The recent announcement by both the U.S. and Cuba that they intend to normalize their diplomatic relationship has been positively received by investors who see the potential for economic benefits to both parties. The perspective of less constrained economic relations has lowered the discount applied to the price of shares of companies operating in Cuba, such as Sherritt International, whose shares immediately gained.
At this stage, the perspective of free economic exchanges remains just a promise. Much of what has to happen for that promise to be realized will have to come from the U.S., as it is U.S. policies and laws that today prevent normal exchanges between the two countries.
U.S. legislations affecting relations with Cuba
Subsequent to the 1959 Cuban revolution, the United States imposed a general embargo against Cuba, later extended by the Helms-Burton Act.
The U.S. Embargo – The embargo is a set of laws that bar all U.S. citizens, residents, individuals and enterprises either located in the United States, organized under U.S. laws or owned or controlled by any of the above (unless specifically licensed) from participating in transactions involving Cuba, Cuban enterprises or any entity deemed to be owned or controlled by Cuba (actions defined as “trafficking”).
As a result, U.S. originated technology, U.S. originated goods, and many goods produced from U.S. originated components or with U.S. originated technology cannot under U.S. law be transferred to Cuba or used by non-U.S. companies when operating in Cuba.
As the foreign subsidiaries of U.S. enterprises are subject to the embargo’s prohibitions, foreign governments including Canada have enacted laws blocking the extraterritorial application of U.S. law to the locally registered subsidiaries of U.S. enterprises.
For foreign companies operating in Cuba, the embargo limits their access to U.S. capital, U.S. financing sources, and U.S. customers and suppliers.
The Helms-Burton Act – Separately from the embargo, the Helms-Burton Act authorizes U.S. nationals (or persons who have become U.S. nationals) to claim damages in U.S. courts against individuals or entities that use, profit from, or participate in the use or profit of Cuban properties that were confiscated from the claimant.
This law has never been applied as since its enactment all U.S. Presidents have exercised their authority to suspend the right of claimants to bring such lawsuits. Under Canadian law any judgment given under the Helms-Burton Act would not be recognized or be enforceable in Canada.
The threat of the Helms-Burton Act is however enough to discourage some investors, lenders, suppliers and customers from doing business with companies operating in Cuba, even though as regards investors the Helms-Burton Act explicitly excludes from the definition of trafficking “the trading or holding of securities publicly traded or held” – unless the trading is done with a company deemed to be owned or controlled by Cuba.
The U.S. perspective – The announcement of the intention to normalize diplomatic relations between Cuba and the U.S. was made in the U.S. by the President in his capacity as head of the executive branch. As per a fact sheet issued by the White House, the President will be able to use his executive power to for example open an embassy, work on common issues (such as migration, environment, drugs) and through regulatory changes ease travel and trade restrictions. However, government funding (such as funding for an embassy), confirming a new ambassador or repealing U.S. laws remain the privilege of Congress.
This is where politics will become conflictual as both Republicans and Democrats are divided on the new policy. The heaviest burden however will fall on Republicans given their new control of Congress. With a presidential election in two years they will have to balance the conflicting interests of various constituencies, like U.S. corporations wanting the freedom to operate in Cuba or the Cuban-American lobby, strong in Florida, opposing normalization without the removal of the current Cuban government. The politics promise to be murky and quick action to fully open up trade is unlikely.
The Cuban perspective – In his brief announcement, Raúl Castro, the current Cuban President, was clear that the normalization between the two countries has to be done “without detriment to the national independence
and self-determination of our people”, even praising
those who defended “our principles since the beginning
of our independence wars on 1868” – a period that encompasses not only three wars against colonial Spain but also targets the U.S. who, after Spain had capitulated, sidelined the Cuban leadership and in 1902 imposed its tutelage through a Cuban constitution that gave the U.S. the right to intervene in Cuban affairs and supervise its finances and foreign relations. The Cuban revolution of the 1950s did not happen in a vacuum.
In all likelihood the current Cuban government will hope for improved economic conditions without loss of control, like has been happening in China or Vietnam for example. Whether this will prove possible while being geographically so close to the U.S. and without any real language barriers remains to be seen – but it will be tried.
In any case, U.S. corporations hoping for a free for all will likely be disappointed – Cuba has an established legal system allowing it to deal fairly with foreign corporations while confidently preserving its own economic interests. Cuba has been a reliable partner to such corporations (Sherritt’s previous CEO and Chairman used to infer that Cuba was a more stable environment to do business than Alberta – there had been fewer changes in especially royalty regulations). It is to be expected that accommodating U.S. interests will be done on Cuba’s terms, with a caution and sensitivity enhanced by the memory of past U.S. behavior.
Frozen for fifty years, the relationship between Cuba and the U.S. has entered a new phase that will inevitably lead to more exchanges and more opportunities for Cubans, Americans and everyone else. What is less certain is how long this process will take, and how Cuba will evolve along the way – trying to balance its economic interests, its desire to maintain its independence, and what its people will want to keep from its political and social system.
24 December 2014
(Abridged version – 12 January 2015)
Reflections is published by Takota Asset Management Inc.
Information is drawn from Sherritt’s annual reports, which have a thorough description of the limitations currently imposed by U.S. law.
The third party information used in this document has been obtained from various published and unpublished sources considered to be reliable. However Takota Asset Management Inc. cannot guarantee its accuracy or completeness and thus do not accept liability for any direct or consequential losses arising from its use.