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The Economic Impact Of The Lift Of US Sanctions On Cuba

How much effect will they actually have?

15Jun

The lifting of US sanctions on Cuba after almost 55 years represents a symbolic thawing of relations between the two countries. The stated aim of the embargo - to topple the Cuban Government in retribution for nationalizing a number of US-owned businesses after the revolution in 1960 - has failed, and several of the island’s exports are highly desired in the US, particularly their new lung cancer treatment, CimaVax.

However, many sanctions remain in place, and Cuba’s socialist government is still in power. Under such circumstances, how big an economic impact will the move actually have?

Investment

The removal of sanctions makes it theoretically easier for firms to invest in the island, but it has not put an end to Cuba’s restrictive business policies. Around 95% of the island’s economy remains in state hands, meaning that it is still not an especially attractive proposition for investors. Foreign investors in Cuba must partner with the Cuban government as opposed to private companies, and they must do so as minority shareholders, so American firms can only take a small stake in an unequal partnership.

The Financial Sector

For the US, the impact is likely to be minimal for the financial services sector. Historically, US sanctions have also had negligible impact on Cuba’s banking and insurance sectors. They were not previously an exporter of banking or insurance services to the US. It is unlikely that this situation will change. There are also no privately owned banks or insurance firms permitted in the island’s domestic market, although more insurance products should become available on the island if insurance companies move into the region.

At the moment, US financial institutions have to transfer funds to, and receive funds from, Cuba using third-country banks. The lifting of sanctions will mean US banks can directly access the Cuban financial system.

PWC notes that the symbolism of the event is the most important aspect, arguing that the Cuban economy may increase its prominence in the region as a result.

Industry

Automakers, agricultural conglomerates and telecommunications companies are among those that have long eyed Cuba as fertile territory. Telecommunications in particular has massive options for growth, as just 5% of the island’s population has internet access.

The Castro government has, however, already entered into agreements with European-based multi-national firms to distribute many Cuban products, including the island’s most desired exports - cigars and rum. Cuban cigars, for one, are controlled exclusively by Imperial Tobacco. With these agreements in place, it may be difficult for American businesses to gain much of a foothold.

Tourism

Cuba should see a massive boost in tourism, as it becomes far easier for American nationals to gain the necessary license to travel to the country. Cuba has been a popular destination for Canadian and European tourists for many years, and it was for Americans until 1959. Roughly 92,300 US citizens made the trip in 2013, and this is expected to double. They can also now bring back up to $400 dollars worth of goods, and US visitors will now be able to use US credit and debit cards in Cuba.

Construction

Cuba’s ageing infrastructure needs refreshing if it is going to exploit any opportunities presented by the end of the embargo, which should mean a lot of construction work available. The interest shown by American builders has been low, with many skeptical of their ability to pay for the work, but this may change, and Cuban builders will likely see more work coming their way.

Healthcare

Cuba’s healthcare system is renowned for being one of the best in the world. The life expectancy of its citizens is 79, which is on par with that of the US, despite its GDP per person being eight times smaller.

The embargo has, however, greatly hampered drug research. Researchers have struggled to find necessary parts for equipment with which to conduct testing, as well as necessary ingredients for drugs. Cuban scientists often cannot properly maintain their medical scanning technology without spare parts from companies linked to the U.S, which many refuse to provide, even indirectly. Even still, Cuban researchers have worked around it, and grown into one of the world’s preeminent immunology communities. The relaxing of sanctions should be a boost to this. The US will also benefit greatly. A deal has already been put in place for ClimaVax, a lung cancer vaccine which is in the early stages of testing, and it is likely that more will follow.

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