Analysis and Economic Impact of U.S. and Cuba Rapprochement

By the Curmudgeon with Victor Sperandeo

Executive Summary:

"These steps will be the most significant changes to our Cuba policy in more than 50 years," said a U.S. government official on a conference call with reporters last week.

He was referring to the normalization of relations between the U.S. and Cuba, which was concurrently announced by President's Obama and Raul Castro this past Wednesday. That was right after Cuba released U.S. government worker Alan Gross who had been imprisoned for the last five years.

The core components of this long anticipated U.S.-Cuba detente (18 months in the making) are the following:

1. Discussions to re-establish full diplomatic relations that have been severed since 1961. Obama wants to re-open the U.S. embassy in Havana as he vowed to “cut loose the shackles of the past” and sweep aside one of the last vestiges of the Cold War.

2. U.S. Secretary of State John Kerry to visit Havana and review Cuba's designation as a state sponsor of terror.

3. A number of steps to significantly increase travel, commerce, and the flow of information to and from Cuba. This will include an easing of current travel restrictions, permitting American visitors to the island to bring home more than $400 worth of goods (including a limited number of Cuban cigars) and efforts to make it easier for Americans to use debit cards and other financial instruments while in Cuba.

4. Items that will be authorized for export to Cuba include: certain building materials for private residential construction, goods for use by private sector Cuban entrepreneurs, and agricultural equipment for small farmers.

5. U.S. residents will be allowed to send up to $3,000 every three months to relatives in Cuba- quadruple the current limit!

6. Telecommunications providers will be allowed to establish the "necessary mechanisms, including infrastructure, in Cuba to provide commercial telecommunications and internet services, which will improve telecommunications between the U.S. and Cuba." More on this dynamic below.

Reference: The official U.S. statement on its new course for Cuba can be read here.

Lifting the 54 year old trade embargo isn't part of the first round of normalization, as it would require Congressional approval to repeal it. Expect a battle royale on this issue, with many Republican's likely to oppose the move.

Cuban-American Senator-(R-FL) pledged Congress wouldn't lift the trade embargo with Cuba. Senator Lindsey Graham (R-SC) tweeted he would "do all in my power to block the use of U.S. funds to open an embassy in Cuba. Normalizing relations with Cuba is a bad idea at a bad time."

Motivations for Better U.S. - Cuba Relations:

The Curmudgeon believes the prime motivation of these "buddy-buddy" U.S. - Cuba initiatives are President Obama's quest to secure a notable foreign policy accomplishment before his second term expires. Waiting for Raoul Castro to retire in 2018 to negotiate with a new Cuban leader would be too late for him, as the next U.S. President would then get the credit for any rapprochement.

Obama claims normalization of relations was a goal from the day he took office in January 2009. However, the effort didn't begin in earnest until his second term as President, according to many news media sources.

Many have given credit to Pope Francis for "breaking the logjam" between the U.S. and Cuba and facilitating the new policies. The pope wrote letters to both Obama and Raul Castro, urging them to settle outstanding issues related to prisoners in both countries and to pursue closer ties.

Cuba continues to be plagued by a very weak domestic economy which is mostly supported by foreign tourism and gifts from Venezuela - its main benefactor for years. From 2008 to 2011, Hugo Chávez's government in Venezuela gave Cuba $18 billion in loans, investments and grants. University of Maryland economist Roger Betancourt said Venezuela accounts for about 40% of Cuba’s trade in goods.

For the past year, Venezuela has been badly hurt by a mismanaged economy and the sharp drop in oil prices. A June 21, 2014 Economist article asked "How much worse will Venezuela’s economy get?" Answer: a lot worse! That'd be a huge threat for Cuba, which depends on oil and grants from Venezuela for its domestic economy to function.

CNN's Ana Navarro said it best, "A lot of what (Cuba’s) survival depends on is Venezuelan oil money, which is drying up."

Telecom & Internet Infrastructure is Top Priority for the Cuban Government:

Recognizing the urgent need to improve its infrastructure and bolster the private sector economy, Castro & company felt the need to engage the U.S. in dialog to get U.S. companies to invest in the island, especially in telecommunications infrastructure.

A revealing editorial in the December 15th Gramma (Cuba's state owned and controlled newspaper) is titled "The digitalization of society, a priority for Cuba"

"Steps have been taken at the administrative and enterprise levels to guarantee technological sustainability and sovereignty for the massive provision of Internet access services. The trial balloon has been the opening of 154 Public Navigation Centers, distributed throughout the nation, as a prelude to the generalized availability of data services, which will allow the country to commercially offer broadband access (with greater speed and options), work on which is currently underway."

Continuing... "other initiatives are under development, or in the start-up process, to facilitate the distribution of data via mobile phones and the development of platforms for university and institutional networks, which could extend their services to all of society."

"The strategy additionally projects the creation of new wireless access capacity; and the integration and orderly use of institutional data networks, such as those in sectors such as public health, education and culture, which are well known by Cuban users. These will be hosted by high performance servers, which will facilitate their potential use. Also planned is the development of video games and multimedia with educational and historical content, as well as the updating of the regulatory framework governing the use of information and telecommunications technology."

Bottom line: Cuba seeks help from U.S. telecommunications carriers and equipment manufacturers to modernize its outdated telecom facilities in order to provide broadband access for the country's industries, universities, and the public. The projects and strategies noted by Gramma can NOT be achieved without international assistance and investment to build out and overhaul/ upgrade Cuba's telecommunications networks and information infrastructure.

Other U.S. Investment Opportunities in Cuba:

Cuba's largest existing exports include sugar, tobacco products and nickel, according to data from the BACI International Trade Database and the Observatory of Economic Complexity. China and Spain are among its largest trading partners.

The U.S. currently exports $500M of goods a year to Cuba, mostly foodstuffs that are exempt from current trade restrictions, although goods have to be paid for with cash. The provision of more normal trade finance could substantially boost that figure.

The Financial Times reports that Cargill, the privately held U.S. commodities trader, was among the first to welcome the announced easing of U.S. trade restrictions on Cuba that could also prove a valuable opportunity for aerospace, cruise ship and building companies.

“Our two countries and people deserve the opportunity to trade and engage with each other,” said David MacLennan, Cargill’s chief executive. “This is an important moment. The history of trade liberalization has clearly led to economic and social benefits for others,” he added.

“One thing will lead to another. First there will be the easing of travel restrictions for US visitors, and greater involvement by Cuban-Americans in their relatives’ businesses,” said Sebastian Berger, of Ceiba Investments, a Guernsey-registered company that is the largest foreign holder of Cuban tourism and commercial real estate. “Then, in time, there will come an easing of anger from US opponents to the move and more changes — even if the market is anticipating it all happening immediately, now.”

U.S. cruise ship operators, such as Royal Caribbean and Carnival Corporation, as well as airlines will potentially gain from more travel between the two countries. American Airlines and Delta already run charter flights to Cuba from the U.S., carrying most of the 300,000 Cuban-Americans who visit their every year, as well as the 98,000 U.S. citizens that visited in 2012 under special rules that will now be somewhat relaxed.

A concise, informative NY Times graphic "What U.S. Companies Can Expect in Cuba" may be viewed here.

A related article, "U.S. Companies Clamor to Do Business in New Cuban Market" is available here.”

"The improved relations will lead to a great deal of new commerce,” said Marion Blakey, U.S. Aerospace Industries Association president. That is, if Congress doesn't block Obama's new course of action for the island nation. Opening of the U.S. embassy in Havana will be the first test.

Counter-point from Miami's Little Havana:

The Financial Times reports that Cuban exiles in Miami’s Little Havana erupted in "bursts of fury that disrupted the leisurely coffee-drinking and people-watching."

“We call it a day of infamy,” said Miguel Saavedra, 57, who fled Cuba in 1965, and was aghast that US restrictions on trade, telephone and internet links will be loosened, even though a Congress-imposed embargo remains. “They are going to give the regime more money — and the security services will use that money to continue making people disappear.”

Mr. Saavedra was giving voice to the anger that has festered for five decades among the Cuban exiles who fled Fidel Castro’s regime for Miami after the 1959 revolution. He was also expressing the sense of betrayal of an older generation that is losing influence as opinion shifts and the world changes.

For the younger generation, normalized U.S.-Cuba relations would mean being able to speak to relatives on a clear phone line, being able to send food and clothes without paying extortionate fees, and being able to fly to Havana without getting entangled in red tape.

“They just want a normal life with Cuba,” said Guillermo Grenier, a sociology professor at Florida International University. According to his polling, a majority of Cuban-Americans in Miami — 52% — oppose the U.S. embargo. He said the noisy elders, who tended to vote Republican, had long been seen as the community’s voice, but the rebalancing of opinion presented Democrats with a chance to consolidate new support.

Roberto Ramos, now 50, left Cuba for the U.S. in 1992. He said it was not just U.S.-born twenty somethings who disagreed with the old guard. “People like me, 50 or under, think differently. They don’t want to invade. They want to open Cuba up and go. They want to rebuild houses, play music, and dance with women on the Malecón [Havana’s seafront promenade].”

Some Cubans in Little Havana are still nervous about talking openly. A flower seller who left in 2002 said he supported President Obama and would be glad to be rid of the $1,200 he pays in annual fees to send goods to his relatives. He did not want to be named, fearing he would lose clients who disagreed with him. “They could even turn violent,” he said, making a pistol shape with his hand.

Victor's Comments: Deal Won't Benefit Cuban People

Cuba has been ruled by the Castro brothers through nine U.S. Presidents. During those 54 years, the Cuban economy has steadily declined and the people have struggled to survive at 1/50th of the U.S. poverty rate.* The median income of a Cuban is estimated at $17-$20 per month. Doctors make about $25.00 per month and most have to take second jobs to make ends meet.

* The poverty rate in the U.S. is $11,670 income per year for an individual and $23,850 for a family of four.

Of course, Fidel and Raul (like Russia's Putin) are in another league as to net worth and income. Forbes estimates Fidel's net worth at $900 million.

History is clear for all Communist and Socialist societies: they decline over time. Without the USSR and then Venezuela propping up Cuba's economy, that island nation would have a lower standard of living of any country in the world, with the possible exception of Haiti or North Korea.

So if the implied reason for President Obama to resume relations is to help the Cuban people (rather than to boost his own legacy as the Curmudgeon suggests), he is telling you a fib.

Obama is elevating the Castro's status by saying the U.S. policy toward Cuba has not worked (and therefore was wrong) for many years. The U.S. has fought undeclared (and unconstitutional) wars in Korea and Vietnam to prevent the spread of Communism in the name of promoting freedom and democracy. In Cuba it has been a cold war via the trade embargo, travel bans, and political isolation.

To change or concede now, without any concessions is virtually criminal, in my humble opinion. With Raul stating he would retire next year when at 84, a U.S.-Cuba deal with a new leader would be very likely. Normalizing relations before then seems very self-serving, if not pro-communist.

The U.S. as a whole - will not be helped by trade with Cuba, as the tiny increase in our GDP would be equivalent to a rounding error. Aside from another Caribbean island for vacation, nothing proposed is likely to benefit the American people directly.

Cuba is (and has been) a Communist dictatorship or a police state. According to Raul, nothing will change. In his most recent speech he said: "President Raúl Castro declared victory for the Cuban Revolution on Saturday in a wide-ranging speech, thanking President Obama for “a new chapter,” while also reaffirming that restored relations with the United States did not mean the end of Communist rule in Cuba."

Fidel Castro was interviewed in August 1985 by Playboy magazine where he put his ideas into concepts... "Socialism is just the opposite (of Capitalism). By definition, it expresses confidence and faith in man, in solidarity among men and in the brotherhood of man-not born of selfishness, ambition, inequality, injustice, competition and struggle among men."

Without self-interest, ambition, inequality, and competition you get injustice (believing that earning more than another is unjust), struggle and an average income of only $20 a month. Where is the incentive to produce?

The Cuban people are great workers - several have worked for my company over the years. So it's not the people that've caused the decline of the Cuban nation. Instead, it's due to the Castro's mental distortion of the way society should be according to Marxist Communism. With Cuba going the way of Venezuela, why save them without any concessions or obvious negotiations to help the Cuban people?

This proposed U.S.-Cuba deal was not the result of a true negotiation, which is defined as "a dialogue between two or more people or parties intended to reach an understanding, resolve points of difference, to gain advantage for an individual or collective, or to craft outcomes to satisfy various interests."

Instead, it seems to be a gift to a Communist state. The losers will be the Cuban people who are being "thrown under the bus" for the recognition of doing something that has no meaning for them by our dear President Obama.

Bottom line: the Cuban state and leaders will benefit - not the people of Cuba - if the initiatives are realized. However, Congress will likely oppose Obama's course of action for Cuba, as they weren't consulted prior to Wednesday's announcement. Thereby, Obama will be a loser for his "I'm the king" type of proposals. The American people may be winners in the long run, as this topic will most likely be debated and we'll get both sides of the issue.

Till next time......

The Curmudgeon
ajwdct@sbumail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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