A fork in the road? Cuban-Venezuelan relations

Venezuelan flag

Hugo Chavez, president of Venezuela and leader of the ‘Bolivarian Revolution’ from 1999 until his death in 2013, oversaw a dramatic shift away from previously harmonious relations with the United States. Considering himself a bulwark against perceived American imperialism, he formed a major alliance with another Latin American socialist revolutionary, Fidel Castro of Cuba. These bilateral relations were an important theme of Chavez’s time in office. Chavez considered Castro to be his mentor and in their footsteps followed the ‘pink tide’ of Latin America – a term used to describe the ascendency of a number of left-wing governments in the region.

However, the two countries previously fighting hand in hand against perceived American imperialism have recently diverged in remarkably different directions. This is highlighted by the normalising of relations with Cuba by the US government and the sanctions placed on Venezuela as a result of the increasingly oppressive regime of President Nicolas Maduro, declared by Obama to be a national security threat. Although relations between Cuba and Venezuela are unlikely to see any imminent deterioration, the current divergence in political and economic prospects between the two is startling nonetheless.

Economic prospects: a striking contrast

The economic prospects between the two nations could not be more marked. During the winter of 2002-2003, in an attempt to force a fresh presidential election, the Venezuelan opposition to President Chávez organised a nine-week general strike. The result was the crippling of the oil industry leading to food and fuel shortages. The strike did not succeed and in its aftermath the Chávez regime imposed price controls on basic foodstuffs ostensibly to combat inflation and safeguard the poor. In the words of Mr Chávez, the aim was to “protect people from capitalism”.

In the years of high oil prices during the economic boom of the 2000s, oil revenue kept the economy afloat with strong GDP growth statistics from 2004 to 2008. However the recent plummet in oil prices has had a hugely detrimental effect on the Venezuelan economy. Petroleum products account for 96% of Venezuelan exports earnings, 12% of GDP and 45% of government revenues. Venezuela’s public finances were already in deficit before the price drop and in a careless display of myopia, the government did not save or invest the windfall from higher oil prices in previous years.

Perversely, the price controls that Chavez’s regime implemented have actually caused the very shortages they were designed to prevent. Although these issues have been present ever since the introduction of price controls in 2003, they have been severely exacerbated by the recent downturn in oil prices. With prices set below the market value, businesses in Venezuela are unable to import goods, as they would be unable to breakeven. Consequently Venezuela has in recent months suffered from shortages in regulated goods ranging from basic foods and vital medicines to toilet paper and condoms with empty shelves and long queues outside supermarkets an all-too-common sight.

The government’s solution to the fiscal deficit has been to print more money, which unsurprisingly has led to high inflation, reaching 70% in 2014. The policy response to inflation has been price controls, which in turn lead to increased shortages. The problems are thus mutually reinforcing. Although it is reasonable to blame much of Venezuela’s economic woes on the drop in oil prices, they are exacerbated by incompetent economic policy.

In contrast, Cuba’s economic prospects are markedly sanguine. The lifting of the 54-year US trade embargo could put Cuba on a path for strong growth, opening up the world’s largest single economy to its exports. Endowed with oil, gorgeous beaches and world-famous cigars, Cuba certainly has ample potential for growth. The normalisation of relations with the US is bound to attract American investment in its tourist, offshore oil and agricultural sectors. It is estimated that, without the embargo, trade between the two countries would be worth upwards of $10 billion.

However, caveats abound. Cuba remains dependent on its benefactors Russia and Venezuela. Barriers to trade with the US will remain; sugar, which accounts for 25% of Cuba’s exports, will still be subject to the US tariff on sugar regardless of the lifting of the embargo. Its subsidised energy imports from Venezuela have actually become more expensive following last year’s plummet in the price of oil, as Cuba has to pay a higher proportion of the cost up front. Furthermore Venezuela’s recent economic woes cast doubts on the sustainability of this agreement.

Cuba is also heavily indebted, and its largest creditor Russia is facing the problems of a weak currency and pernicious US sanctions. Additionally Cuba’s second largest export market, the Eurozone, has stagnated since the global financial crisis with the ensuing years littered with economic crises. These show no signs of abating with the continuing prospect of a Greek default on its sovereign debt.

Despite recent improvements in growth prospects, Cuba’s economy cannot yet be considered prosperous. The decade following the collapse of the Soviet Union was a period of severe economic crisis in Cuba defined primarily by severe shortages of energy resources and rather ironically dubbed the Período Especial, “The Special Period”. Cuba had lost a crucial benefactor in the Soviet Union, which provided it valuable aid, was its main trading partner and sheltered it from fluctuations in world oil and sugar (Cuba’s main export at the time) price fluctuations. However in the 21st century, Cuba’s GDP per capita has caught up with that of Venezuela, which has historically been the wealthier of the two countries. This looks set to continue with the normalisation of relations with America and the economic benefits that this will undoubtedly shore up. The same cannot be said about Venezuela.

Political prospects: a fork in the road?

Although some Republicans in Congress have expressed outrage at Barack Obama’s decision to normalise relations with Cuba and remove it from the list of state sponsors of terrorism, it seems unlikely that the current momentum will be significantly curtailed. Fidel Castro has also been at best lukewarm towards the thawing of relations being overseen by his younger brother, Raul Castro. Progress towards truly normalised relations will inevitably be slow as the embargo on most trade and investment between the two countries can be lifted only by Congress.

However, 25 years after the end of the Cold War in Europe, it seems that progress towards the end of the Cold War in the Atlantic is ultimately unstoppable. Cuba is a market desired by many American firms and this will only place further pressure on Republicans and Democrats alike to continue on this path. Netflix has recently launched streaming services in Cuba due to the thawing of relations. MasterCard has launched operations in Cuba recently and American Express has also announced that they will launch operations soon.

Republican candidates for the 2016 presidential election such as Marco Rubio and Jeb Bush have denounced many of the recent moves made by the Obama administration with regards to Cuba. But even in the event of a Republican victory in 2016, it seems unlikely that the current changes will be reversed. With Venezuelan and Russian problems (its oil supplier and main creditor respectively), Cuba may become increasingly dependent on America and would be forced towards reform, negating many Republican concerns about the extent to which this normalising of relations might ‘prop up’ the Castro regime.

Venezuela, on the other hand, is moving towards full-blown dictatorship. President Nicolas Maduro, under intense pressure from the economic woes largely caused by ruinous socialist policies and looking increasingly likely to be removed from office through legal means, is responding with increasingly authoritarian policies. Although Chavez curtailed free speech and free press to some extent, the current deterioration in the political situation within the country is unprecedented when looked at in comparison to the years under Chavez. It has culminated in the arrest of Antonio Ledezma, the mayor of Caracas, without an arrest warrant, on trumped up charges of conspiring to overthrow the government. The incriminating evidence was a one-page advertisement written by Mr Ledezma in an independent newspaper calling for the establishment of a broad-based transitional government.

Mr Ledezma is indeed only the tip of the iceberg. According to Carlos Ocariz, the head of the Venezuelan Mayors’ Association, 33 out of 78 opposition mayors elected since December 2012 face legal proceedings of some kind. Ordinary citizens known to be opposed to the regime are barred from public-sector jobs or government benefits according to The Economist. In contrast to Cuba’s normalisation of relations with America, Mr Obama has recently imposed sanctions on a number of government officials in Venezuela in response to these events.

Venezuelan-Cuban relations: close but no cigar

Although Venezuelan-Cuban relations are unlikely to deteriorate meaningfully in the short-term, in the long-term implications seem strikingly prophetical over their relationship. For most of Hugo Chavez’s premiership Cuba’s government and economy were partly propped up by highly subsidised oil in return for technical personnel including physicians, sport coaches and teachers as well as military training.
But with Venezuela increasingly struggling to provide basic goods and services to even its own citizens and with oil prices remaining low, Venezuela’s ability to provide a meaningful quid pro quo with Cuba is increasingly under strain. In addition to their economic divergence, it seems likely that they will also diverge politically as Cuba begins to reap the benefits of greater openness with America while Venezuela becomes increasingly shunned by both America and its Latin American allies.

Co-authored by Ben Stanbridge.


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