US Embargo Reforms Likely, But Not Imminent

BMI View: Given international disapproval of the US embargo on Cuba, the domestic support for reform, and the significant economic opportunities which would arise under a normalisation of relations, we believe that US foreign policy towards Cuba will become less antagonistic in the coming years. However, given the political inertia on the issue in the US, we do not expect substantive changes to be imminent.

The US embargo on Cuba, which has lasted more than half a century, remains a major impediment to Cuban growth, given the close proximity of the Caribbean nation to the world's largest economy, and the untapped potential for goods exports, tourism, and investment. At the UN General Assembly in New York, Cuba once again pushed for international condemnation of the US embargo on the Caribbean nation.

Some Modest Headway...

International Opinion Unequivocal
Cuba - UN Vote Breakdown On Resolutions Condemning The US Embargo Against Cuba

US Embargo Reforms Likely, But Not Imminent

BMI View: Given international disapproval of the US embargo on Cuba, the domestic support for reform, and the significant economic opportunities which would arise under a normalisation of relations, we believe that US foreign policy towards Cuba will become less antagonistic in the coming years. However, given the political inertia on the issue in the US, we do not expect substantive changes to be imminent.

The US embargo on Cuba, which has lasted more than half a century, remains a major impediment to Cuban growth, given the close proximity of the Caribbean nation to the world's largest economy, and the untapped potential for goods exports, tourism, and investment. At the UN General Assembly in New York, Cuba once again pushed for international condemnation of the US embargo on the Caribbean nation.

International Opinion Unequivocal
Cuba - UN Vote Breakdown On Resolutions Condemning The US Embargo Against Cuba

Some Modest Headway...

The Obama administration has intimated that it wants to soften the US stance regarding Cuba, announcing modest reforms, including easing of restrictions on travel and remittances. However, the pace of change has been an enormous disappointment to the Cuban government, with Deputy Foreign Minister Abelardo Moreno telling the press at the UN that 'the blockade not only is being maintained, but strengthened in some aspects'. Moreno added that banks are increasingly unwilling to contend with the legal complications of dealing with Cuba, and the difficulty with which the country can import advanced medical technology means that the embargo often has 'life or death' consequences.

For its part, Cuba has in fact taken some modest steps toward liberalisation which have been welcomed by the business community and proponents of greater engagement with the island nation. Beginning in January 2013, most Cubans are no longer required to obtain 'exit permits' to leave the country, a reversal of a longstanding policy aimed at retaining skilled professionals, particularly doctors. While the policy is not free of caveats (anyone deemed a threat to the public interest can be denied a passport), it will be seen by the US as another step in a positive direction, and is a continuation of President Raúl Castro's more moderate stance. Under the younger Castro, brother of former leader Fidel, Cuba has also loosened property laws, allowed greater non-state-run enterprises, and announced an intention to abolish the market-distorting dual currency system, by which citizens use one peso (pegged at CUP25.00/US$), while another 'convertible' peso is used by visitors and tourists (pegged at CUP1.00/US$). State media announced in October that authorities would work to unify the currencies to boost growth and promote greater economic efficiency.

In the event that the embargo is lifted, we expect the economic dividend to be very large. The densely populated US state of Florida is less than 100 miles away from Cuba, providing an enormous market for Cuban goods and services. Indeed, the United States is already the second-leading source of tourists to Cuba (with more than 300,000 per year including Cuban-Americans, who are not counted as visitors by the Cuban government), despite the difficulty in reaching the island legally. Similarly, Jorge Luis Fernandez Maique, co-president of Habanos, the Cuban state tobacco company, claimed at a press conference in October that Americans already buy 20mn Cuban cigars, despite the fact that they are illegal. Clearly, American demand for Cuban goods is robust, and if transactions were normalised, the effect would be substantial.

US Politics To Sideline More Substantive Change, For Now

The longstanding US decision to retain its chilly relationship with Cuba is not widely supported in the US itself. Polling organisation Gallup has surveyed Americans repeatedly on the issue, and in all nine of the polls conducted since the beginning of 1999, a majority of respondents favoured re-establishing diplomatic relations with Cuba, with a slight majority in most polls favouring an end to the trade embargo as well (compared to just 36% opposed, in the 2009 poll). However, small vocal constituencies and lawmakers retain a hard stance towards the Castro regime, which they condemn for its persecution of dissidents and general repression of democratic ideals.

Although the international community is expected to again condemn the embargo (as it has every year for over two decades), we do not believe that substantial reforms are imminent. The administration of President Barack Obama is currently intensely focused on domestic policy such as healthcare reform and the budget, and the paucity of political capital available to take on the issue, which is still a hot topic among some constituencies, will likely sideline a revisiting of Cuban relations over the medium term. Nevertheless, given the US popular support for easing of the embargo and small steps toward liberalisation taken by the Cuban government, we expect US-Cuba relations to open up over the longer term.

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