Finance & DevelopmentFinanceHavana Libre! Managing Political Risk Through Investment Treaties

Havana Libre! Managing Political Risk Through Investment Treaties

Starwood Hotels & Resorts recently announced the opening of the 186-room Four Points Havana—the first hotel in Cuba to be managed by a U.S hospitality company since the Cuban Revolution. Starwood will renovate and operate the hotel, with the Cuban Government retaining ownership of the property. This is the first of three hotels that Starwood has agreed to open in Havana.

In stark contrast to Cuba’s expulsion of foreign investment 50 years ago, Cuban laws and policies have changed drastically, and Cuba is now seeking foreign investment to revive its outdated economy. The resumption of diplomatic relations between the United States and Cuba has piqued the interest of U.S. hospitality companies looking to expand their offerings of Caribbean destinations. Its close proximity to the United States and miles of undeveloped, pristine beaches make the island particularly attractive.

U.S. hospitality companies investing abroad, however, often face challenges that differ significantly from those encountered in the United States. For example, in 2014, alleging nonpayment of rent, the Pakistani Defense Housing Authority raided and took control of the Carlton Hotel in Karachi. U.S. hospitality companies investing abroad thus should be aware of the tools that may be available to manage political risk and protect their international investments.

Protecting international investments
International investment agreements (IIAs) are international treaties between two or more countries that protect international “investments” made by “investors.” Most IIAs define an “investment” as “every kind of asset” and an “investor” as a corporation that is incorporated in one of the countries that is a party to the IIA. IIAs ordinarily cover international investments made by hospitality companies, including hotel ownership, lease and management contracts, and franchise agreements.
If a foreign government nationalizes an international investment or treats it unfairly, most IIAs enable a company to seek monetary damages against the government in international arbitration.
Hospitality companies have obtained sizable awards in international arbitrations brought against governments pursuant to IIAs. For example, in Wena Hotels v. Egypt, the Egyptian Hotels Company (EHC) forcefully took possession of two hotels. The EHC eventually returned the properties, but in an inoperable condition. The investors commenced international arbitration pursuant to the UK-Egypt Bilateral Investment Treaty (BIT) and obtained an award of $20.6 million.

Structuring investments
As the graphic below illustrates, Cuba has BITs with 40 countries:


Notably, Cuba does not have a BIT with the United States. In the absence of a U.S.-Cuba BIT, U.S. hospitality companies considering investing in Cuba nevertheless may be able to take advantage of IIA protections by structuring their investments through an existing foreign subsidiary located in one of the countries listed above.

Although investing in Cuba may be a risky proposition, Cuba is an untapped market and a particularly attractive one for U.S. hospitality companies. U.S. hospitality companies interested in investing in Cuba thus should consider IIAs and their ability to manage political risk and protect international investments.

About the Authors
Charles B. Rosenberg and Raquel Martinez Sloan are with White & Case LLP.