Cuba Is Hoping To Replace Venezuelan Oil With American Tourists

CUBA 7:33 AM JAN 16, 2015

Cuba Is Hoping To Replace Venezuelan Oil With American Tourists
By FRANCISCO TORO

Cuba's strategic pivot toward the United States got specific on
Thursday, as the White House announced new regulations easing travel and
other restrictions for Americans wishing to go to the island. This same
week, oil prices flirted with levels of $40 per barrel. Americans don't
usually think of these stories as being in any way related. But
Venezuelans do.

When the historic thaw between Cuba and the U.S. was announced last
month, one detail jumped out at Venezuelans. Secret negotiations had
begun, we were told, a year and a half before. In Caracas, everyone
could do the math: The talks started right after Hugo Chávez, the leader
of Venezuela's socialist revolution and Cuba's staunchest ally, died.

Few could mistake the timing for a coincidence, or be confused about the
message being sent: Havana had sized up Venezuela's untested new
leadership and hedged against the possibility the countries' close
relationship wouldn't last much longer.

But it took the recent freefall in oil prices for Havana to take the
plunge and finalize the deal. The reason is that the considerable help
Venezuela sends Cuba is in the form of barrels, not dollars. As oil
prices fall, the value of Venezuela's aid falls. In the final quarter of
last year, Cuba's state finances began to look worse and worse.

With the fall in oil prices, the original worries about the stability of
Venezuela's post-Chávez leadership have only increased, raising the
prospect of Venezuelan aid stopping altogether.

Only very fast growth in Cuba's two other major dollar-earners — tourism
and remittances — could possibly compensate for a loss of Venezuelan
oil. Only a dramatic opening to the U.S. could prevent a full-scale
social and political crisis that could imperil the government's
stability. Raul Castro is a calculating politician, and detente with the
U.S. is a move calculated to help his regime survive.

It's easy to lose sight of just how central Venezuela's oil largesse has
been to the Cuban state's financial strategy. Following a landmark 2003
"Cooperation Agreement," Venezuela has been sending 115,000 barrels a
day to the island. The Cubans re-export some of the crude that Venezuela
sends them to other countries, pocketing some $765 million in 2014.
That's a vital source of fresh dollars for an island that doesn't have a
lot of other good options for earning hard currency.

But surely that's a fraction of the value of the Venezuelan oil deal to
Cuba: The much bigger piece is getting the island's whole energy import
bill more or less paid for. Without Venezuelan shipments, Cuba would
have to scrounge up billions in foreign currency it doesn't possess to
pay for the oil it needs to keep buses and trucks on the road and power
stations running (at least some of the time). When you figure in those
savings, you see that Venezuela's oil was worth more than $3.6 billion
to the Cuban treasury in 2014.

By some measures, Venezuela's oil subsidy is the Cuban state's single
largest source of revenue. It's worth a billion dollars more than the
$2.6 billion the country reportedly earns from tourism annually.

Apart from tourism, the only source of Cuba's foreign income in the same
league as Venezuela's oil freebies is the remittances Cuban exiles in
the U.S. send back home, which have been estimated at an impressive $3
billion in 2014.1

Even without any cut in the volumes sent, the value of Venezuela's
in-kind aid to Cuba has already fallen by almost half in the last six
months: if prices stay around $50 per barrel, Cuba will earn $365
million less from Venezuelan oil re-exports in 2015 than it did last
year. That shortfall is worth about twice the value of Cuba's entire
sugar industry.

You start to see why the alarm bells went off in Havana when the price
of oil started to fall. It's not just that the re-export business is a
lot less juicy with oil at $50 per barrel than at $110. It's that the
Cuban elite is well aware that Venezuelan volumes may not hold up for
much longer. If the collapse in oil prices is bad news for Cuba, it's a
kind of cataclysm for its benefactor.

In 2015 Venezuela faces a historic fiscal emergency, with international
bond markets taking it virtually for granted that the country will
default on its foreign debt. The Cubans understand that Venezuela's
president, Nicolás Maduro, will come under strong pressure to pinch
every penny over the coming year, with his own government stability very
much on the line. If worse comes to worse, the Maduro regime could
collapse altogether, leaving the Cubans entirely in the lurch.

You can imagine the kind of scenario planning Finance Ministry officials
in Havana must have been busy doing these last few months. What happens
if the Venezuelans cut their shipments to, say, 80,000 barrels a day? Or
to 50,000 barrels? What if the price of oil falls farther still?

It's easy to construct plausible scenarios where Cuba's sideline as an
oil re-exporter dries up, leaving the island scrambling to scrounge up
dollars to pay for energy imports. Below, I've gamed out four such
scenarios, with a comparison to the baseline numbers from 2014.

How can Cuba make up these shortfalls, and quickly? There are two
obvious targets: tourism and remittances.

Tourism has grown into a $2.6 billion a year industry over the last two
decades. It's telling that the largest source of tourists into Cuba
remains Canada, a relatively small country a relatively long flight away
that nonetheless contributed 1.1 million of the 2.9 million tourists who
hit Cuba's beaches last year. The reason is simple: as long as U.S.
visitors remained barred from the island, Canada was the biggest rich,
cold country in Cuba's general proximity.

That gives us a rough sense of the huge potential of the American
tourist market to the island. There are 10 times as many people in the
U.S. as in Canada — and it can be a shorter flight. If a million
Canadians go to Cuba each year, why shouldn't 10 million Americans do
the same?

I estimate the average tourist is worth roughly $700 to Cuban state
coffers. This is really a rough estimate: I took the number of tourist
dollars — from this topline estimate — divided by the number of
tourists, and subtracted 20 percent, which I assume goes to airlines and
hotel and tour operators.2 Keep in mind that the $700 per tourist is
essentially all profit to the Cuban government. The state does incur
costs in running the tourism industry, but these costs are minimal
because of the country's unique dual-currency system.3

So with this estimate of profit at $700 per tourist, it would take some
480,000 extra tourists next year to make up the fiscal hit just from the
recent drop in oil prices. If Venezuela cuts down on its subsidy volumes
further or oil prices fall lower, those numbers climb quickly. If
Venezuelan aid stops altogether, Cuba would have to more than double the
size of its tourism industry to make up the difference.

Of course, Cuba wouldn't make up the entire shortfall just on the back
of the tourist industry: added mining and agricultural exports would
probably be part of the mix. But whichever combination of sugar, nickel
and warm beaches Havana settles on to manage the transition, access to
the U.S. market will be a must if adjustment is to be carried out in a
reasonable amount of time.

It's little wonder then that in negotiating for a rapprochement with the
U.S., relaxing travel restrictions for Americans wanting to go to Cuba
was near the top of Havana's wishlist.

The only other plausible source of extra revenue on this scale is
remittances from the Cuban exile community in Miami and beyond. This is
a dicier proposition, as the money relatives send creates a space for
independence from state control that Havana's old-line Stalinist leaders
clearly fear. But in an economy that's still as thoroughly
state-controlled as Cuba's, there's little doubt that remittance money
"trickles up" from individual pockets to the state, as people spend
their foreign currency in the state-owned "convertible peso" shops that
have a monopoly on the sale of a whole range of consumer goods, from PCs
to refrigerators.

Which is why Havana negotiated for — and got — much looser rules for
remittances from stateside Cubans. The new limit quadrupled to $2,000
per year and the licensing regime was greatly simplified.

From Havana's point of view, these are all clearly second-best
solutions. If the regime had had the choice to keep itself in power by
continuing to pocket the proceeds from Venezuelan oil re-exports, it
probably would have gone for that. But the recent oil price collapse
forced its hand.

Cuba's communist elite knows a thing or two about surviving in power
after a major foreign paymaster collapses. When it happened in 1991, it
caught the regime totally unprepared, and led to a period of privations
normally only seen in wartime. It's not a mistake they're likely to want
to make twice.

See table on how many US tourists Cuba needs to replace Venezuelan Oil
http://alturl.com/vmoph

Source: Cuba Is Hoping To Replace Venezuelan Oil With American Tourists
| FiveThirtyEight -
http://fivethirtyeight.com/features/cuba-is-hoping-to-replace-venezuelan-oil-with-american-tourists/