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US-CUBA RELATIONS THAW, BUT CHALLENGES REMAIN

February 24, 2015

Originally published in Global Finance Magazine

An improvement in relations with the US may not change much on the ground in Havana.

After 54 years of economic and diplomatic isolation, relations between Cuba and the United States appeared to thaw in mid-January, when the United States implemented a host of regulatory changes to its sanctions regime against the Communist country. The changes are part of an initiative by president Obama to reestablish diplomatic relations with Havana and improve bilateral economic ties between the two countries. The US government eased restrictions on travel to the island nation and allowed American companies to export certain technologies, like computers and software, construction supplies and tools. The move was intended to empower the nascent Cuban private sector.

Washington also increased the ceiling on remittances to Cuba and authorized US banks to set up correspondent banking relationships to process US credit and debit cards there. Experts agree that this is an important step forward, but they advise caution.

“After years of bellicose relationships between the two countries, this is a positive development,” says Aryam Vázquez, senior Latin American economist for Oxford Economics, which provides economic forecasting and modeling. “But it is not a game changer—it does not make Cuba the next hot-spot emerging market.” According to Vázquez, more remittances and travel to Cuba by Americans are bound to strengthen the country’s domestic demand and drive some economic growth. But they won’t be nearly enough to unleash its full potential, as many hurdles remain.

For one, it is still unclear how welcoming Cuba’s domestic regulators will be to the increased flow of US dollars. Second, Cuba’s appeal to American, and international, business interests remains limited at this time. “We have the toxic combination of the embargo, which remains in place, low foreign direct investment as a result of the complex operating environment, and insufficient domestic reforms,” says Daniel Sachs, senior consultant and Central American and Caribbean analyst at consultancy Control Risks. “In addition, productivity in Cuba is weak, as structural reforms and supply-side adjustments are nonexistent while the country battles with severe external financing constraints.”

The real question, then, is whether a thaw in relations with the United States will trigger a virtuous cycle for Cuba toward the modernization of its political and economic institutions or serve as a sideshow at a time when traditional allies like Venezuela, China and Brazil are struggling economically.

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