For the first time in nearly half a century the discussion of lifting the Cuban embargo seems to have gained momentum. The recent easing of travel to Cuba in addition to prisoner exchanges have given hope to many businesses waiting to enter this untapped market. Many companies have been patiently waiting on the sidelines, however they should not underestimate the potential perils that will remain. Cuba’s potentially “coming in from the cold” may allow foreign investments onto the island, however it will still be far from business friendly.

This phenomena of Western adversaries suddenly shifting towards a more amicable relationship is nothing new. The geo-political and economic landscape is continually shifting. Myanmar was a recent example, with President Obama’s official visit serving as a ceremonious reentry into the international community for this once ostracized state. Currently Iran is in the midst of negotiations to reduce or eliminate sanctions in exchange for their nuclear program. Nevertheless, once these governments have inked their deals and the international restrictions have been lifted, the road to a sustainable foreign investment framework being implemented is not paved overnight. There is also no guarantee that it will last. One need only look at Russia to see the very real risk of political and economic backsliding.

The rapid growth of emerging markets, coupled with the use of new technologies to access consumers, has made the base of the pyramid a highly desirable and readily accessible market. Enticed by this prospect, many organizations are seeking expansion into these often perilous frontier markets. While the payoff can be great, many considerations must be taken into account when pondering these types of investments. Of these, the political regime is first and foremost, followed closely by corruption, lack of infrastructure, supply chain issues and the likelihood of an underdeveloped banking system. Additionally, the structuring of foreign investments needs to be assessed. In Myanmar for example, it is possible to set up a 100% foreign owned company, while Cuba requires that foreign investments are joint ventures with the Castro government. This can give pause to prospective investors as it creates a litany of business and operational risks. Likewise, the type of industry and services being offered need to be evaluated.

In Myanmar, where mineral resources such as precious stones are in rich supply, industries in the extractive sector may encounter lower barriers to entry with fewer needs for large scale infrastructure. With their advanced machinery, and “bring your own infrastructure” approach they can often perform in harsh environments. By contrast firms like Coca-Cola, requiring large scale production and distribution, have to consider different investment and operational strategies. Staying with Myanmar as a case in point, Coca-Cola with its deep coffers, took a more involved approach, investing heavily in infrastructure, plants and so forth. While a risky endeavor to put so much capital in one country with such a tumultuous history, it created a mutually beneficial situation where local officials saw long term revenue opportunities. As a first pioneer, Coca-Cola’s operations in Myanmar could serve as an example of best practices for local regulations on foreign investments. While successful in Myanmar, a one-size fits all frontier strategy is foolhardy. As mentioned previously, Russia is an example of a country retreating back into the cold. The ongoing tension that Russia and the West are experiencing, has caused much economic turmoil for McDonalds, who saw the majority of its restaurants in and around Moscow closed. This caused a significant drop in its global revenues, as well as potential loss of assets, and reputational consequences.

How can firms, particularly cash strapped organizations, contemplate expanding and in some cases, should they? Conducting thorough due diligence of the potential upside and downside risks is paramount. Many solutions are available to help de-risk some of these investments, not least of which are alternative risk transfer and traditional insurance policies. Political risk coverage to protect against nationalization of assets, expropriation, among other perils is an easily obtainable measure, yet many organizations overlook it until it is too late. In Cuba alone, nearly 280 Spanish owned companies had about $300 million in assets frozen by the government, not allowing any profits to be repatriated. Employing an enterprise risk management solution across operations would help offset some of these losses. Many firms tend to isolate their risk management strategy by focusing on the extreme risks or peak perils, making obtaining the necessary insurance, or other risk transfer solutions often unpalatable. A holistic approach would encourage firms to leverage their economies of scale to help offset risks and reduce pricing.

These conditions represent some of the harsh realities firms must face when seeking to expand into new and uncharted markets. Countries that have long been pariahs will not become less risky overnight by the mere lifting of sanctions, yet firms can find ways to reduce risks and make their investments more desirable. Emerging markets will mature overtime, and as the economic conditions improve, their infrastructure and services will follow suit. However the underlying political philosophies and shifting from socialism to capitalism will be a much tougher move, and one that should not be taken lightly by firms seeking growth in these frontier regions.

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