What the future holds for Cuba

America and Cuba have announced moves to thaw diplomatic relations after more than 60 years of frost. Simon Wilson looks at what this will mean.

What's happened?

In the week before Christmas, following 18 months of secret talks in Canada and at the Vatican between US and Cuban officials, President Obama announced a set of moves towards normalising relations between the United States and its communist island neighbour.

After an embargo lasting more than half a century, Washington and Havana are to restore diplomatic relations and re-open embassies. American tourists will be allowed to travel to the island for the first time (and take home $400 of Cuban goods) and crucially the amount of money that Cuban-Americans will be allowed to send home will jump from $500 a quarter to $2,000.

Why now?

As the US president pointed out in his speech, the United States' attitude towards Cuba has been anomalous for decades. Washington long ago normalised relations with communist China and even with Vietnam, a country with which it fought a bitter war costing more than 50,000 American lives.

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Maintaining the economic embargo on Cuba that it first imposed in 1961 had become more about political posturing (and appeasingCuban-American hardliners who see any concessions as a betrayal) than the genuine promotion of foreign-policy interests.

What will the thaw achieve?

Obama freely admitted that the policy of isolating Cuba had failed, and said the goal of the changes are to "allow Cubans to improve their living standards and gain greater economic independence from the state".

In time, presumably, they are expected to demand more political freedom. It's a timely move given that Cuba has been hit hard by the economic crises in its major patrons, Venezuela and Russia. Cuba's economic viability depends heavily on subsidised energy imports from Caracas worth more than $3bn (it sends highly educated Cuban doctors in return).

But Venezuela's economic turmoil is deepening, making it increasingly unable to afford its subsidy of Cuba. Meanwhile Russia, still one of Cuba's largest creditors two decades after the collapse of the Soviet Union, is facing its own economic problems.

Is the embargo over?

No. President Obama doesn't have the power unilaterally to lift the embargo on Cuba. That is a matter for Congress and many Republicans are opposed. But what Obama has done is use his executive powers to water down its effects. It means that, for the first time since the 1959 revolution, US firms will be able to export general goods, agricultural equipment and construction materials into Cuba.

American companies will help to overhaul the island's ancient telephone network and install high-speed internet. In addition, the US is restoring bankingties with Havana and has approved the use of US debit and credit cards.

How rich is Cuba?

The country's 11 million people enjoy a gross national income of about $5,890 per person, according to The CIA World Factbook. That's not among the poorest nations in the world, but it is about one-tenth of the United States and puts it behind countries such as Turkmenistan in central Asia and Gabon in Africa.

The $70bn economy, which is largely run through state-owned businesses and firms managed by the political and military elite, "is a basket case", reckons Roger Noriega, a US diplomat-turned-academic with "colossal debts" owed to Venezuela, Russia, China and others. The official unemployment rate in 2013 was 4.3%, but unofficial estimates are much higher.

Hadn't Cuba been opening up already?

Since Ral Castro, 83, took over as president from his brother, Fidel, 88, in 2008, he had begun tentative moves to liberalise the economy. New laws allow Cubans to set up small private businesses. More than 11,000 state firms have become employee-run co-operatives, according to a Cuban academic quoted by The Sunday Times.

Almost half a million Cubans now work for themselves and about the same again for co-operatives, making up a fifth of the workforce. But the economy is barely growing, and wages are less than half their 1989 level in real terms. Food production is shrinking and the country is more dependent than ever on cheap Venezuelan oil.

Who will benefit?

Tourism, telecoms and construction are the obvious gainers, along with Cuba's famous cigar industry. However, the bulk of new investment is expected to come from exiled Cubans and Cuban-Americans, taking advantage of the new rules to send home more money to invest in grassroots private enterprises in the handful of sectors that don't require Congress's assent to the lifting of the embargo.

What opportunities does Cuba offer?

The sorts of small Cuban businesses that should benefit first include business training, farm machinery, materials for private house building and equipment for building telecoms and internet networks. But investors hope more opportunities will follow.

"One thing will lead to another. First there will be the easing of travel restrictions for US visitors, and greater involvement by Cuban-Americans in their relatives' businesses," Sebastiaan Berger, of Ceiba Investments, a Guernsey-registered company that is the largest foreign holder of Cuban tourism and commercial real estate, told the FT.

"Then, in time, there will come an easing of anger from US opponents to the move and more changes even if the market is anticipating it all happening immediately, now."

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.   

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.