Cuba Prepares for Another Year in Isolation

Cuba Prepares for Another Year in Isolation
Analysis DECEMBER 21, 2015 | 09:15 GMT

Summary

Cuba has made some notable political and economic improvements in 2015,
but the same will not be true in 2016. Cuba's economy, underpinned by
tourism and remittance revenues and Venezuelan energy ties, has thrived,
especially after the United States re-established economic and political
ties with Cuba earlier in the year. However, in spite of the relative
stability, it is unlikely that the United States will lift its trade
embargo on Cuba in 2016. Havana will have to make difficult choices to
counter the dependencies it has created and survive economic isolation.

Analysis

According to a U.N. 2015 study led by the Economic Commission for Latin
America and the Caribbean, Cuba's services sector is responsible for the
growth in the Cuban economy, representing roughly 70 percent of gross
domestic product. Tourism in particular has and continues to provide
significant revenue to Havana, contributing $2.5 billion, or roughly 3
percent of GDP. From January to September 2015 alone, Cuba received more
than 2.6 million tourists, and it is likely to surpass the 2014 total of
3 million tourists, according to Cuba's National Statistics and
Information Office.

Furthermore, Cubans and Cuban-Americans have sent approximately $2
billion worth of remittances in the past year. The revenue is expected
to grow within the coming years as well, ever since the U.S. Treasury
Office of Foreign Assets Control raised the limit of remittance exports
from $500 to $2,000 per quarter as part of Washington's rapprochement
with Havana. The amendments also authorized U.S. citizens to import $400
worth of Cuban goods, which will boost Cuba's domestic market sales. As
a result, the Cuban economy, unlike other Latin American economies, is
forecast to grow on average more than 4 percent between 2016 and 2020.

Cuba 2016

Unfortunately for Cuba, the U.S. trade embargo and the restrictions it
places on economic growth remain, and unrestricted trade with the United
States is unlikely to begin in 2016. For all the benefits tourism and
remittances provide, Cuba's economy still heavily depends on these
revenues, with no alternatives to diversify the economy because of the
embargo. Cuba also incurs major economic trade imbalances after five
decades of economic isolation, despite President Raul Castro's
2010 legalization of Cuba's untaxed and unmonitored informal business
activities. In 2016, Cuban state-owned companies will reduce their
demand for imports such as steel, machinery and other basic goods needed
to streamline and grow the manufacturing, agricultural and construction
industries. Because of high demand in the surging tourism sector, there
is simply not enough liquidity to afford such inputs. And because U.S.
sanctions continue to isolate Cuba from the international financial
system and prohibit transactions, Cuba will be unable to buy these
inputs, reinforcing its dependence on tourism and remittance revenue.

The embargo will also continue to cause structural problems, such as a
shortage of foreign currency, to persist, which may require decisions
that have ramifications beyond 2016. Cuba has a two-tiered currency
exchange rate consisting of two types of pesos. One is a convertible
peso pegged to the U.S. dollar, which is used for foreign trade and
tourism, and the other is a local peso, which is mainly used by the
locals to support their livelihoods. But to attract much-needed foreign
investment into the manufacturing, agriculture and construction
industries, Cuba will eventually have to unify these two currencies. Of
course, it will not be a simple decision to make. Unifying the
currencies would ultimately be at the expense of the general population,
as a needed economic adjustment would occur, causing the cost of basic
goods to skyrocket and possibly leading to social unrest. Until the U.S.
embargo is gradually and or fully lifted, it is highly unlikely that
this currency system will be unified, creating uncertainty for economic
investments in Cuba in the coming years.

Finally, as long as the United States upholds the embargo, Cuba will
have no short-term alternatives but to continue depending on Venezuelan
aid and fuel subsidies. Roughly 50 percent, or around 100,000 barrels
per day, of the country's hydrocarbons supply comes from Venezuela. But
Venezuela's sagging economy has put the country's political environment
in a precarious situation that will continue to threaten Cuba. The
Venezuelan opposition has already achieved a two-thirds supermajority
after winning in legislative elections as a result of the economic
crisis, threatening the ruling United Socialist Party of Venezuela's
hold on power. The opposition-led National Assembly can now legally call
for a referendum on Venezuela's international treaties that are deemed
to compromise its national sovereignty, specifically its controversial
treaties with Cuba. For this reason, throughout 2016 Cuba will attempt
to expand ties with Mexico and China, while simultaneously aiming to
negotiate more economic agreements with the U.S. Congress to
counterbalance its uncertain but critical ties with Venezuela.

The Politics of the U.S. Embargo

The embargo on Cuba will define the success or failure of its economy in
2016, and unfortunately for Cuba, chances that the United States will
lift restrictions are slim at best. With congressional and presidential
elections approaching in 2016, domestic politics will limit U.S.
politicians' and lawmakers' ability to cooperate in lifting the embargo,
which must be removed by congressional vote. Without even considering
the presidential race, divisions within the U.S. Congress on the subject
of Cuba will likely hamper meaningful dialogue toward passing
legislation addressing the matter. Unresolved legislative matters
remain, which opponents of a Cuba rapprochement can promote in an
attempt to halt congressional action. For example, negotiations over
compensation for seized U.S. property in Cuba will curb Congress' desire
to seek a full repeal of the embargo.

The most likely way the U.S. Congress will eventually lift the Cuban
trade embargo is by amending the process by which Cuba may meet legal
requirements to have the embargo removed. As of now, laws in the
Helms-Burton Act that make up the U.S. embargo require Cuba to make
substantial policy changes involving transitioning to a democratic
government and a free market-based economy before trade can resume.
Without amendments to make the transition more gradual, Cuba would have
to make significant — and potentially destabilizing — changes to its
domestic politics, such as allowing a wider spectrum of political
parties to participate in elections. The act would also specifically
require Castro to step down as president before the embargo is fully
lifted. Confined and unable to expand the economy without dramatic
repercussions, Havana will avoid equally destabilizing political
decisions at all costs, making it unlikely that it would agree to such
stringent measures in the near term.

More to the point, Cuban leaders may change their minds on the
rapprochement with the United States as well. Cuban Vice President
Miguel Diaz-Canel, one of the first major leaders to rise through the
ranks of the Cuban Communist Party after the revolution, will assume
Cuba's highest office in 2018. And though Diaz-Canel fulfills the
criteria of leading a civilian government in Cuba as well as replacing
Castro, it is still far from certain that he will follow his
predecessor's lead and fully re-establish ties with Washington. As a
result, it is uncertain how the Diaz-Canel government would comply with
the U.S. legislative criteria regarding the embargo, especially
concerning the role of the Cuban armed forces — which are intimately
involved in planning the Cuban economy — in government affairs.

Thus, despite the thaw in U.S.-Cuba relations in 2015, it is unlikely
that the United States will lift its embargo in 2016. It will be a more
difficult year for Cuba as it becomes more dependent on tourism,
remittance revenues and Venezuelan oil subsidies, all while remaining
economically isolated.

Source: Cuba Prepares for Another Year in Isolation | Stratfor -
https://www.stratfor.com/analysis/cuba-prepares-another-year-isolation