A SMALL WINDOW FOR THE U.S. AND CUBA / GEOPOLITICAL FUTURES

A Small Window for the US and Cuba

The war in Ukraine has magnified the island’s economic problems.

By: Allison Fedirka

The war in Ukraine is a truly global conflict. 

Citizens of faraway regions may not themselves be in physical danger, but any country that is sensitive to fluctuations in food or oil prices, both of which have risen since the conflict started, have become its victims.

Such is the case with Cuba. 

Its economic problems are well-documented, as are the government’s limited means of solving them. 

But the war in Eastern Europe has amplified the situation, and any kind of reconciliation between Havana and Washington will depend to some degree on the outcome of broader global crises sparked by the war in Ukraine.

Hardships

Recent comments by Cuban officials show that Havana is feeling the pressure already. In mid-June, the state sugar company announced that the 2021-22 sugar crop produced only half the expected yield, marking the lowest harvest in a century. 

The following month, Energy Minister Livan Arronte Cruz said on state-run television that Cuba’s 20 power plants were largely obsolete, largely because of delayed maintenance and lack of funding. 

Days later, a member of Cuba’s national assembly publicly questioned the veracity of Economic Minister Alejandro Gil’s statements regarding the island’s economic health, saying the government was not, in fact, satisfying the population’s needs. 

In a country like Cuba, where official data is generally tightly controlled and criticizing the government is fairly rare, these kinds of statements stand out and suggest the government knows more trying times lie ahead.

Partly that’s because Cuba is highly reliant on imports for energy, and thanks to the war in Ukraine and the sanctions that followed, the rising cost of oil has made it impossible for cash-strapped Cuba to purchase sufficient supplies (the discounts it receives from Venezuela and Russia notwithstanding). 

Rising commodity prices have also curbed the island’s ability to import food and fertilizers. 

But perhaps more important, the war has deprived Cuba of the attention of its most important benefactor, Russia, which can provide only short-term relief that treats Cuba’s symptoms but not its problems.

The war has also undermined Cuba’s ability to remedy these problems. 

The government can no longer rely on its plan to leverage tourism for the influx of foreign currency it uses to buy imports. 

Indeed, the importance of tourism cannot be overstated. 

It accounts for roughly 10 percent of gross domestic product, employs half a million public workers, and is the second largest source of foreign currency for the government. 

In 2022, the government hoped to bring in $1.6 billion through tourism from roughly 2.5 million visitors. 

But by the end of June, only 682,297 tourists had visited the country. 

High inflation throughout the world reduced disposable income, and consumers have been forced to downgrade consumption habits, which includes vacations. 

Furthermore, strong sources of Cuban tourism – Russia and wealthy European countries – have been disproportionately affected by the conflict in Ukraine. 

Currently, Canadians and Cubans residing outside the island account for half of all tourism. 

The government has taken steps to create alternative sources of foreign currency, but all of them come with some political costs. 

For example, the government intensified its policy of holding wages of foreign-employed workers, a practice meant to ensure equitable wages among private and public employees but one that ends up providing more money for the government at the expense of workers. 

Havana has also altered its relationship with the island’s thriving black market in an attempt to solve market shortages and collect foreign currency. 

It created special grocery stores where clients who pay in hard currency can purchase food products that are difficult or impossible to come by in regular shops. 

The problem is that foreign currency is not universally accessible, often reserved for families receiving remittances or with coveted jobs (often determined by the government) that provide access. 

Most recently, the government decided to embrace the black market by changing the official exchange rate to meet the black market value of 1:120. 

The move aimed to take foreign currency off the black market and place it under government control. 

The preferential rate is available only to hotels, banks and currency houses willing to sell, since buying foreign currency is not an option.

In addition to currency problems, the Cuban government appears to have reached its limit on what it can do about energy prices. 

The high cost of oil and the dilapidation of electricity generation plants present an immediate threat that can be met only by time and massive funding – two things the Cuban government does not have. 

Chronic power shortages became notably worse in recent months. 

The government canceled public celebrations to save energy, encourages the use of wood stoves for cooking, and had to introduce regular rolling blackouts across the island. 

In the second week of August, the daily electric deficit ranged from 650-950 megawatts, with peak shortages at night reaching 750-1071 megawatts, according to UNE.

 

Energy drives economic activity, so electricity and fuel shortages naturally constrain economic growth. 

But the shortages have also already begun to affect the everyday lives of Cubans. 

Since March, the government has been diverting fuel supplies to generation plants to keep as much electricity online as possible. 

This intensified fuel shortages across the island, limiting people’s ability to work and conduct normal business, including much-needed agriculture production. 

Electricity shortages resulted in water shortages in rural areas at elevation because there was no electricity to pump the water.

Naturally, these economic problems have had social consequences. 

Last year, when large-scale anti-government protests erupted across the island, leaders in Havana had no trouble cracking down and sending agitators to jail – some sentences were as along as 30 years, just to show the new generation what it was capable of. 

This is very much in keeping with Cuba’s rich history of suppressing political dissent. 

The problem is that suppression can’t fix the underlying problems that led to protests in the first place. 

The current demonstrations are not an expression of ideological difference but the direct result of nearly unfixable economic hardship.

 

Make or Break

The backdrop for Cuba’s latest economic meltdown, coupled with the absence of a benefactor like Russia, creates a small window of opportunity for the U.S. and Cuba to improve ties. 

Cuba needs a strong patron to survive economically, and Washington could at least partially fill the void. 

Migration has become an important area for improving diplomatic ties. 

From November 2021 to July 2022, an estimated 140,000-150,000 Cubans have entered the U.S., the highest number in 40 years. 

The influx coincides with Nicaragua’s lifting visa restriction on Cubans, which opened up the Central American land route. 

While Cubans represent a small percentage of migrants on the U.S. southern border, their presence in a hotly contested area forces Havana and Washington to engage on the matter.

In May, the U.S. government launched a rapprochement strategy toward Cuba. 

The strategy prioritizes working closely with the Cuban government for issuing visas as part of the family reunification program. 

Washington has made it clear that it has no plans to soon resume its political refugee program or fast-track political prisoner emigration. 

So by prioritizing families over politicians, the U.S. is letting a contentious point lie rather than undermining the Cuban government.

Another part of the strategy indirectly helps Havana by eliminating limits on remittances from the U.S. to Cuba, which account for approximately 90 percent of all remittances to the island. 

Remittances rank as the third largest source of foreign currency on the island and support household incomes where the government falls short. 

On both accounts, the Cuban Foreign Ministry said these were limited steps in the right direction.

The potentially problematic portion of the U.S. strategy – support for entrepreneurs – is the one that has remained untouched. 

This provision was meant to help entrepreneurs by improving internet access, cloud technology and e-commerce. 

It could be a boon to small businesses, yet increased internet access is a threat to Havana because it can popularize and fuel unrest.

How the U.S. pursues this portion of its Cuba strategy can make or break its relationship with Havana, and Washington is unlikely to burn any bridges before getting a clearer picture of how the world will take shape in the wake of Ukraine and global economic chaos.