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US to restrict business and travel with Cuba, negatively affecting tourist sector and discouraging new foreign investment

10 Oct 17

United States President Donald Trump is to issue new regulations restricting business and travel to Cuba, affecting mainly the tourism sector and undermining the business environment by reversing a process of normalising US-Cuba relations.



IHS Markit perspective

Outlook and implications

  • The United States is to issue new measures restricting business and travel in Cuba.
  • The new measures will become effective immediately once the Office of Foreign Assets Control and the Department of Commerce issue the new regulations, most likely within the three-month outlook, undermining the business environment and reversing a process of normalising US-Cuba relations.
  • The tourism sector, which represents 10.2% of GDP, is likely to be most affected. Cuba's group GAESA, a military-run company that operates companies in the island's tourism and food sector, is increasing likely to be banned from being able to do business with companies subject to US jurisdiction and sectors like hospitality, telecoms, and infrastructure, including the Mariel port special development zone, which had been expected to benefit from improved US-Cuba relations.

Risks

Government stability; Policy direction; State failure

Sectors or assets

All sectors

US President Donald Trump points as he speaks about policy changes he is making towards Cuba at the Manuel Artime Theater in the Little Havana neighbourhood in Miami, Florida, on 16 June 2017.

Joe Raedle/Staff/Getty Images

Miguel Díaz-Canel, Cuba's first vice-president, accused on 8 October United States President Donald Trump of aiming to discredit the island's tourism industry and aiming to refuse lifting sanction on the island until it restores democracy. Trump is to issue new regulations tightening doing business in Cuba and restricting travel to the island in the following weeks and Díaz-Canel is considered to be the most likely successor of President Raúl Castro when he steps down in October 2018. With 4 million visitors a year, the tourism sector represents 10.2% of GDP, of which US tourism represents a small segment but one that has been growing fast. Specifically, companies subject to US jurisdiction are increasingly likely to be forbidden to trade with Cuban businesses owned by the military, security, and intelligence services, via amendments of the US Department of the Treasury's Office of Foreign Assets Control (OFAC) and the Department of Commerce Export Administration Regulations. The US Department of State is expected to publish a list of companies and entities with which any type of commercial transaction will not be permitted.

The military plays a major role in influencing the government and managing the economy. An increasingly likely main target of the new Trump measures is going to be Cuba's GAESA, a military-run company that operates companies in the island's tourism –including hotels and marina infrastructure, car rentals, and restaurants – and food sector, which would no longer be allowed to do business with companies subject to US jurisdiction. GAESA owns the infrastructure where the Four Points Sheraton hotel in Havana belonging to US Starwood Hotels & Resorts Worldwide was inaugurated on 28 June 2016 in the Cuban capital Havana. The Four Points Sheraton was the first US hotel allowed to operate in Cuba following the thaw of relations between the two countries, introduced by the Obama administration in December 2014. The easing of US sanctions had substantially increased the numbers of US visitors to Cuba, encouraging US investment in the Cuban tourist sector and leading to more frequent commercial flights and cruise ships.

The reversal of Obama's measures was announced by Trump on 16 June, but specific regulations for their implementation are still to be outlined. Nearly 161,000 US citizens visited the island in 2015, a 76% increase from 2014. The number decreased to 116,604 in 2016 but went up again during the first five months of 2017 to 284,565, according to data from Cuba's Ministry of Foreign Affairs. US citizens are still not freely allowed to travel to Cuba and require authorisation from the US treasury department under specific categories which include educational, humanitarian, and religious and aid issues. Nevertheless, the ban system has been abused by travel agencies benefiting from creative schemes taking advantage of technicalities and lax law enforcement. This has allowed "people to people" travel on educational trips, in practice violating existing regulations restricting US travel to Cuba, something that is likely to change through a stricter enforcement of the travel ban.

Bad timing

The new regulations reverting the easing of the US embargo comes at a difficult time for US-Cuba relations. On 29 September, the US confirmed the withdrawal of half of its diplomatic staff following a spate of rare "health attacks" that affected at least 21 embassy employees. The unprecedented and still unexplained event lead to US Secretary of State Rex Tillerson to say the US was considering shutting down the embassy after the attacks. The attacks are presumed to have been staged through sonic waves that have led to US diplomats showing negative physical symptoms, including, of hearing loss, tinnitus, headaches, visual problems, and dizziness, among others. The new regulations compound the negative effects that Hurricane Irma caused on Cuba's tourist sector, including partial damages to the José Martí International Airport in Havana and to four- and five-star tourism. Electricity infrastructure in the northern coast of the island, social housing, and agricultural crops have also been also been significantly affected. Tourism, travel, and leisure activities, including restaurants and bars, are likely to be affected in the three-month outlook, and cargo disruption in the north is also expected.

Outlook and implications

The new measures will become effective immediately once OFAC and the Department of Commerce issue the new regulations, most likely within the three-month outlook. The new regulations underline a clear trend that the Trump administration's relations with Cuba will continue to deteriorate, undermining the business environment and generating uncertainty that would slow down fresh investment in Cuba's tourism sector and others such as hospitality, telecoms, and infrastructure, including the Mariel port special development zone, which had been expected to benefit from a continued gradual improvement in US-Cuba relations.

Despite Trump's strong rhetoric, the new measures will not be retroactive and therefore are unlikely to significantly affect or disrupt operations from companies already doing business in Cuba with pre-existent licences. In particular, the new measures will not affect those companies that have conducted transactions with entities related to the Cuban military, security, or intelligence services. This provided that the transactions took place before the date in which the new regulations are to become effective. However, the measures will prevent and limit further expansion plans these companies may have and deter other US companies from looking to start business on the island. Despite the fact that new sanctions on GAESA and other military firms are increasingly likely, the speed and codification of the new sanctions regime remains undetermined. Currently, the US is dealing with placing new sanctions on Iranian, North Korean, Russian, and Venezuelan entities, placing increasing strains on OFAC's operational capacity. Although highly unlikely, there is still a very small possibility that GAESA is not included immediately once the new regulations become effective given its scale and ongoing businesses with major international business partners.

Only commercial flights and cruise lines blacklisted in US OFAC regulations will not be permitted, allowing all those who are not included to continue operating freely and engage with US companies and citizens.

An important indicator to watch, in terms of state failure and how the tourist sector is to be affected by the new measures, would be to what extent tighter restrictions on US citizens to travel and stricter implementation will decrease the current number of travellers to the island. US citizens legally allowed to travel to the island will still be able to bring to the US Cuban goods such as cigars and rum without previously imposed limits. The other important indicator to watch would be the negative effect on bilateral co-operation and trade as a result of increasing uncertainty over Cuba's opening of its economy to the private sector. Remittances from Cuba, the island's second source of revenues and foreign exchange, are unlikely to be affected by the new regulations unless these are directly linked to Cuban military, security, and intelligence actors.

More broadly, US-Cuba relations are unlikely to improve and the US embargo will be maintained unless the latter undertakes a process of democratisation, which the former will demand includes holding free and fair elections (currently banned in the island) and the release of an estimated 140 political prisoners, according to the Cuban Commission of Human Rights and Reconciliation. However, Cuban authorities are unlikely to heed these demands in at least the two-year outlook.

 
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