Opportunity calls in the Cuban telecoms sector

Recent changes in US-Cuban political and economic relations provide unprecedented opportunities for US businesses in the telecommunications sector.

However, these companies will have to gauge whether the benefits offered by a largely untapped Cuban consumer market outweigh the risks associated with navigating persistent economic sanctions and working with a partner whose reliability is largely untested.

Late last year President Obama announced the restoration of diplomatic relations with Cuba. The two countries’ 54 year-long estrangement has long been viewed as an ideological hangover from the Cold War and counterproductive to both sides. The decision to reestablish ties was followed by the much-anticipated removal of Cuba from the US State Sponsors of Terrorism list.

From an economic point of view, the warming of relations between Cuba and the US opens up a number of commercial possibilities previously unavailable to firms in either country. The US Treasury Department seems to have considered these opportunities prior to releasing a revision of US economic policy towards Cuba in January. At least for now, these revisions mainly relate to US firms’ ability to operate and invest in the Cuban telecommunications market.

Previously, American companies could only facilitate third party operations on the island.  However, the US Treasury’s Office of Foreign Assets Control’s (OFAC) restructuring of pertinent regulations now allows for US companies to establish direct operations in Cuba, as well as forge partnerships with local and foreign third parties. US firms have already started to take small steps towards reengaging the island by forging bonds with government-run companies such as state-run internet services provider Empresa de Telecomunicaciones de Cuba (ETECSA).

The appeal of the Cuban telecommunications sector to foreign investors is clear. Currently, Cuba’s internet usage is one of the lowest in the world, with only 25% of its population of approximately 11 million having consistent access to what remain slow and highly restricted services monopolized by ETECSA.

However, as is the case with most new or emerging markets, US firms planning to do business with Havana face a number of risks and challenges. Some of the most pressing are posed by the US economic embargo, a complicated piece of legislation that will prove difficult to repeal due to its political sensitivity in the US. Adding to this are successive pieces of embargo-tightening legislation passed by the US Congress in 1992 and 1996 and strengthened further by the second Bush administration.

For now, the majority of US economic sanctions remain in place. This alone could discourage US firms from investing in the Cuban market, as fines imposed for violations – even inadvertent ones – could lead to significant financial penalties. OFAC could choose not to enforce what it considers unintentional violations of sanctions, although it is yet to clarify its position. Given this uncertainty, some US firms may be reluctant to navigate their way through existing sanctions and expose themselves to risk.

The lack of experience among US firms will also complicate attempts to gain a share of the Cuban market. Canadian and European firms have long enjoyed more amicable relations with Cuba and have built up track records in several key industries, including telecommunications.

It is similarly unclear whether or not the Cuban government will be a reliable partner to the US government any time soon. The Castro regime is likely to seek to control the rate at which US firms enter the market in order to stay competitive and prevent saturation of key sectors. This may prove frustrating to US firms accustomed to working with a multiplicity of stakeholders, both public and private, in other emerging markets.

Getting to know the Cuban market and avoiding potential pitfalls will inevitably take time and require investment from US firms. However, stronger political relations and an unencumbered Cuban telecommunications sector seem likely to foreshadow an even greater opening of the economy in the short to medium term. A tremendous incentive exists for those US firms that are aware of this and remain committed to operating within Cuba.

Eric Wheeler is an associate at The Risk Advisory Group.

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