The United States’ risky investment into Cuba

The United States’ risky investment into Cuba
4 Flares 4 Flares ×

As the United States attempts to phase-in the next stage of economic rapprochement with Cuba,  American investors are wary of the developing risks on the island.

The United States’ rapprochement with its former Caribbean adversary has shined a new light on a more risky situation for American investors, who are lining up for access to the Hemisphere’s last remnant of the Cold War. America’s reversal on its decades-old isolationist policy has finally echoed the private sector’s ambition to do business in the communist country.

Cuba’s demand for agricultural products has renewed interest from companies and state governments alike. Louisiana governor John Bel Edwards recently accompanied a trade mission to the island, where a “memorandum of understanding” was signed to satisfy Cuba’s foodstuffs scarcity. Yet, the investment climate has significantly deteriorated amid newfound risks on the island, which have slowed the economic and political capital needed for change.

Cuba’s economic uncertainty

Despite Cuba’s unique governmental situation, the island’s economic exposure to commodity shocks mirrors that of its Latin American neighbors. The recent drop in global commodity prices has forced Cuba into austerity, which has dampened the opportunities for economic and political change. This recent global commodity plunge has strained Cuba’s export base as well as its strong dependency on Venezuela.

Low oil prices and economic mismanagement in Caracas has led Venezuela into a spiral of economic depression and political uncertainty. This uncertainty has caused a 40% decrease in oil exports to Cuba. The Castro regime’s fuel has been dangerously stressed and has even caused utility cuts in tourist-heavy areas. Inconveniently timed while the United States has been open to a stronger relationship, the economic hardship on the island has also caused an increase in the regime’s hard-line rhetoric and its repression of popular dissatisfaction.

The economic uncertainty on the island is endemic to the region; economic dependence and a lack of a diverse export base have undone their fair share of Latin American economies. The economic risks associated with the Cuban economy are shared between foreign stakeholders and the government. For American investors, their business depends on less regulation or on the government’s continued oversight of its growing black market. Shortages in the tourism sector could potentially undermine efforts by airlines, for instance, to increase flights to the country. For the regime, more investment in the country, coupled with more access to information could undermine the regime’s rhetoric. These developments could put American interests at risk on the island and delay future investments.

Political obstacles

The U.S. private sector ambitions on the island have been historically thwarted by a lack of political will in the halls of Congress. The deficit of American political will to open relations to Cuba has been a historic result of the Cuban-American lobby in Washington, D.C. Despite a change of heart in the younger communities of Miami’s Cuban communities, Republican rhetoric on trade with the island has remained firmly negative. Especially given the political climate surrounding the 2016 presidential election, it is unlikely there will be any major change in how the United States approaches Cuba.

The political rhetoric in the United States, however, must also create the demand to reform America’s immigration policy towards Cuban refugees. The Republican base has stood strongly against President Obama administration’s expansion of refugees into the country. However, the prospects of change between the United States and Cuba have prompted an outflow of Cuban refugees through Central America and thereby, into the United States. Yet, the “wet-foot, dry-foot” policy, which accepts any Cuban who makes it into U.S territory, has not yet made its way into the public discourse. There is no doubt that increases in the flows of refugees into the United States will make it difficult to negotiate an agreement, especially given the unique status given to Cubans.

For Cuba, the regime has maintained that lifting the embargo must also include closing the United State’s military base in Guantanamo Bay. President Obama has made it clear that Guantanamo Bay is not up for discussion and that it will continue to remain open. Differences over this issue may extend over time in which more friendly economic conditions between the countries can develop. This is despite the active effort by the Obama administration to slowly liberalize American restrictions on goods such as rum and cigars.

Geopolitical implications

The American private sector must also be cognizant of the geopolitical reality currently in place in Cuba. Cuban economic dependence over the past century has largely led to its economic problems. During the “special period” following the collapse of the Soviet Union, Cuba struggled to recover economically. Presently, that the same phenomenon may be occurring due to its dependence on Venezuela. For this reason, Cuba will not open to the United States exclusively.

Cuba has been actively seeking to hedge its future economic dependence on the United States by getting closer to countries such as Russia and China. Though this may be in the best interest of Cuba, it may present a challenge to American businesses who will find themselves limited by a reactive American foreign policy. Russian media has indicated that Russia is considering a military installation on the island for the first time since the beginning of the century. This direct challenge to American influence and security in the region will most likely be met with hostility and an uncertain situation for American economic interests on the island.

Though there is no doubt that American companies will once again find themselves doing business in Cuba, the newfound risks they face are both economic and political. Unfortunately, it seems as if America’s willingness to embrace “una cuba libre” came at a difficult time domestically and globally.

Categories: Economics, Latin America

About Author

Miguel Tavera

Miguel Tavera is a Washington D.C based analyst with a focus on Latin America. He currently works for Risk Cooperative, a specialized strategy, risk, and capital management firm. He holds a B.A in international affairs from George Washington University with minors in business and political science.