadors and relevant policymakers would reassure U.S. companies, helping them better protect themselves from inadvertently violating sanctions that are still in place.

MISSED CONNECTIONS

Although easing the U.S. embargo is a step in the right direction, promoting Cuba’s economic development and political liberalization will be a long process fraught with pitfalls and opportunities for failure. Politically, much of the U.S. public supports the thaw in U.S.-Cuban relations, but many in Congress—including a number of potential Republican presidential candidates—have expressed misgivings about the sanctions relief granted to Cuba and have announced their intention to undermine Obama’s initiative. Senator Marco Rubio (R-Fla.) noted that he “intend[s] to use [his] role as incoming Chairman of the Senate Foreign Relations Committee’s Western Hemisphere subcommittee to make every effort to block this dangerous and desperate attempt by the President to burnish his legacy at the Cuban people’s expense.” Republican representatives are also considering defunding any embassy established in Havana, as well as blocking Obama’s nomination of a U.S. ambassador. Likewise, former Governor Jeb Bush (R-Fla.) recently suggested that he thought the embargo on Cuba should be strengthened, not weakened. In the same way that members of Congress have posed significant challenges to Obama’s attempts to strike a deal with Iran over its nuclear program by threatening to pass additional sanctions legislation, here too Congress could take a number of steps to derail improving relations.

Although normalized U.S.-Cuban relations mark early signs of political and diplomatic progress, the Cuban government has not significantly altered its political policies in response to U.S. concessions. Soon after Obama’s announcement, Cuban President Raúl Castro proclaimed that although the United States may have changed its position on the embargo, Cuba intends to continue along its socialist economic and political path. For the development of the telecommunications sector to have the intended effect of bringing Cubans information from the outside world, and for U.S. companies to become involved, Cubans will need the kind of Internet access that the government will be loath to grant. But unlike in the past, Havana will no longer have the U.S. embargo to blame.

By loosening restrictions on IT and the telecommunications sectors, the Obama administration targeted an area where U.S. companies can lead while also enabling the Cuban people to gain access to information they have lacked for many decades. At its core, the new policy reflects the administration’s belief that the Cuban people themselves, integrated into the global information community after decades of isolation, will be the best agents for peaceful democratic change in a post-Fidel Cuba. The new regulations were prescient first steps. Washington should now take the actions necessary to maximize their effectiveness.