Diplomatic Opening Will Reinforce Reform Impetus

The surprise announcement by US President Barack Obama and Cuban President Raúl Castro of an agreement to pursue the normalization of relations has significant positive implications for Cuba’s risk profile. The policy changes unveiled by Obama in mid-December 2014 do not include a near-term lifting of the trade embargo that has been in place for more than five decades, which will require congressional approval. But the easing of restrictions on travel, financial flows, and some forms of trade will bring immediate benefits for an economy threatened by the deepening political and economic troubles in Venezuela, which has been a crucial source of financial support for the government in Havana for years.

The immediate beneficiary of Washington’s opening will be businesses operating in the tourism industry and related hospitality services. Although Obama’s proposals do not include a lifting of the ban on pleasure trips by US citizens, the easing of restrictions on permitted activities by travelers visiting Cuba for educational, humanitarian, and professional purposes figures to create stronger demand for leisure-related opportunities that will encourage higher levels of investment, bolstering the expansion of private-sector jobs. Likewise, the easing of restrictions on flows of remittances will boost the purchasing power of average Cubans, creating stronger demand for the expansion of retail establishments.

The reduced risk of serious near-term economic difficulties diminishes the danger of domestic political instability that might prompt backtracking on the program of economic liberalization initiated by Castro as part of a strategy for laying the foundation for a smooth transfer of political control to a younger generation of leaders within the ruling Communist Party of Cuba (PCC) in 2018.

The conventional wisdom has long been that any significant thaw in US-Cuba relations awaited the end of the Castro era. However, with his presidency winding down, and his domestic agenda hamstrung by opposition majorities in both congressional chambers, Obama has increasingly looked to the international arena for opportunities to bolster his legacy. A breakthrough with Cuba would certainly qualify as a significant achievement, and even the most hard-core opponents of the Communist regime are hard-pressed to point to any positive result from the US policy of isolating Cuba.

Even so, criticism of the move was to be expected. Old-guard Cuban dissidents decried the easing of pressure on Havana without any promise of political reform as a betrayal, a sentiment that was echoed by some in Washington. The Cuban government did release 53 dissidents listed by the US as political prisoners, and Alan Gross, a US citizen who had been imprisoned in Cuba since 2011 on charges of “crimes against the state” was granted release (apparently, but not officially, in exchange for three Cubans imprisoned in the US on espionage and conspiracy charges). But critics of Obama’s policy shift have pointed out that Cuban authorities have continued to detain citizens for exercising basic democratic rights without interruption.

Indeed, according to data compiled by the US Department of State, some 178 political prisoners were detained in January. The Obama administration has conceded that the Castro regime is authoritarian in character and will continue to be so for the foreseeable future. The hope is that partial normalization of bilateral ties might encourage Havana to ease restrictions on domestic political activity. In that vein, human rights officials noted that the number of arrests in January was far below the December 2014 total of 489.

Although the Castro regime may make additional good-faith gestures as the rapprochement evolves, there is little reason to expect that government in Havana will pursue any substantial political reforms. President Castro’s domestic reforms have been narrowly focused on the economic arena, and that will remain the case at least until the carefully managed transition is completed in 2018.

External Conflict

Forward Momentum Slowed

The full normalization of ties will require the lifting of the embargo, which is not currently on the agenda. As a step toward that objective, the Obama administration is pursuing the re-establishment of diplomatic ties, which entails the establishment of embassies and the resumption of direct high-level communications that were severed more than 50 years ago. Immediately after the December 17 announcements by Obama and Castro of the breakthrough in relations, the two governments initiated a series of talks aimed at restoring diplomatic ties. However, the task has proven to be more complicated than anticipated.

The US was counting on the process being completed in time for the Summit of the Americas, which was held in Panama on April 10. Latin American nations have long pressured the US to change its Cuba policy, and Washington’s stubborn refusal has been an irritant in hemispheric relations.

However, following the third round of talks in mid-March, it became clear that the timeline would have to be revised. The Havana meetings were expected to last for several days, but the US delegation returned to Washington at the end of the first day without explanation. Both sides kept discussions of what transpired vague, while indicating that the talks would resume after the summit.

The sticking point appears to be hostile moves by the US against Cuba’s close ally, Venezuela. The March meeting occurred shortly after President Obama issued an executive order imposing sanctions on seven Venezuelan officials, who were targeted for alleged human rights violations, but under the wording of the executive order were characterized as threats to US national security. Venezuelan President Nicolás Maduro, who is already struggling with twin political and economic crises at home, assailed that move as “aggressive and poisonous.” Perhaps not coincidentally, President Castro was in Caracas the day that the Havana meetings were so abruptly adjourned.

The obstacles are not insurmountable, and both sides have displayed a strong desire to make progress. In Panama, Obama and Castro sat down for the first face-to-face meetings between US and Cuban leaders in more than half a century, and Castro publicly praised his US counterpart.

Since the summit, Obama has indicated that he will remove Cuba from the State Department’s list of state sponsors of terrorism, a move that beyond its symbolic importance will restore Cuba’s access to the US banking system. Kerry has acknowledged that the delay in restoring diplomatic ties is an indication that further confidence-building measures are needed. It was perhaps with that in mind that Kerry suggested on April 20 that the US is open to improving its ties with the government in Caracas.


Increased Remittances Will Boost Economy

The easing of commercial restrictions and the normalization of bilateral relations will produce little, if any, near-term improvement in the more general climate for investment, the key weaknesses of which include woefully inadequate infrastructure, weak legal protections (particularly with regard to intellectual property rights), and the lack of an institutional framework for the arbitration of disputes. However, the diplomatic thaw will encourage investors to take a closer look at Cuba, and also brightens the prospects for restructuring old debt and tapping new sources of credit.

In a bid to seize those opportunities, Havana has signaled that it will be more forthcoming with data on the state of government finances. In that vein, the release in late December of information about the current account balance and foreign-currency reserves, long treated by Cuban officials with great secrecy, is encouraging.

As for the near-term economic impact of the thaw, the quadrupling of the maximum amount of money that US residents are permitted to send to relatives in Cuba figures to be one of the most important changes. Previously, remittances from individuals were limited to $500 per quarter. Under the old rules, remittances injected $2 billion of hard currency into the Cuban economy each year, providing much of the capital that helped to fuel the expansion of private businesses on the island. Based on the historical trend, remittances could potentially soar to $8 billion, which, in combination with increased tourism activity, figures to boost business expansion, hiring, and domestic spending on goods and services.


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