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TRUMP’S NEW CUBA SANCTIONS MISS THEIR MARK

Posted on November 9, 2017 by Arch Ritter

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BY WILLIAM M. LEOGRANDE | NOVEMBER 9, 2017

Original Article: SANCTIONS MISS THEIR MARK

REGULATIONS ON TRAVEL AND TRADE WILL LIKELY HAVE LITTLE IMPACT ON CUBA’S GOVERNMENT, HURTING ORDINARY CUBANS INSTEAD.

After two years of restored diplomatic ties, new U.S. regulations on Cuba are bringing back a thicket of travel, financial and trade restrictions – and a tougher stance toward the island. The goal of these restrictions, according to U.S. President Donald Trump, is to starve the Cuban government of money from travel, remittances and commercial ties. But the real victims of the new sanctions will be U.S. residents whose right to travel is curtailed, Cuban families who depend on remittances to survive, the struggling Cuban private sector, and U.S. businesses that will face an even greater disadvantage competing with Asian and European firms.

The regulations issued by the Treasury and Commerce Departments on Nov. 8 re-impose significant limits on educational travel to Cuba that former President Barack Obama relaxed. They also redefine “prohibited officials of the Government of Cuba” expansively, potentially cutting off remittances to hundreds of thousands of Cuban families. Finally, they prohibit anyone subject to U.S. jurisdiction from engaging in any “direct financial transactions” with entities controlled by the Cuban military or security forces that “disproportionately benefits” those entities.

All this marks the implementation of new sanctions Trump announced on June 16, 2017, at a Cuban American rally in Miami. The sanctions were mandated by the National Security Presidential Memorandum the president signed onstage, and included several major changes to the Cuban Assets Control Regulations (CACR), which spell out the operational details of the U.S. embargo.

Educational travel

In January 2011, Obama relaxed restrictions that former President George W. Bush had imposed on educational exchanges with Cuba – restrictions so onerous they eliminated most U.S. study abroad programs. Trump’s new regulations re-impose the Bush era restrictions, albeit with some exceptions for students accompanied by a representative of their U.S. academic institution. When combined with the State Department’s Sept. 29 travel warning advising people not to visit Cuba at all because of the injuries suffered by two dozen personnel at the U.S. embassy, the new restrictions on educational travel could drastically reduce U.S. study abroad in Cuba, which had been on the upswing since 2014.

U.S. visitors traveling under the “people-to-people” educational license (for educational travel not leading to an academic degree) can no longer travel on their own. They must now travel with organized groups under the auspices of a U.S.-based, licensed travel provider. Obama had lifted the group travel requirement in March 2016, providing an immediate boon to Cuba’s emerging private sector because individual travelers are much more likely to stay at private B&Bs (casas particulares), eat in private restaurants (paladares), take private taxis, and hire private guides. Most organized groups are too large for private rentals and thus have to be booked into government-owned hotels. Consequently, although Trump’s policy purports to boost Cuba’s private sector, the prohibition on individualized people-to-people travel hits the private sector hardest.

Although Cuban private businesses may suffer, the new travel regulations are not likely to put a huge dent in the number of U.S. visitors. The volume of travelers from the United States jumped dramatically in 2015, up 77 percent over 2014, after Obama and Cuba’s President Raúl Castro announced their intention to normalize relations in December 2014. This surge occurred before Obama ended the prohibition on individualized “people-to-people” travel. U.S. visitors are far more likely to be deterred by the State Department’s travel warning. Even then, a significant decline in U.S. visitors will not do serious damage to the Cuban tourist industry, which hosted four million foreign visitors in 2016 and is on track to host 4.7 million this year, of which only seven percent were non-Cuban American U.S. visitors.

Remittances

The new regulations redefine “prohibited officials of the Government of Cuba” to include all employees of the Ministry of the Revolutionary Armed Forces and Ministry of the Interior, thousands of ordinary Cubans who volunteer as leaders of their local Committees for the Defense of the Revolution, as well as senior government and party officials. The previous regulatory definition of prohibited officials, put into place by Obama in October 2016, was limited to members of the Council of Ministers and flag officers of the Revolutionary Armed Forces. The new definition encompasses hundreds of thousands of people, since the armed forces manage a significant number of commercial enterprises such as the Gaviota hotel chain and TRD Caribe retail stores, especially in the fast-growing tourism sector.

Cubans who are “prohibited” are not allowed to receive payments from U.S. nationals. That includes remittances and gift packages (Cuban Assets Control Regulations,  §515.570), so the new regulations could potentially deprive hundreds of thousands of Cuban families of support from their relatives abroad. However, the actual impact is harder to predict. There is no way to enforce this prohibition since the U.S. government does not have a list of all the people covered in the expanded definition. Moreover, Cuban Americans can carry funds and gift packages to family when they travel or can wire funds through third countries, just as they did in 1994 when former U.S. President Bill Clinton tried, unsuccessfully, to cut off remittances to punish Cuba for the balsero (rafters) migration crisis.

Apart from whether the new prohibition proves effective, it would seem to run counter to the purported aim of Trump’s policy to empower the Cuban people by directing U.S. funds to them, rather than to the Cuban government. Remittances are by far best way to do that because the dollars go directly to family on the island.

Transactions with military-linked enterprises

The most complex regulatory change is the prohibition on engaging in any “direct financial transactions” with businesses controlled by the Cuban military or security forces if they “disproportionately benefit” those forces. This is a potentially significant prohibition because the Cuban armed forces ministry administers commercial holding companies involved in everything from banking and port management to hotels and retail sales. The presence of military enterprises is greatest in the tourist sector, where both U.S. visitors and U.S. companies are most likely to encounter them.

The U.S. Department of State was tasked with creating a list of prohibited enterprises, which it released along with the new regulations. The list includes 180 entities, 58 percent of which are in the tourist sector, including 84 hotels – by far the largest category of businesses included. Some of the entities listed are holding companies for hundreds of retail outlets, but U.S. travelers and companies can still do business with subsidiaries of prohibited entities so long as the subsidiaries themselves are not specifically listed. Quite reasonably, the State Department took the view that it could not expect travelers to know which retail outlets might be subsidiaries of prohibited entities unless they were specifically named.

Senator Marco Rubio (R-Fla.) and Representative Mario Díaz-Balart (R-Fla.), who were the intellectual authors of the ban on transactions with military-linked enterprises, complained that the State Department’s list was not inclusive enough because “bureaucrats” were “refusing” to carry out Trump’s policy. Rubio wanted to see the entire Cuban tourist sector put off-limits because the Minister of Tourism, Manuel Marrero Cruz, is a former military officer. According to Rubio, that means the entire sector is controlled by the armed forces.

The Cuban government was not happy with the sanctions either. Josefina Vidal, Director General for U.S. Affairs in the Foreign Ministry, said the new measures “confirm the serious regress of bilateral relations as a result of the decisions adopted by the government of the President Donald Trump,” and called some of them “subversive.”

In truth, the impact of these sanctions on commercial relations with Cuba is likely to be limited. The Cuban government, adept at coping with U.S. hostility for the past half century, may feel the pinch, but it can look elsewhere for trade partners and tourists. Also, in order to avoid disrupting ongoing business relationships, the new regulations exempt existing contracts from the prohibition on doing business with military-linked enterprises. So, for example, Marriott-Starwood Hotels’ contract to manage hotels owned by holding companies administered by the armed forces ministry is not affected by the new regulations. Moreover, even future contracts will be allowed with military-linked businesses involving ports, airports, and telecommunications, which are the three sectors in which most U.S. businesses (cruise ship lines, airlines, and cell phone companies) now operate.

On balance, the regulatory burden falls most heavily on U.S. academic institutions, whose study abroad programs in Cuba will be curtailed; on U.S. travelers who can no longer travel by themselves on a people-to-people educational license; on Cuban-Americans whose families on the island who will no longer be eligible to receive remittances and gift packages; and on U.S. businesses that may want to sell goods to Cuba in sectors where their counterparts are commercial enterprises managed by the armed forces ministry.

The Cubans who will suffer most are small business owners, suppliers, and employees who cater to individual U.S. travelers; employees of state firms managed by the armed forces ministry and their families, who may lose remittances and gifts; and Cubans who might have found employment with U.S. companies whose potential business deals are now blocked.

The Cuban state will suffer only marginally from Trump’s new sanctions – certainly not enough to force it into the sorts of concessions Washington demands.

 

 

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DOES THE CUBAN MILITARY REALLY CONTROL SIXTY PERCENT OF THE ECONOMY? ANATOMY OF A FAKE FACT

Posted on June 29, 2017 by Arch Ritter

William M. LeoGrande, Contributor, Professor of Government at American University

Huffington Post, 06/28/2017 11:39 am ET

Original Article: Fake Fact

President Donald Trump’s decision to prohibit U.S. transactions with Cuban enterprises controlled by the military has thrown a spotlight on the role of the armed forces in Cuba’s economy. That role is extensive, reaching across a number of different sectors, and it has grown in recent years along with Cuba’s tourism industry, where military-controlled firms are concentrated. These enterprises are managed by the holding company Grupo de Administración Empresarial S.A., GAESA, which reports to the Ministry of the Revolutionary Armed Forces (MINFAR).

The sudden spurt of media interest has produced widespread repetition of the spurious “fact” that the Cuban military controls 60% of the economy. “GAESA is the business arm of the Cuban Revolutionary Armed Forces and controls 60 percent of the island’s economy,” the Miami Herald reported shortly after Trump’s speech and repeated several times thereafter. The Economist, Politico, The Guardian, The Times of London, Business Insider, and others repeated it.

Even a cursory review of the composition of Cuba’s Gross Domestic Product demonstrates that this “fact” is ludicrous. Sectors in which the military has little or no participation easily comprise more than half of GDP, and in the other sectors, there are civilian as well as military-controlled firms (Anuario Estadístico 2015).

So how much of the economy do military enterprises really control and where did the 60% claim come from?

The Cuban government does not routinely report the revenue from individual enterprises, but we have a few data points for the largest military holding companies from which we can make reasonable projections.

Total revenue from enterprises managed by the military was reported as $970 million in 1997. Since a large portion of their revenue comes from tourism, let’s suppose that their revenue has increased in tandem with the rapid growth of that sector. In 1997, Cuba had 1.2 million foreign visitors (according to Cuba’s 2004 statistical year book, Anuario Estadístico). In 2016, Cuba had 4.1 million — a 249% increase. At that same rate of increase, projected revenue from military-linked firms in 2016 would be $3.4 billion.

We can check the reliability of this estimate with data from the three main military companies, Gaviota, Cimex, and TRD. Gaviota, the largest military-controlled conglomerate, is concentrated in tourism. Total revenue from the tourism sector was $2.8 billion in 2015 (Anuario Estadístico 2015). While Gaviota is the largest player, it does not hold a monopoly; it controls 40% of all available hotel rooms (though it has a higher proportion of the better ones), plus car rentals, tourist taxis, and restaurants. It is plausible, then, that Gaviota may generate as much as 60 percent of the earnings from tourism, or approximately $1.7 billion.

Cimex had 2004 revenue of $740 million. Using the same projection method based on the growth of tourism, Cimex’s estimated 2016 revenue would have been about $1.3 billion. The Havana Consulting Group, whose President Emilio Morales was formerly an executive at Cimex, estimates its revenue as $1.2 billion.

TRD, a chain of retail stores created to capture hard currency, had sales of $250 million in 2004. Using the same projection method, TRD’s estimated 2016 revenue would have been about $442 million.

Thus we estimate that the three largest GAESA companies taken together would have had 2016 revenue of about $3.45 billion, very close to the $3.4 billion initially estimated from the data on total MINFAR revenue. Emilio Morales at the Havana Consulting Group, using data he has collected over the past 15 years, estimates GAESA’s total current revenue at $3.8 billion.  Using Morales’ estimate, GAESA’s revenue constitutes 21% of total hard currency income from both state enterprises and the private sector, 8% of total state revenue, and just 4% of GDP (Anuario Estadístico 2015). That’s a long way from 60% of the economy, no matter what metric you use.

Where Did It Come From?

So where did the wildly inaccurate claim of 60% come from?

It first appeared in a February 2004 story in the Miami Herald about the head of Gaviota, Manuel Marrero Cruz, being named Minister of Tourism. “Cuba’s armed forces have taken over up to 60 percent of the island’s economy,” the Herald reported, citing the Cuba Transition Project (CTP), a U.S. government-funded project of the University of Miami’s Institute for Cuban and Cuban-American Studies.

In subsequent months, Institute Director Jaime Suchlicki regularly repeated the claim. In the proceedings of a November 2004 CTP conference, he wrote, “Today, more than 65 percent of major industries and enterprises are in the hands of current or former military officers.” In August 2006, he told the Associated Press, “They’re running 60 percent of the Cuban economy. All major industries are in the hands of the military’s active duty or former military people.”

Although no data or evidence was ever produced to support that claim, Suchlicki’s formulation was at least plausible, though misleading, because he included not just enterprises managed by the armed forces, but civilian enterprises and whole ministries led by active or retired military officers. The implication was that these entities were controlled by the armed forces, although there was no basis for such a conclusion. On the contrary, because the military has always been among the most efficient Cuban institutions, it has a long history of exporting managers to the civilian sector, going back to the 1970s.

Before long, the claim of military control devolved into a claim that MINFAR enterprises themselves constituted 60% of the economy. “The University of Miami’s Institute for Cuban and Cuban-American Studies estimates that soldiers control more than 60% of the island’s economy,” the Wall Street Journal reported in November 2006.

Other conservatives picked up the theme. “The military… controls about 60 percent of the economy through the management of hundreds of enterprises in key economic sectors,” wrote Carl Gershman, President of the National Endowment for Democracy (which also received U.S. government funding for “democracy promotion” in Cuba), and Orlando Gutierrez, national secretary of the exile organization Cuban Democratic Directorate. A 2008 Heritage Foundation report declared, “Serving or former military officers direct an estimated 60 percent of Cuba’s business and industry.”

By 2016, Suchlicki himself, who had originally been careful to specify that he was talking about major industries and enterprises run by military officers and former officers, had lapsed into the broad, unqualified claim that “more than 60% of the economy is under military control.”

Various newspapers and web sites repeated the claim over the years, setting the stage for this oft-repeated “fact” to be widely circulated when President Trump’s announcement made the Cuban military’s role in the economy a news story, as exemplified by the Miami Herald’s declaration, “GAESA…controls 60 percent of the island’s economy.”

It’s a case study in how fake facts become legitimated and spread, even without the boost of social media. Promulgated by a university-based center, which gave the claim credibility, it began as an exaggeration of the military’s control, lumping together military enterprises and civilian enterprises run by officers and former officers.

Gradually, those details fell away, perhaps because the flat statement of 60% control was more dramatic, or a better sound-bite, or perhaps because journalists failed to understand the nuances of the claim. As more and more sources quoted it, it gained credibility. By the time of President Trump’s June 16 policy announcement in Miami, it had become conventional wisdom that Cuban military enterprises controlled 60% of the economy, even though that “fact” was spectacularly wrong.

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WHAT TRUMP’S NEW CUBA POLICY MEANS FOR AMERICAN BUSINESS

Posted on June 23, 2017 by Arch Ritter

By Mimi Whitefield

Miami Herald, June 23 2017

Some U.S. executives that do business with Cuba breathed a sigh of relief after President Donald Trump outlined his new Cuba policy in Miami because it won’t have much impact on their companies. But others have pressed the pause button until they see how the new regulations implementing the changes are written.

Lawyers who help firms navigate the thicket of laws and regulations governing the embargo and dealings with the island have been combing through a memorandum that Trump signed on June 16 as well as three pages of frequently-asked questions issued by Treasury’s Office of Foreign Assets Control (OFAC) and a White House fact sheet to get a sense of the new policy.

Until the regulations are written, that’s all they have to go on. Trump has mandated that the regulation-writing must begin by mid-July.

“Until the regulations change, everything is status quo,” said Yosbel Ibarra, a Miami lawyer on Greenberg Traurig’s Cuba practice team.

How long it will take to write new rules is anybody’s guess, but it isn’t an easy task because multiple agencies and departments will be involved. Some key posts that would have oversight over the new policy also have yet to be filled by the Trump administration, according to lawyers.

Don’t expect a rush by U.S. companies that have proposals pending before the Cuban government to get deals inked before the new rules go into effect, say lawyers and business consultants.

“The way corporations are, when they know rule-making is underway, they are always going to hold up until the regulations are written,” said Robert Muse, a Washington lawyer who specializes in U.S.-Cuba law. “They are not going to set themselves at the far end of the branch based on a Q&A from OFAC.”

There will be important changes in the new policy: it bars most business by U.S. companies with Cuban entities owned or controlled by the military or intelligence services and cuts out people-to-people trips to Cuba by individuals. Group travel in that category is still OK – although there is expected to be more scrutiny of all Cuba travelers to make sure the purpose of their trips isn’t tourism.

The prohibition on doing business with the military is significant because since the 1990s, the Cuban military has been taking control of ever larger chunks of the economy, partly because military managers are viewed as more efficient. Many officers have been sent abroad for business training.

Now the military conglomerate GAESA controls an estimated 40 to 60 percent of the economy, with heavy involvement in the tourism industry, logistics and retail operations.  The military’s Gaviota Tourism Group, for example, controls or has joint ventures with foreign partners in 64 hotels and villas, including many resort hotels as well as the Saratoga, a favorite of visiting Congressional and business delegations, and the new luxury Gran Hotel Manzana Kempinski in Havana.

Even though former President Barack Obama opened up more opportunities for U.S. companies to do business in Cuba, not that many agreements have been finalized. Most are in the transportation sector, the telecommunications industry (notably roaming agreements and Google’s deal to install its servers on the island) and in the hospitality sector.

Some of the U.S. companies have inked deals with military entities. Telecommunications projects, for example, go through ETECSA, the state communications company that is controlled by the military, and Starwood Hotels & Resorts, now a part of Marriott International, has signed an agreement with Gaviota, the military tourism company, to manage a Cuban hotel as a Four Points by Sheraton.

But the administration has said it doesn’t want to hurt American businesses that have engaged in lawful commercial opportunities with Cuba and those agreements will be grandfathered into the new Cuba policy. That’s also true of any other projects that are in place prior to issuance of the new regulations.

Meanwhile, the coming prohibition on doing business with the Cuban military has prompted calls from clients who want to make sure exactly who their Cuban counterparts and business partners are, said Ibarra.

But even companies looking at business that seemingly have nothing to do with the Cuban military are wary.      “I’ve already had a client from New York call and say I guess I’m not going forward [in Cuba],” said Charles Serrano, a Chicago business and travel consultant who has taken clients on more than 130 trips to Cuba.

He is helping four other companies that have signed agreements, have submitted proposals or are in negotiations. But Serrano, managing director of The Antilles Strategy Group, said: “This will slow the interest of American businesses in exploring opportunities in Cuba. They calculate risk based on real things.”

The next battleground is how the new regulations are written.   “After the announcement there was a little sense of relief because companies now know more or less what the landscape will look like and the direction policy is going,” said Pedro Freyre, chairman of Akerman’s international practice, which includes clients doing business or trying to do business in Cuba. “But now the next level of anxiety is about what the regulations will look like. Depending on how they are crafted, they could shut down a lot of business activity.”

Hardliners can be expected to make the case that the rules should be written so as much U.S. business activity as possible is precluded. But the Cuban Study Group, which includes executives and professionals who favor engagement, wants the administration to narrowly interpret what it means to do business with the Cuban military.

“There is a vast difference between a Fortune 500 company forming a joint venture with the Cuban military and a U.S. humanitarian worker buying a water bottle at a government-run store,” said the group in a statement. Among the military’s holdings are retail stores where visitors often buy bottled water.

“Nothing stops business like uncertainty,” said Ibarra. “The more clear and transparent the new regulations are, the better.”

Eventually, the State Department is expected to publish a list of military concerns that are off limits for U.S. companies.

Despite military links to airport and seaport operations in Cuba, the new policy allows cruise lines from the United States to continue to call at Cuban ports, U.S .airlines to keep on flying and limited legal trade, under exceptions to the embargo, to keep flowing.  “Carnival Corp. is pleased that the policy changes announced by the Trump administration will allow our ships to continue to sail to Cuba,” said spokesman Roger Frizzell. He said Carnival plans to review how the tightening of travel rules potentially might affect its passengers.  But he said all cruise passengers since Carnival’s social impact line Fathom inaugurated the first regular cruise service by a U.S. line to Cuba in March 2016 have been traveling under permissible categories for travel to Cuba.  Carnival Corp. has discontinued its Fathom service to Cuba, but its Carnival Cruise Line currently calls in Cuba and its Holland American Line plans to begin sailing there in December.

Other cruise lines also have jumped into the Cuban cruise market. With current sailings and service that is planned, nearly 200,000 travelers are expected to sail from the United States to Cuba this year.

American Airlines, which offers 70 flights weekly to six Cuban cities, doesn’t expect too much impact from the new Cuba policy. Because all but one of its flights — a Charlotte-Havana route — depart from Miami, they have proved popular with Cuban Americans whose travel is not restricted by the new policy.  “Because Miami is the heartland of Cuban exiles, we have a strong market of passengers visiting family and friends in Cuba,” said Martha Pantin, an American spokeswoman.  Since it began regular scheduled flights to Cuba last year, American has opened a ticket office in Havana, begun selling tickets at the Havana airport and installed self-service kiosks there too. “By July, we expect to have self-service check-in at all the airports we serve in Cuba,” said Pantin.

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SUN, SAND AND SOCIALISM: WHAT THE TOURIST INDUSTRY REVEALS ABOUT CUBA

Posted on April 6, 2017 by Arch Ritter

Stuck in the past: The revolutionary economy is neither efficient nor fun.

The Economist, April 1, 2017

Original Article: STUCK IN THE PAST

TOURISTS whizz along the Malecón, Havana’s grand seaside boulevard, in bright-red open-topped 1950s cars. Their selfie sticks wobble as they try to film themselves. They move fast, for there are no traffic jams. Cars are costly in Cuba ($50,000 for a low-range Chinese import) and most people are poor (a typical state employee makes $25 a month). So hardly anyone can afford wheels, except the tourists who hire them. And there are far fewer tourists than there ought to be.

Hotel at Vinales; apparently constructed with Mafia money as part of their major money-laundering 1950s tourism investment project. (Photo by Arch Ritter, 2015)

Few places are as naturally alluring as Cuba. The island is bathed in sunlight and lapped by warm blue waters. The people are friendly; the rum is light and crisp; the music is a delicious blend of African and Latin rhythms. And the biggest pool of free-spending holidaymakers in the western hemisphere is just a hop away. As Lucky Luciano, an American gangster, observed in 1946, “The water was just as pretty as the Bay of Naples, but it was only 90 miles from the United States.”

There is just one problem today: Cuba is a communist dictatorship in a time warp. For some, that lends it a rebellious allure. They talk of seeing old Havana before its charm is “spoiled” by visible signs of prosperity, such as Nike and Starbucks. But for other tourists, Cuba’s revolutionary economy is a drag. The big hotels, majority-owned by the state and often managed by companies controlled by the army, charge five-star prices for mediocre service. Showers are unreliable. Wi-Fi is atrocious. Lifts and rooms are ill-maintained.

Despite this, the number of visitors from the United States has jumped since Barack Obama restored diplomatic ties in 2015. So many airlines started flying to Havana that supply outstripped demand; this year some have cut back. Overall, arrivals have soared since the 1990s, when Fidel Castro, faced with the loss of subsidies from the Soviet Union, decided to spruce up some beach resorts for foreigners (see chart). But Cuba still earns less than half as many tourist dollars as the Dominican Republic, a similar-sized but less famous tropical neighbour.

But investment in new rooms has been slow. Cuba is cash-strapped, and foreign hotel bosses are reluctant to risk big bucks because they have no idea whether Donald Trump will try to tighten the embargo, lift it or do nothing. On the one hand, he is a protectionist, so few Cubans are optimistic about his intentions. On the other, pre-revolutionary Havana was a playground where American casino moguls hobnobbed with celebrities in raunchy nightclubs. Making Cuba glitzy again might appeal to the former casino mogul in the White House.

The other embargo is the many ways in which the Cuban state shackles entrepreneurs. The owner of a small private hotel complains of an inspector who told him to cut his sign in half because it was too big. He can’t get good furniture and fixtures in Cuba, and is not allowed to import them because imports are a state monopoly. So he makes creative use of rules that allow families who say they are returning from abroad to repatriate their personal effects (he has a lot of expat friends). “We try to fly low under the radar, and make money without making noise,” he sighs.

Cubans with spare cash (typically those who have relatives in Miami or do business with tourists) are rushing to revamp rooms and rent them out. But no one is allowed to own more than two properties, so ambitious hoteliers register extra ones in the names of relatives. This works only if there is trust. “One of my places is in my sister-in-law’s name,” says a speculator. “I’m worried about that one.”

Taxes are confiscatory. Turnover above $2,000 a year is taxed at 50%, with only some expenses deductible. A beer sold at a 100% markup therefore yields no profit. Almost no one can afford to follow the letter of the law. For many entrepreneurs, “the effective tax burden is very much a function of the veracity of their reporting of revenues,” observes Brookings, tactfully.

The currency system is, to use a technical term, bonkers. One American dollar is worth one convertible peso (CUC), which is worth 24 ordinary pesos (CUP). But in transactions involving the government, the two kinds of peso are often valued equally. Government accounts are therefore nonsensical. A few officials with access to ultra-cheap hard currency make a killing. Inefficient state firms appear to be profitable when they are not. Local workers are stiffed. Foreign firms pay an employment agency, in CUC, for the services of Cuban staff. Those workers are then paid in CUP at one to one. That is, the agency and the government take 95% of their wages. Fortunately, tourists tip in cash.

The government says it wants to promote small private businesses. The number of Cubans registered as self-employed has jumped from 144,000 in 2009 to 535,000 in 2016. Legally, all must fit into one of 201 official categories. Doctors and lawyers who offer private services do so illegally, just like hustlers selling black-market lobsters or potatoes. The largest private venture is also illicit (but tolerated): an estimated 40,000 people copy and distribute flash drives containing El Paquete, a weekly collection of films, television shows, software updates and video games pirated from the outside world. Others operate in a grey zone. One entrepreneur says she has a licence as a messenger but wants to deliver vegetables ordered online. “Is that legal?” she asks. “I don’t know.”

Cubans doubt that there will be any big reforms before February 2018, when Raúl Castro, who is 86, is expected to hand over power to Miguel Díaz-Canel, his much younger vice-president. Mr Díaz-Canel is said to favour better internet access and a bit more openness. But the kind of economic reform that Cuba needs would hurt a lot of people, both the powerful and ordinary folk. Suddenly scrapping the artificial exchange rate, for example, would make 60-70% of state-owned firms go bust, destroying 2m jobs, estimates Juan Triana, an economist. Politically, that is almost impossible. Yet without accurate price signals, Cuba cannot allocate resources efficiently. And unless the country reduces the obstacles to private investment in hotels, services and supply chains, it will struggle to provide tourists with the value for money that will keep them coming back. Unlike Cubans, they have a lot of choices.

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CANADA-CUBA ECONOMIC RELATIONS: AN UPDATE

Posted on October 13, 2016 by Arch Ritter

By Arch Ritter                                                                                                  October 5, 2016

 Canada and Cuba have maintained a normal and mutually beneficial economic relationship from Colonial times to 2016.  With the beginning of Cuba’s “Special Period” in 1990 and its modest moves towards a mixed market economy in the 1990s, Canadian participants were optimistic about future economic relations.  In the 2000’s, this was replaced by some skepticism, but with the reforms of 2010-2012 and the beginning of the normalization of US Cuba relations, optimism has returned. This article provides an update on Cuban-Canadian economic relations, including trade, foreign investment, development assistance and migration and some speculation concerning the future of the relationship.

Canada-Cuba Trade Relations

Since the start of Cuba’s revolution, normal trade relations between Canada and Cuba have been maintained. However, trade has waxed and waned over the years as can be seen in Chart 1. The chief feature of the trade relationship in the 1980s was the large volume of Canadian exports which were mainly wheat. Trade expanded steadily in the 1990s with the ending of the special trade relationship with the Soviet Union, as Cuba’s economy began to recover and as it began to diversify its export markets and sources of imports.

q1After 2001, Cuba’s exports to Canada expanded and began to exceed Canada’s exports to Cuba due to high nickel volumes and prices. Canadian exports to Cuba have more or less stagnated since 2001 while other countries have increased their market shares.  By 2015, Canada was the fourth ranking exporter to Cuba following Venezuela, China, and Spain (Table 1.) In contrast, Canada was the second largest export market for Cuba after Venezuela in 2015, accounting for 11% of Cuba’s exports.

r1

Cuba’s exports to Canada have consisted almost totally of nickel concentrates, with cigars, rum, seafood and copper scrap (presumably a quirk in 2015) as very small foreign exchange earners (Table 2.).

By 2015, Canada’s exports to Cuba were reasonably diversified (Table 2.) Its agricultural exports remained significant, though overwhelmed by US agricultural exports. Minerals (sulfur for Cuba’s nickel industry, potash for fertilizer), metals (copper products for Cuba’s electrical system mainly) and machinery of various types have all been significant in the 2010s.

r2 Tourism

Cuba’s best and most faithful friend is the brutal Canadian Winter, which has driven millions of Canadians to warmer Caribbean climes during the December to April period. Canada has been the largest single national source of tourists consistently from 1990 to 2015 and accounted for almost 40% of all tourist arrivals in 2015.  But when US tourism opens up completely, there will likely be a deluge of US winter-escape tourism as well as curiosity tourism, convention tourism, medical tourism, March-break tourism and retirement relocation. The result will likely be that prices rise, and Canadian winter time tourism may well be squeezed out of Cuba into lower cost destinations.

q2Canadian Enterprises in Cuban Joint Ventures

In 1991, Cuba opened itself to foreign investment in joint venture arrangements with state firms. By the end of 1999, there were 72 joint ventures or “economic association” agreements between Canadian firms and Cuban state enterprises but few seem to have ever come to life.

Sherritt International has been by far the most successful Canadian-Cuban joint venture.  Its formula for success is one that cannot likely be replicated by any other enterprise.  In effect, it exchanged 50% of its ownership in the nickel refinery in Alberta Canada for 50% ownership of the Moa mine and concentrator in Cuba and shared in the ownership of the marketing enterprise.  This made Cuba a significant foreign investor in Canada!  The Sherritt experience was explored in the previous issue of this publication.

A number of mineral exploration companies established joint ventures in Cuba by 1994 in association with Geominera S.A. It was thought that Cuba was an ideal location for mineral exploration because much of the country had been covered by aero-magnetic and geological surveys in the Soviet era.  Among the enterprises involved in exploration projects in joint ventures with Geominera were Holmer Gold Mines, Joutel Resources, CaribGold Resources, Northern Orion, and MacDonald Mines. Unfortunately, the exploration undertaken from 1992 to 2007 yielded disappointing results and none of the exploration projects led to producing mines. This suggests that either the quality and/or magnitude of the deposits are lower than in other regions of the world. Alternatively, perhaps the investment conditions, the policy environment and/or the political risk situation were worse than elsewhere. It would be surprising if there were another mineral exploration rush in the medium term future, unless mineral prices were to rise to very high levels.

Canadian enterprises in real estate development have also had difficult experiences in Cuba. One project announced in October 1998 by an association between Cuba’s luxury hotel chain, Gran Caribe and Cuban Canadian Resorts International proposed U.S. $250 million set of four condominiums with hotel and resort facilities. It would have opened up an important new type of tourism for Cuba.  However, in May 2000, the Ministry of Foreign Investment and Cooperation announced a prohibition of foreign ownership of condominium units killing this and other such projects for the time being.

Another project was that of Leisure Canada for the construction of some 11 hotels and two golf courses, a marina. (Leisure Canada Incorporated, 2000). This project fizzled out. In 2011 Leisure Canada, having changed its name to 360 VOX Corporation, was bought out by Dundee Corporation in May 2014.  Any mention of this project has disappeared.

One successful venture was the construction of five airports in Cuba, including Varadero and Havana International Airports by Intelcan Technosystems of Ottawa. The CDN$ 52 million investment in the Havana Airport, was financed in part by Canada’s Export Development Corporation (33%) and 15% from Intelcan. Since 2000, the ultimate payment has come from international passengers who pay U.S. $25.00 (CUC 25.00) as an airport tax on departure.

Unfortunately brilliant successes for Canadian-Cuban joint ventures seem to be few and far between.  Indeed, a number of executives of Canadian trading enterprises and joint ventures, Cy Tokmakjian and Sarkis Yacoubian, were jailed and tried on corruption charges –a cooling factor in the foreign investment process. The moral of the story is that establishing a joint venture in Cuba can work, but it must be done with patience, intelligence, and scrupulous awareness of Cuban regulations and processes and with clear benefits for the Cuban partner enterprise and the Cuban people.

Canadian Development Assistance

The Canadian International Development Agency (CIDA) has provided some interesting development assistance to Cuba since 1994. A major proportion of this has been “economic” in character, aimed at the “modernization of the state.”  Some has been used to support the initiation of projects by Canadian enterprises with Cuban counterparts or to promote Canadian exports. Some of the economic programs were micro-enterprise tax administration, economic management, support for technical training and computer acquisition at the Central Bank, a program to help strengthen administration and professional economics at the Ministry of Economics and Planning and training/certification programs for tradesmen in some basic industrial areas. Various types of commodity assistance were provided as well. Much of the assistance provided by NGOs was aimed at community level activities.  A small amount of assistance was directed towards human rights and governance initiatives including a “Human Rights Fund Pilot Project” and “Dialogue Fund” with multiple Canadian and Cuban partners.

r3Canada’s active development assistance projects in Cuba as of mid-2016 are listed in Table 3. The annual expenditures of these multi-year projects for 2014-2015 was $CDN 2.42 million, a very

 International Migration

 An interesting dimension of Canadian-Cuban relations is migration. As indicated in Chart 3, Cuban migration to Canada has risen from levels in the hundreds in the 1980s to around 1,400 in 2014-2015. However, an unknown number of the Cuban immigrants to Canada move on to the United States, especially Florida, reflecting the attraction of the large Cuban-American population there and the weather.

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Detailed sociological information on Cuban migrants is not available. However, my impressions are that, generally speaking, they are relatively well-educated, industrious, self-activating and entrepreneurial. They also seem to be relatively young, for the most part, many having recently finished their education and just starting out on their careers. Many Cuban immigrants seem to have done reasonably well and have found work in their professional areas, something that is not easy in a new society, culture and language.  This migration represents a “brain drain” or a loss of human capital for Cuba and a corresponding gain for Canada.

 Prospective Canadian-Cuban Economic Relations

The future economic relationship between Canada and Cuba will be shaped mainly by three factors: the strength and durability of Cuba’s economic recovery; the nature of Cuba’s economic policies affecting trade, and foreign investment; and the character and timing of complete normalization of relations with the United States.

A sustained recovery of the Cuban economy would promote a deepened and broadened economic relationship with Canada. A growing Cuban economy would permit increases in imports from all trading partners, including Canada.  At the same time, economic recovery in Cuba also requires expansion of its exports of goods and services.

Is an enduring recuperation of the Cuban economy probable in the next decade or so? First, the driving force for the Cuban economy, namely export earnings, at this time depends mainly on tourism, medical services and nickel exports.  Nickel and tourism should continue to be strong, but the obscured subsidization from Venezuela is over. Cuba’s medical service exports will likely be transitory as other countries develop their own medical systems and increase medical personnel.  Pharmaceutical exports may hold promise in the longer term but have been somewhat disappointing relative to the high hopes once placed in their prospects. Little progress appears imminent regarding the expansion of other merchandise exports. New exports of manufactured products have not appeared on the scene in a significant way and are obstructed by some public policies.

Some continuing problems may prompt skepticism regarding Cuba’s economic prospects in the near future. Among the difficulties often cited are: a dual exchange rate system with negative consequences for export diversification and expansion; a blockage of people’s initiatives, energies and entrepreneurship due to the unwillingness to extend further the reform process especially for medium scale enterprise; and the deterioration of parts of the infrastructure, most notably housing.

The second set of factors that will shape Canada’s future economic relations with Cuba in is Cuba’s policies relating to trade, foreign investment and tourism. These policies are unlikely to undergo dramatic change under Raul Castro’s leadership. This implies that the basic Canadian-Cuban economic relationship should not be affected seriously by changed Cuban policies in the next few years. The state-trading that in part characterizes these relationships is not intrinsically beneficial for Canada.

Thirdly, the complete normalization of U.S. – Cuban relations especially regarding trade and US investment in Cuba, will have a major effect on the Canada-Cuba economic relationship. Complete normalization will permit expansion of Cuban exports, US foreign investment in Cuba, US tourism in Cuba, financial flows and the possibility of open and vigorous collaboration of Cuban-America and Cuban citizens in business activities.  Greater prosperity will be the result.

Normalization with the United States will lead to expanded exports of goods and services to Cuba from the U.S. and vice versa.  This is due to geographic and transport factors.  More frequent freighter connections, high speed hydrofoil passenger boat connections, a re-connection of U.S. and Cuban railway systems and a proliferation of airline connections will lead to a reintegration of the two economies. The diversified U.S. economy can provide a broad range of consumer and capital goods and services competitively with other countries and with low transport costs and quick delivery times.

Canadian exporters to Cuba therefore will face a challenge after US – Cuban normalization. The location and logistical advantages of U.S. exporters, plus the interest, activism and advantages of the Cuban-American business community will outweigh any lingering “goodwill effect” with Canada. Overnight or next-day delivery of products ordered from the U.S. makes continuation of some types of exports from Canada difficult, as delivery from Canada currently may take up to two weeks or more on ships leaving Canada every week or ten days on average.

On the other hand, some of Canada’s current exports to Cuba are competitive with U.S. products and should increase in a post-embargo Cuban economic recovery. This might include fertilizers (potash), cereals, animal feed stocks, lumber, wood and paper products and fabricated non-ferrous metals products. Canada also is competitive in certain types of capital equipment such as minerals machinery and equipment, some paper making equipment, Bombardier aircraft, railway rolling stock and equipment, urban transit vehicles, communications equipment, electrical generation and distribution equipment, and some specialized vehicles. However, some Canadian exports may be threatened by U.S. competition.

In summary, the recovery of the Cuban economy and the increase in foreign exchange receipts that U.S.-Cuban normalization in time should bring about will be of benefit for some Canadian exporters while others may be replaced by U.S. suppliers.  Will the “expansionary effect” outweigh the costs of the “displacement effect” for Canadian exporters?  Perhaps, but this is not assured.

Normalization will also induce U.S. enterprises to invest in Cuba. With no further changes to the foreign investment law and within the current policy environment, one can imagine some but not many U.S. firms entering joint ventures.  But with policy liberalization in a post-Raul Castro situation, one can imagine large numbers of U.S. enterprises investing in Cuba. Cuban-Americans would also enter Cuba to set up small businesses or to finance business ventures with their Cuban relatives or counterparts.  The “geo-economic” gravitational pull of the U.S. will be strong. After U.S.-Cuba rapprochement Canadian trade and investment as a proportion of total trade and investment will likely diminish even though both might increase in absolute terms.

To conclude, there are future uncertainties and challenges regarding the Canadian-Cuban economic relationship.  The character and intensity of future economic performance in Cuba, Cuba’s policy environment and the timing of the complete normalization of relations with the United States are still ambiguous and uncertain. These factors will have mixed effects, but effects that on balance should be positive for Canada and Cuba.

Bibliography

Citizenship and Immigration Canada.  http://www.cic.gc.ca/english/resources/statistics/facts2014/permanent/10.asp.  Accessed October 23, 2016

Cuban Club Resorts. 2000. Web site: www.cubanclubresorts.com

Global Affairs Canada, Cuba – International Development Projects, http://www.acdi-cida.gc.ca/cidaweb/cpo.nsf/fWebCSAZEn?ReadForm&idx=00&CC=CU.  Accessed 3 October 2016

Industry Canada, Trade Data Online (TDO), Trade by Product (HS Codes) http://www.ic.gc.ca/eic/site/tdo-dcd.nsf/eng/Home

Leisure Canada Incorporated. (2000, August, 17). Press Release. Reproduced in   www.cubanet.org

Nolen, Stephanie. 2015. In tourist-deluged Cuba, Canadian firms are noticeably absent. The Globe and Mail December 13.

Oficina Nacional de Estadisticas, Cuba.  Anuario Estadistico de Cuba. (Various issues) http://www.one.cu/ . Accessed various times and October 4 2016.

Sequin Rob. 2013. Leisure Canada now a defunct Cuba real estate development brand.  Havana Journal September 25,

 

 

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FLIGHTS TO CUBA FROM THE U.S. COULD START THIS FALL

Posted on July 8, 2016 by Arch Ritter

JEFF MASON and JEFFREY DASTIN

Globe and mail, Reuters, Thursday, Jul. 07, 2016 3:44PM EDT

Original Arcicle: FLIGHTS TO CUBA FROM THE U.S. zzza - Copy

The United States has tentatively approved flights on eight U.S. airlines to Havana as early as this fall, with American Airlines Group Inc. receiving the largest share of the limited routes, the U.S. Transportation Department said Thursday.

The decision, coming about a year after the United States and Cuba re-established diplomatic relations, includes 35 flights per week on American, the biggest U.S. airline in Latin America by flights. Its rival for Caribbean travel, JetBlue Airways Corp., was granted 27.

The department expects to reach a final decision on the routes later this summer after reviewing any objections. It also recommended flights to Havana on Delta Air Lines Inc., United Continental Holdings Inc., Southwest Airlines Co., Alaska Air Group Inc., Spirit Airlines Inc. and Frontier Airlines Inc.

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The flights to Cuba’s capital would be the latest step in bringing the former Cold War foes closer together.

Last month, the Transportation Department gave airlines the green light to schedule flights to other cities in Cuba for the first time in decades. Until now, air travel to the Communist-ruled island has been limited to charter services.

Selecting the carriers for the Havana flights created a challenge for the Obama administration. Airlines applied for nearly triple the 20 daily round-trips that Cuba and the United States agreed to allow.

“The proposed slate of airlines will ensure service to areas of substantial Cuban-American population, as well as to important aviation hub cities,” U.S. Transportation Secretary Anthony Foxx said.

“The department also sought to offer the public a wide array of travel choices in the type of airline such as network, low-cost and ultra low-cost carriers.”

Miami and Fort Lauderdale, Fla. which have the biggest Cuban-American communities in the United States, received the most flights, at 83 a week among six airlines.  American won one-third of flights from south Florida. This may give it a leg up over rivals because it can offer corporate customers more convenient connections through Miami.

“It’s enough to make it a viable business-traveler schedule,” said aviation industry consultant Robert Mann.

Over time, U.S. airlines anticipate a bigger payout from Cuba than is typical for Caribbean destinations.  Strong demand will come from Cuban-Americans visiting relatives and executives travelling in business class to evaluate commercial opportunities, experts said.

“These flights open the door to a new world of travel and opportunities for our customers,” said Oscar Munoz, United’s chief executive officer. United will fly from Newark, N.J., and Houston under the proposal.

Atlanta, Charlotte, N.C., Los Angeles, New York, Orlando and Tampa will also offer non-stop service.

While a ban on tourism to Cuba remains part of U.S. law, President Barack Obama has authorized exceptions. U.S. citizens that meet one of 12 criteria, such as taking part in educational tours, can now visit Cuba.  The U.S. House of Representatives was due to vote as early as Thursday on a spending bill amendment that would essentially lift travel restrictions to Cuba for a year.

American said it hopes to begin Havana service in November.  Its shares rose 3.3 per cent while JetBlue shares added 1.7 per cent. Southwest rose 1.7 per cent and Delta was up 2.2 per cent.

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Cubana de Aviación Ilyushin Il-96-300; What Share of the US Tourism Market for Cubana?

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U.S.-CUBA NORMALIZATION AND THE ZIKA VIRUS RISK: PROBABLE IMPACTS ON CUBAN AND CARIBBEAN TOURISM

Posted on March 14, 2016 by Arch Ritter

By Arch Ritter, March 14, 2016

Tourism has been the spectacular growth sector for Cuba since the beginning of the “Special Period” in 1990.  Tourist numbers have increased 10-folds in the quarter-century from 1990 to 2015, as illustrated in Chart 1.  Foreign exchange earnings from tourism have increased correspondingly.  Canada has been by far the largest source of tourists. Indeed, Cuba’s best friend throughout the “Special Period” has been the Canadian winter.

Now with full normalization of U.S. – Cuban relations “en route,” huge prospective increases in U.S. tourism will have major impacts on Canada but also perhaps on other Caribbean tourist destinations.  What might these impacts be?

Chart 1. International Tourist Arrivals, 1990-2015, Thousands. y Source: Oficina Nacional de Estadisticas, Government of Cuba, various issues, Access3ed February 23, 2016

The Coming U.S. Tourism “Tsunami” to Cuba!

Full normalization of U.S. – Cuban relations in time will bring unrestricted travel for U.S. citizens to Cuba. This will lead to a deluge of US visitors. Among the varieties of U.S. tourists would be the following:

  • Curiosity tourists. There will be a huge tourist influx of US citizens wanting to see Cuba for the first time since 1961. Relatively few US citizens appear to have broken US travel restrictions so that the pent-up demand is enormous.
  • Family Reunification tourists. When all controls are lifted on the US side for travel to Cuba, a further increase in short-term visits by Cuban-Americans for family purposes is likely to occur – following major increases already.
  • Sun, Sea and Sand tourists. Many US citizens, especially from the North Eastern and Central parts of the country will likely follow the winter-escaping Canadians to Cuban beaches for one to two week periods.
  • “Snow-bird” tourists. Some US citizens, mainly retirees, will spend several of the winter months in Cuba.
  • Retirement tourists. With normal U.S.- Cuban relations, some citizens of the northern part of the United States, especially Cuban-Americans in new Jersey, may decide to reside for half the year or so in Cuba returning to the U.S. for the other half of the year or even the whole year in Cuba, if their pensions permit it.   Permitting the purchase of time share condominiums would facilitate both snowbird and part-time retirement tourism.
  • Medical tourists. There may be some travel to Cuba for access to medical services which will likely continue to be inexpensive relative to the United States.
  • Convention tourists. Short-term visits for conventions could increase significantly.
  • Cultural and Sport tourists. One might expect more visits for purposes of interacting with and experiencing Cuban art, music, cinema, and sports.
  • Educational tourists. It is likely that American students and teachers at various levels would enroll or visit Cuban institutions of higher learning or cultural and sports centers for courses, years abroad, sabbaticals, language training etc., in much greater numbers than have been possible under the embargo.
  • “March-Breaker” tourists. Students from the US are likely to try a visit to Cuba for the March Break, instead of the Maya Riviera, Florida or elsewhere.

One can only guess at the future volumes of U.S. tourists to Cuba. One could imagine it quickly doubling the 2015 Canadian level (1,300,092 tourist arrivals) and then redoubling again to 5.2 million and then beyond, as Cuba’s capacity to accommodate more tourists expanded. The total number of tourists then could reach about 8 million by 2022 – or many more if tourism from other countries also increases and does not get “squeezed out.”  (However, U.S. “curiosity tourism” will peak and then subside over the next four or five years following complete normalization.)

This would perhaps lead to an increase Cuba’s total foreign exchange earnings from tourism to about $US 8.0 to 9.0 billion by 2022, up from the estimated level of $US 2.98 billion in 2015 (extrapolating from ONE’s 2014 statement of tourism earnings and 2015 total numbers of tourists.)  This would replace the foreign exchange earnings and the semi-obscured subsidization that Cuba has been receiving from Venezuela which looks totally unsustainable at this time.

The expansion of tourism is great news for Cuba, and will lead to

  • increased foreign exchange earnings for the country,
  • a construction boom in resorts and tourist facilities,
  • a major increase in incomes for the growing private sector servicing tourism (bed and breakfasts, restaurants, travel and guide services among others),
  • higher tax revenues of many sorts, and
  • generalized improvement as real incomes of citizens improve.

The downside is that success in the tourism sector may reduce the urgency of reviving the manufacturing sector which is still operating at close to 50% of the level it had achieved in 1988 before the economic meld-down.

 Will “El Cheapo” Canadian Tourism be Squeezed Out?

Will the increase in U.S. tourism to Cuba crowd out the Canadian tourists who constituted 37% of all tourists to Cuba in 2015%.  Maybe. But U.S. “curiosity tourism” will most likely focus on Havana and the historical areas of Cuba rather than the beaches so that the Canadians at the beach resorts would not be pushed out for some time, at least mot physically!

 yy Source: ONE Anuario Estadistico de Cuba, 2015 Table 15.3), Accessed February 23, 2016

 Most Canadian tourists head to the beach with a package tour – going to Havana or another city on a day’s excursion.  For this reason, they have been sometimes derided as “el cheapo” tourists who spend as little as they can in the Cuban economy.  There may be some truth in this, but most other tourists also are in similar package tours. If prices were to rise significantly with the influx of U.S. tourists, one could expect that some Canadian tourists would switch to other Caribbean destinations. This could indeed happen to some extent, especially if the winter-time “sun, sea and sand” tourism from the United States increases greatly.

Chart 3 Tourist Arrivals, Major Caribbean Countries, 1995 – 2013

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Table 1. Caribbean Tourist Arrivals and Earnings, 2010 and 2014 yyyy1

Source: United Nations World Tourism Organization, Annual Report 2014, p.6.  http://www.e-unwto.org/doi/pdf/10.18111/9789284416899, Accessed February 29, 2016

Will Other Caribbean Destinations Lose Out to Cuba?

There has been some fear that other Caribbean tourist destinations would lose when U.S. citizens start flocking to Cuba.  This indeed is a legitimate fear.

A glimpse at the past 25 years suggests that the impacts on other Caribbean destinations in general may be mixed. A glance at Chart 3 indicates that some other major destinations, including the Dominican Republic, Jamaica and the other “Caribbean Small States” in general have been able to withstand the growing competition from Cuba and have continued to expand significantly in terms of tourist arrivals over the 1995-2013 period. The expansion of tourism in the Dominican Republic is especially notewortheyPuerto Rico is the major exception along with The Bahamas.  Both have lost its shares of tourist arrivals and of revenues in the brief 2010-2014 period as indicated in Table 1.  Surprisingly, Cuba increased its share of tourists in the region, but its share of tourist revenues actually declined.

There is one reason for optimism with respect to the other Caribbean destinations.  Much of the prospective U.S. tourism to Cuba will not be of the “sun, sea and sand” variety, but will be of the other varieties especially “curiosity tourism.”  But what most of the other Caribbean Islands offer is a beach “escape-from-the-winter” holiday. They may therefore be less vulnerable to a tourism “shifting to Cuba” effect.

A small compensation will be that if Canadians are squeezed out of tourism in Cuba with the onslaught of U.S. beach resort tourists, they will likely go to other Caribbean destinations. However, there is also great affection on the part of many Canadians for Cuba as a tourism destination, and the return again and again and again!

Furthermore, international tourism generally has been growing steadily in the post-World War II period and there is little likelihood that this will cease unless the world enters a deep and prolonged recession.  Tourism in the Caribbean generally has been increasing steadily as well.  The overall expansion of tourism in the region should help compensate for any diversion of U.S. tourists from the other Caribbean islands to Cuba.

Will the Maya Riviera be hit with a diversion of U.S. tourists to Cuba?  This may well happen to some degree.  However, the Mexican Yucatan region is a highly attractive tourist waterfront destination with other major attractions. A beach holiday can be combined with archaeological tourism with a visit to the ancient Maya cities of Uxmal and Chichen Itza (both World Heritage Sites), Tulum, to less well-known but quite incredible Calakmul (another World Heritage Site) and Kohunlich and innumerable smaller sites. As well as this is the Colonial legacy in many small towns as well as Merida and Campeche (still another World Heritage site.)   In the long term, the Yucatan should certainly be able to hold its own.

 The Zika Virus Risk to Cuba’s Population and Tourism

While it is not known whether or not the  Zika Virus, linked to birth defects elsewhere in Latin America, has arrived in Cuba, there can be no doubt that it will. If, as seems increasingly certain, the Zika virus is primarily transmitted by the female Aedes aegypti, then pregnant women in Cuba would be at grave risk. This would likely have a major impact on the tourist sector and the Cuban economy generally – as well as tourism elsewhere in the Caribbean and tropical parts of the world, as suggested by the accompanying map.

Cuba has had long and reasonably successful experience in containing the dengue virus that has affected many people and also the rarer Chikungunya virus, a disease that causes fever and severe joint pain.  Both are also spread by some branches of the Aedes aegypti mosquito.  This has been achieved with frequent fumigation of homes, public and buildings and clean-up of stagnant waters that are the breeding grounds of the mosquitos.

 Map 1. Probable Occurrence of Aedes Aegypti in the Caribbean Region zika 2

Source: Wikipedia, Zika Virus, accessed February 29, 2016

Note: Global Aedes aegypti predicted distribution. The map depicts the probability of occurrence (blue=none, red=highest occurrence).

 On February 23, a public program was announced to deal with the potential problem. This involves:

  • using the army to expedite fumigation spraying,
  • calling on the somewhat moribund neighborhood associations – the Comites por la Defensa de la Revolucion – to promote public education,
  • a general clean-up of the streets and stagnant waters and
  • improved garbage disposal arrangements.

Judging from recent reports from Cuba these programs have been implemented quickly and people are already adjusting their behavior to eliminate the mosquito vector of the disease and in their normal living arrangements (using mosquito nets at night for example.)

Cuba’s public health system is very strong and its actions already seem to be determined and serious.  Cuba will probably be able to deal with the mosquito and the disease very effectively. Obviously effective action is imperative to protect Cuba’s people and future generations.

What will be the effect on Cuba’s tourism and its tourism-dependent economy?  Already there are concerns on the part of young women and especially of course pregnant women regarding travel to Cuba. This will undoubtedly have an impact, very minor one hopes, on Cuba as well as on the rest of the countries in the region.  But it is probable that Cuba’s public health system will minimize and hopefully eliminate the problem. If so, tourism will not be affected that seriously.

 Conclusion

In summary, if managed wisely, Cuba can look forward to greatly expanded and economically beneficial tourist boom with full normalization of relations with the United States. This may generate some collateral damage for Canadian tourists who may face a crowding out and pricing out effect, but this will likely be modest and would likely benefit other Caribbean countries. Within the Caribbean region, some countries may feel pressure from the diversion of U.S. beach resort tourists, but most of the bigger destinations have held their own in the last few decades and will continue to do so.

A question mark and potential risk for the tourist sector – and more importantly for the whole population and for future generations in Cuba and many tropical regions is the Zika virus. This will likely hit Cuba in time if it has not already. But resolute policy, education and action have begun to deal with Zika.  Cuba’s past successful programs for controlling the dengue virus should facilitate rapid and effective action against Zika.

With respect to tourism in summary, the positive economic impacts of the coming U.S. tourism tsunami should far outweigh any possible effects of the Zika virus, which will likely be successfully controlled.

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Cuba’s Best Friend of the 1990s: The Canadian Winter

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Cuba’s Best Friend of the 2016 Onward: The Curious American Tourist !

> on February 26, 2015 in Havana, Cuba.

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HOW CUBA IS, AND ISN’T, CHANGING, ONE YEAR AFTER THE THAW WITH THE U.S.

Posted on December 15, 2015 by Arch Ritter

By Nick Miroff December 15 at 7:00 AM

HAVANA — No event in decades shook up Cuba like the announcement last Dec. 17 by presidents Obama and Raul Castro that their countries would begin normalizing long-broken relations. In the 12 months since, Cubans have witnessed scenes few expected to see in their lifetimes, or at least in the lifetimes of Fidel Castro and his brother, Raul.

A U.S. flag snaps once again in the sea breeze outside a U.S. embassy in Havana. Raul Castro and Obama held talks on the sidelines of a hemispheric summit in April. So many U.S. politicians, corporate executives, foreign leaders, tourists and celebrities have visited, that an island long known for isolation suddenly feels it is at the center of the world.

The psychological impact of these events, however, has far outpaced any physical one. So far, U.S. businesses have only completed a handful of new deals. Cuba remains the only closed, one-party state in the Americas, and if anything, normalization with Washington has left communist authorities increasingly anxious about dissent and more determined to stifle it.

Cuba is still very much the same country it was a year ago. And yet, not quite.

“For a lot of my friends who are university graduates, the news was positive, and we saw it as the beginning of a long and complicated process,” said Lenier Gonzalez, a founder of the group Cuba Posible, which advocates gradual reform. But for more of the population, “it produced an unrealistic expectation

That third group of Cubans heard in Obama’s words last Dec. 17 a cue to flee. They fear normalization will put an end to the immigration rules that essentially bestow residency and welfare benefits on any Cuban who reaches U.S. soil.

As many as 70,000 Cubans have left for the United States in the past year, in what appears to be the largest wave of migration from the island in decades.

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The Legal Emigration Route to the USA: Early Morning Queue outside the American Embassy, April 2015

The changes of the past year have set Cuban authorities on edge too, bringing an escalating crackdown on public protest or opposition activity.

Dozens, even hundreds of activists are detained or arrested each Sunday, when the Ladies in White dissident group attempts to march in Havana and another group, the Patriotic Union of Cuba, stages a weekly mobilization in Santiago, the island’s second- largest city.

Though the government generally no longer locks up dissidents for long prison terms, it increasingly relies on short-term arrests to block protests by activists it considers “mercenaries” at the service of foreign interests.

The illegal but tolerated Cuban Commission of Human Rights and Reconciliation tallied 1,447 political arrests or arbitrary detentions in November, the highest monthly total in years.

In an interview published Monday, Obama said that the United States would continue to support Cuban rights activists and that he was considering a trip to the island — but on the condition that he can meet with dissidents. “If I go on a visit, then part of the deal is that I get to talk to everybody,” he said, in an interview with Yahoo News.

“Our original theory on this was not that we were going to see immediate changes or loosening of the control of the Castro regime, but rather that over time you’d lay the predicates for substantial transformation,” said Obama, whom surveys show is a widely popular figure on the island.

Cuban officials this year have tried to push back at public perceptions that Obama is a friend and the United States is no longer a threat or a foe. Relations will not be truly normal, they insist, until Washington lifts its trade embargo, closes the U.S. Navy base at Guantanamo Bay and makes reparations for a half-century of economic sanctions and other grievances.

Yet the rivalry has morphed from hostile confrontation into something more sportsmanlike: a low-intensity contest to set the pace of change, with Washington trying to move faster and Cuba preferring slow, cautious steps.

As Rafael Hernandez, editor of the Cuban journal Temas, put it: “We’ve traded a boxing ring for a chess board.”

For all its revolutionary slogans and lore, Cuba can be a profoundly conservative place, in the strict definition of the term. It is a country where the television programming, food rations and newspaper editorials seem to remain the same, year in, year out. This drives young Cubans crazy. But the continuity is a comfort to some, not least the communist party elders who have ruled for 57 years.

Raul Castro, 84, has pledged to step down in February 2018. Obama has 13 months left in office. That leaves a narrow window for the two men who charted the normalization course to see it through.

Rarely does a week go by without some new chess move. The Obama administration in May took Cuba off the list of state sponsors of terrorism, paving the way for the countries to formally reestablish diplomatic ties in July.

The two countries have signed new agreements on environmental cooperation. They’ve enhanced anti-narcotics enforcement. Direct mail service is set to resume on a trial basis. U.S. and Cuban officials have even started discussing their oldest grievances, opening negotiations to settle billions in U.S. property claims and Cuban counter-claims.

The U.S. secretaries of agriculture, commerce and state have all visited Havana in the past year, along with dozens of U.S. lawmakers, adding up to the highest-level government contacts in decades.

A U.S. tourism tsunami still seems to be building. U.S. travel to Cuba increased by 40 percent since last December, according to industry estimates. Overall tourism to Cuba increased nearly 20 percent, bringing billions in additional revenue for the government.

“Our booking activity has been off the charts,” said Tom Popper, president of Insight Cuba, the largest U.S.-based provider of the licensed “people-to-people” travel permitted under U.S. law.

Most of the U.S. travelers have come to Havana, where a shortage of hotel beds has kicked off a scramble among Cubans and their foreign business partners to buy, renovate and rent properties. Each city block seems to have at least one crew of contractors patching cracks and applying paint.

A deal to reestablish regular commercial flights between the two countries is said to be imminent, with United, JetBlue, American Airlines and other U.S. carriers pledging to begin service as soon as they’re cleared by the two governments.

Cuba established a direct phone link with a U.S. company, IDT, and a roaming agreement with Sprint. It has set up nearly 50 outdoor WiFi hotspots at parks and boulevards across the island, where Cubans gather round-the-clock to chat with friends and relatives overseas.

But the initial Cuba excitement among U.S. companies has been replaced by something more “sober” a year later, said James Williams, president of Engage Cuba, a group lobbying to lift the embargo.

Williams said he knew of at least two-dozen U.S. companies that had submitted formal business proposals to the Castro government, aimed at taking advantage of more flexible rules. “I would imagine it’s probably in the hundreds,” he said.

The companies want to lease office space, build warehouses, dock cruise ships and ferries. Not one has gotten a green light so far, he said.

“Frankly I think the Cubans have been overwhelmed with a surge in interest and the decentralized nature of how that interest is coming to them, with companies calling them up, consultants coming to them, and not a lot of clarity about how to make a deal,” said Williams. “The non-responsiveness has slowed things down.”

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U.S. HOTEL CHAINS CIRCLE CUBA AS VISITORS SURGE, RESTRICTIONS EASE

Posted on September 30, 2015 by Arch Ritter

By Mike Stone And Mitra Taj, Reuters, New York/Lima, Peru, Sept 30 2015

Original Article Here: U.S. HOTEL CHAINS

Cuba April 2015 012.jpgasdA Favouvorite Havana Bar, at the Hotel El Colina, Havana. Can US Chains compete for this for character? photo by A. Ritter

The race for Cuba’s beach-front is on.

Executives from major U.S. hotel chains have stepped up their interest in the Communist island in recent months, holding informal talks with Cuban officials as Washington loosens restrictions on U.S. firms operating there.  Executives from Marriott International, Hilton Worldwide and Carlson Hospitality Group, which runs the Radisson chain, are among those who have held talks with Cuban officials in recent months, they told Reuters.  

“We’re all very interested.” said Ted Middleton, Hilton’s senior vice president of development in Latin America. “When legally we’re allowed to do so we all want to be at the start-line ready to go.”

The United States and Cuba restored diplomatic relations in July after decades of hostility. Washington chipped away further at the half-century-old trade embargo this month, allowing certain companies to establish subsidiaries or joint ventures in Cuba as well as open offices, stores and warehouses in Cuba.  The United States wants to strike a deal that lets U.S. airlines schedule Cuba flights as soon as possible, a State Department official said last week, amid speculation that a U.S. ban on its tourists visiting Cuba could be eased.

U.S. hoteliers are not currently allowed to invest in Cuba, and the Caribbean island officially remains off-limits for U.S. tourists unless they meet special criteria such as being Cuban-Americans or join special cultural or educational tours.  Foreign companies have to partner with a Cuban entity to do business and U.S. hoteliers expect they will have to do likewise if and when U.S. restrictions are lifted.

While they wait for the politicians to iron out their differences, U.S. hotel bosses are conducting fact-finding missions in Havana and holding getting-to-know-you meetings with government officials in Cuba and various European cities.  This week, Middleton, along with executives from Carlson and Wyndham Worldwide Corp., which runs the Ramada chain, are meeting with Cuba’s Deputy Tourism Minister Luis Miguel Diaz at an industry conference in the Peruvian capital, Lima.

In the 1950s Cuba was an exotic playground for U.S. celebrities such as Frank Sinatra and Ava Gardener, as well as ordinary tourists, who travel led there en masse on cheap flights and ships from Miami.  A recent relaxation of some of the restrictions on U.S. travelers has encouraged over 106,000 Americans to visit Cuba so far this year, more than the 91,254 who arrived in all of 2014, according to data compiled by tourism professor José Luís Perelló of the University of Havana.

Overall, tourist arrivals are up nearly 18 percent this year after a record 3 million visitors in 2014, making Cuba the second-most popular holiday destination in the Caribbean behind the much-smaller Dominican Republic.  U.S. hoteliers expect the number of U.S. visitors to balloon if all travel restrictions are axed.  “If and when the travel ban is lifted. We estimate there will be over 1.5 million U.S. travelers on a yearly basis,” said Laurent de Kousemaeker, chief development officer for the Caribbean & Latin American region for Marriott.  De Kousemaeker accompanied other Marriott executives, including chief executive Arne Sorensen, to Havana in July to meet with representatives of management companies and government officials.

Even if sanctions were lifted soon, Cuba traditionally has been slow to approve foreign investment projects, making it unlikely that U.S. hotels would be popping up immediately.  Rivals from Canada and Europe have seized the opportunity, operating and investing in Cuban hotels and resorts, alongside Cuban government partners, for years.  Spanish hotel operator Meliá Hotels International SA, is aiming to have 15,000 rooms in Cuba by 2018. It currently has 13,000 rooms via 27 joint ventures.  London + Regional Properties Ltd, a U.K. hotel and real estate development firm, agreed a deal this summer for an 18-hole golf course, hotel and condominium project with state tourism enterprise, Palmares SA, which has a 51 percent stake in the project.

But even with government plans to add 4,000 new hotel rooms every year for the next 15, the island is not ready for a significant surge in tourism.  The island’s tourism infrastructure went into decline in the decades following the 1959 revolution. Five-star hotel rooms, good restaurants and cheap Internet access are all in short supply.

When and if they get a green light from both governments, executives said U.S. hotel chains will likely offer branding and management partnerships to Cuban government partners such as Palmares and Tourism Group Gaviota, the largest Cuban government tourism entity.

The ultimate goal would be to secure long-term leases on resort developments, which is how Cuban authorities have generally operated with foreign hotels.  But right now, U.S. hoteliers can’t even refer to tourism when they meet Cuban counterparts, let alone talk about actual deals. Instead the buzz word is “hospitality.”  Marriott’s de Kousemaeker likes to use an analogy from baseball, a sport loved both in Cuba and in the United States, to describe the situation.

“We’re learning, and taking batting practice, but we’re sitting on the bench.”

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Airbnb: A US FIRM MANAGES TO CRACK THE CUBAN MARKET

Posted on May 13, 2015 by Arch Ritter

By: Reem Nasr

CNBC, Tuesday, 5 May 2015

Original article here: Airbnb in Cuba

Airbnb Site on Cuba

Tatiana Zuniga started to rent out rooms in her Havana home two weeks into the new year. She had never done it before, but decided, along with her family, that it would be a good way to supplement their income.

Then about three months ago, Zuniga decided to try to attract a new type of visitor—tourists from North America. She connected with Airbnb, the U.S. accommodations broker, and listed her rooms for $33 a night. “They are basically teaching us how to make this a lucrative business,” she told CNBC in a telephone interview. “We are really taught how to reach out to clients and have them come to our home, our neighborhood and our city.”

Zuniga’s rooms are booked through the beginning of June. “It’s very good to get into the North American market, and this is what they seem to be helping us to do,” she said.

“We are an Internet company, and there is a 5 percent Internet penetration in Cuba. We couldn’t expect that hosts would access the site on a daily basis.”-Molly Turner, head of civic partnerships, Airbnb

Zuniga isn’t the only one excited about attracting visitors from the north. Airbnb has taken advantage of an easing of relations between the United States and Cuba since President Barack Obama’s announcement last December that he would seek an opening of links between the countries. Changes to certain trade licenses made it possible for travel services firms, like Airbnb, to finally enter and do business in the long-forbidden Cuban market. It puts the company ahead of most U.S. firms that want to do business there.

“Cuba presented a different case for us because we’ve never launched a market before,” said Molly Turner, global head of civic partnerships at the company. “We had to adapt a lot of our system to the Cuban context.”

The San Francisco-based tech firm launched in late 2008, hoping to link renters and travelers around the world through the Internet. (It is one of Silicon Valley’s many “unicorns,” or start-ups worth more than $1 billion). Travelers can search on the site to rent entire homes or just rooms in 190 countries, most of them at a fraction of the cost of staying in a hotel.

Like many other American companies, Airbnb was banned from doing business in the communist nation until this year. But the company found early success when it launched in Cuba with 1,000 listings on April 2. A month later, it’s consistently adding more listings to the site. It took the company about three months to launch in Cuba because doing business there required a lot of due diligence, Turner said. First, the company had to get in touch with the State Department to make sure it was complying with all U.S. regulations.

“In the beginning, it wasn’t entirely clear to us how the regulations would apply,” Turner said. “We had to work collaboratively with the U.S. government, which meant regular phone calls with them to make sure everything we did was compliant with the law.”

The same applied to figuring out regulations on the Cuba side. That required sending several teams to the island to do research and meet with Cuban officials.

Hagar Chemali, a spokeswoman for the Treasury Department and Office of Foreign Assets Contol , which deals with such trade issues, said that the government is doing a lot of private sector outreach to explain sanctions programs for Cuba and other countries. Interested companies should check the department’s website for more information, she said.

She wouldn’t comment on the specifics of working with Airbnb, but said, “it is very common for companies and individuals to reach out to OFAC to figure out sanctions compliance. In fact, we encourage and welcome that.”

Beyond tricky regulations, the company had to figure out how to do business in a country whose technology use lags much of the globe.

“We are an Internet company, and there is a 5 percent Internet penetration in Cuba,” Turner said. “We couldn’t expect that hosts would access the site on a daily basis.”

Because hosts use their listings on the Airbnb site to manage bookings and payments, the company had to reassess its expectations. Internet cafe culture is not big in Cuba, she explained, so people use the Internet at work to manage listings—providing they even have access on the job.

Zuniga is one of the lucky Cubans who can access the Internet at work, although she said the connection is slow. Like many others, she relies on the help of friends who have better connections at their places of work. “One always finds a way,” she said. “And I can’t miss out on the opportunity, so I try to make it work.”

Turner said that several Cuban hosts get help from friends and family in other countries to manager their online presence.

The company partnered with local payment companies that take payments from travelers made on the site, and put straight into the pockets of the hosts. “To the typical Airbnb customer, the website is no different, but we hacked the back end to make that possible,” Turner said. But Airbnb was lucky, said Turner, because it was able to capitalize on an already existing culture of Cubans who have been renting out their homes for years. The company was able to get into the market first and connect those hosts to the outside world.

“Airbnb was the perfect business at the perfect time,” she said. “If Obama’s talk had been five years ago, it would have been a different story.”

For Zuniga, using the site to list her home has been a start for her as a businesswoman—no small accomplishment for a nation where private property is largely forbidden. The company takes 3 percent of the rental fee she charges.

 5d29f7bb_original 5d592a1e_original 9cba793c_original ed044fde_originalSOME AIRBNB RENTAL ROOMS IN CUBA, from the Airbnb web site.

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