reflections

Jan 26, 2016 | 23:21 GMT

5 mins read

The Immediate Risks of Cuba's Opening

(Stratfor)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

Tuesday proved to be an eventful day for Washington and Havana as the U.S. Treasury and Commerce departments loosened export restrictions against the United States' southeastern neighbor. The move will allow U.S. exporters to apply for licenses to send specific authorized goods other than agricultural products and commodities to Cuba, marking yet another step in President Barack Obama's drive to reopen channels between the two countries.

Since Obama first revealed his intentions for Cuba in December 2014, it has been clear that the path to normalization would be a long one. Though both sides managed to renew diplomatic relations relatively quickly, a solid economic partnership will take much longer to build, especially since the United States' trade embargo will not be lifted any time soon. Therefore, Cuba's economic future, at least in the short term, will be most shaped by its lack of options.

Still, there are some immediate benefits to be had. The developing U.S.-Cuban accord has rapidly boosted tourism on the island — Havana's main source of foreign revenue. This will probably continue to provide the bulk of the Cuban government's income for some time to come. But even with more tourism dollars coming in, the Cuban economy's immediate future looks decidedly precarious. True, the United States and Cuba are on more friendly terms, but Havana is heading into uncharted territory as it adjusts to a system without a Castro at its helm. The political and economic underpinnings of the country's current stability will not last forever, and how they change will determine just how Cuba develops in the next few years.

As these adjustments play out, the country will encounter some notable economic and social risks. The most immediate danger relates to energy, which could result in one of Havana's largest import expenses. Within the next few years, Cuba may very well lose its preferential access to discounted Venezuelan oil. The longer oil prices remain low, the greater the risk Venezuela will default on its debt or cut off its oil shipments to Cuba. For the most part, however, low oil prices could prove an unexpected boon for Cuba. Sustained low prices might even enable Havana to buy crude and refined products on the open market, even as its financial reserves dwindle.

But this strategy will not work in the long term, especially once the cost of a barrel of oil creeps back up. It is unlikely that any other major oil producer will give Cuba the deep discounts it has gotten from Venezuela — discounts enjoyed for nearly 16 years. If Venezuelan oil shipments taper off, Cuba will likely have to re-evaluate its priorities at home. Even with the steady rise in income from tourism, Cuba probably lacks the dollars to fund the unsubsidized and ever-increasing energy imports needed to meet the demands of its burgeoning business sector on top of other budgeted expenses.

Cuba's impending reforms could create additional trouble for its economy. For two decades, Cuba has had a dual exchange rate for its currency, the peso: The Cuban convertible peso is of equivalent value to the dollar, while the Cuban peso is valued at 25 pesos to the dollar. In response to growing economic inefficiencies — including an exodus of skilled workers to the tourism sector, where the more valuable exchange rate is used — Cuba will be looking to unify the two rates in the coming years.

But the social impact of such a move will depend on how Havana executes it. If the government removes the convertible peso suddenly, or if it spurs a sharp devaluation in the peso, Cuba could find it even more difficult to pay for its imports. Inflation would rise as a result. However, the unification of the two exchange rates will be necessary at some point to attract significant foreign investment. Economic planners may well lean toward a more gradual approach designed to soften its impact on the Cuban population.

Meanwhile, the shape Cuban politics will take beyond 2018 (the year President Raul Castro is slated to step down) remains somewhat unclear. Nominally, power will reside with Miguel Diaz-Canel, Castro's likely successor. But economic clout as well as a significant share of political influence will probably continue to be concentrated within the elite circles of the country's Revolutionary Armed Forces.

The most important of these elites is Gen. Luis Alberto Rodriguez, Castro's son-in-law and the head of GAESA, Cuba's largest conglomerate. He and his fellow military leaders will determine the future of U.S.-Cuban relations as they preside over the creation of a lasting regulatory regime for U.S. companies entering Cuba. However, as long as the political structure of the Cuban Communist Party and the security apparatus created by the Castro brothers remain intact, even these powerful military personalities can be held in check.

So while the steady loosening of U.S. trade restrictions against Cuba is good for cross-border trade, that trade is only part of a much bigger story. Cuba's transition from a Cold War relic to a vibrant Caribbean economy will be fraught with risks; how Havana handles them will determine whether U.S. investors choose to do business there or turn to other competitors in the region.

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