On December 17, President Obama called for an end to the long economic embargo against an old Cold War enemy. The United States and Cuba agreed to restore the diplomatic ties originally severed by Washington over half a century ago.
This step will hopefully allow for a new economic relationship to grow between Americans and Cubans.
But the Senate still needs to vote on the lifting of the embargo. The debate on the reform will surely be heated, as Congress has already said that the United States should not recognize Cuba until it takes on democratic reforms.
In spite of arguments in the political sphere, the markets seem ready to move forward and embrace their new trade partners.
More Than Just Cigars
Cuba faced a severe economic downturn in 1990 following the collapse of the Soviet Union and the withdrawal of Soviet subsidies worth $4 to $6 billion annually.
But the United States and Latin America no longer see Castro and his now-ruling younger brother as a threat. Thus, the lifted embargo will be a significant boon for Cuban trade and commerce.
Both markets will soon be playing the rumba and dancing salsa together, supporting greater trade flow and evolving opportunities for farmers, miners, manufacturers, and the energy sector.
Imports and exports have already risen considerably since 2004 and now look to advance at a faster pace.
Cuba mainly imports food, cereals, fuel, diesel engines, vehicles, motor parts, and vegetable oils from Venezuela, China, Spain, and Brazil.
The country’s exports include nickel, cane sugar, cigars, fuel, beverages, metallic ores, fish, cement, oil, and thyroid extract to Venezuela, China, Canada, the Netherlands, Singapore, and Spain.
As a result of low productivity and dependence on food imports, Cuba runs consistent trade deficits. This means that the opportunities for trade with the United States, as well as foreign direct investment (FDI), are massive.
Grabbing a Dance Partner
Some of the best opportunities lay in agriculture, as 32.31% of Cuba’s land is arable. Cuba is also rich in natural resources and is ripe for miners and metallurgists.
The potential for investing in energy infrastructure in Cuba is huge, as the island nation consumes all of the electricity it produces.
According to estimates from 2011 and 2013, Cuba has a generating capacity of 5.914 million kilowatts (kW), natural gas proven reserves of 70.79 billion cubic meters (bcm), and proven crude oil reserves of 124 million barrels (bbl). The country has four refineries all owned by Cuba Petroleos, the state-owned oil and gas company.
Since late 2000, Venezuela has been providing oil and petroleum products to Cuba on preferential terms, currently over 100,000 barrels per day. The island pays for it, in part, with the services of Cuban personnel in Venezuela.
But removing the embargo should reduce Cuba’s dependency on Venezuela because, even while the United States cannot export crude, it can export products, thus creating export opportunity for refiners.
According to the Brookings Institute, a dynamic, independent private sector is rapidly emerging in Cuba, despite the dominance of the state-run socialist system. The private sector is quickly absorbing workers laid off from the state, enlarging its growing middle classes, and defining a new Cuba.
The Cuban government has slowly and incrementally implemented limited economic reforms that allow to Cubans to do many things that we take for granted, including buying electronic appliances and cell phones, staying in hotels, and buying and selling used cars. The Cuban government also opened up some retail services to “self-employment,” leading to the rise of “cuentapropistas” or entrepreneurs, further helping Cuba in terms of economic freedom.
But perhaps the biggest growth prospect is tourism.
The Tourism Cha-Cha
Cuba is known for its beautiful weather and beaches. Thus welcoming FDI could make Cuba a worldwide attraction, just like most other Caribbean islands.
Unfortunately, Cuba still lacks much of the capital, know-how, and resources with which to grow and develop its tourism industry – which will require better infrastructure, transportation, energy, and communications. Thus the country will have a greater need for more steel, copper, timber, cement, power, and agricultural products.
Investors should keep in mind that support from the Cuban government may be a long and arduous process despite the inevitable need for FDI, infrastructure, and growth. Most importantly, providers of FDI need to be mindful of sustainability – preserving Cuba’s pristine lands, nature, and history is in the best interests of its people.
While it is premature to make a prediction about which commodity producers will participate in both Cuban FDI and trade, keep your eyes out for the companies that seek to do business there. They will surely become good investment prospects.