Hormuz and Cuba

Some thoughts on what Iran-US War means for Cuba

As many of you will no doubt have already heard by now, the Iran War is bad for the world economy. In fact, bad may not do justice to how terrifying the impact on global energy supply may be. An excellent, if profoundly sobering, recent piece out of The Economist, just came out last week. You can read it here.

Some of the biggest problems flagged by the piece are

• projected jet fuel shortages are already resulting in airlines cutting back on flights

• energy prices in places like Europe are currently being insulated from the worst of the shock but this is unsustainable

• energy shortages in South and Southeast Asia (outside of China which has significant reserves) are already forcing people to work from home and are on track to paralyze their economies

• even if Iran-US war was fully and magically resolved tomorrow, it will take a while (i.e. months at least) for both production and transportation to restore some semblance of normal

• markets are currently not pricing in just how bad things are and when they do this is going to hurt really bad

• this has major implications for food production around the world as well, given that chemical fertilizers are now in short supply indefinitely

• finally, both the duration of the war and the fact that Hormuz can be used as a bargaining chip again in future conflicts around Iran mean that the pre-2026 oil infrastructure situation no longer exists and the world will have to adapt to higher energy costs indefinitely as insecurity is priced in to things like significantly higher insurance, etc.

Again, pretty sobering. This is one of those pieces of news with implications for every other part of the world economy, so of course one of my first thoughts was what does this potentially mean for Cuba.

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If you subscribe to this newsletter, I’m going to take the liberty of assuming you know Cuba’s general status quo at present, so I’ll limit myself to bringing up some key points:

• the Cuban economy is largely already paralyzed due to lack of energy supply

• tourism is more or less already dead on the island as it struggles to maintain minimal functions

• what food and energy the country receives right now is significantly subsidized thanks to foreign assistance from places like China and Russia, but neither in anywhere near enough for the Cuban economy to function

• whether the US militarily intervenes in Cuba, which it has already threatened to do, remains an open question

Now that you’re up to speed, what on Earth does Hormuz mean for Cuba? For one thing, it makes economic recovery on the island even more of an unrealistic project than it already was.

Long-distance travel from Europe, China, or Russia are now harder, at least if you’re trying to take a direct flight, since the existing fuel crisis made refueling something airliners could no longer rely on. If jet fuel is about to become hard to get even for commercial airliners operating in the developed world, what does that mean for Cuba? Sure, the island can still get local flights and long-distance travelers can stop at a neighboring country before taking the extra final flight to Cuba, but less jet fuel means higher prices, so the added cost of an additional, separate flight will get even more expensive. This both affects the prospects of tourism recovery, dead in the water at the moment, as well as the informal supply chains made possible by ‘mulas’ (mules).

Mulas are not drug mules in Cuba, or at least mostly not about drugs. They are trafficking food, clothing, medicine, computer parts, car parts, and anything else someone on the island asks them to bring (like cash). For some this is a full time profession, and it is certainly something you will have had in your face if you’ve ever flown to the island, even if you didn’t realize who these people were. You can usually spot them with the numerous extra suitcases, all packed to the point of bursting, who arrive at the airport. They can easily frame all their stuff as providing for their families and friends, so it’s possible to confuse them with those who just haven’t been to the island for a while and are looking to bring a ton of stuff on this rare trip, but mulas tend to travel constantly. Sometimes it’s thanks to having dual citizenship somewhere, like the US, and others use visa free travel to places like Russia to bring parts for cars like Ladas or food or whatever else they can get on the cheap their and fly them in. It’s kind of insane that an indeterminate but not insignificant part of Cuba’s supply lines function like this, and have functioned like this for decades at this point. Insane or not, it’s also a crucial part of the economy that will be further affected by issues with flight cancellations and higher costs to fly in future, as they were already charging high commissions before and will simply pass the higher costs onto consumers on the island.

Beyond flights, the next factor is energy writ large. Cuba produces about 1/3rd of what it needs for minimal daily demand, using its super heavy crude from the belt along its northern coast, but obviously requires significant foreign imports to function at a meaningful level. Chinese solar panel imports have helped, especially with providing hospitals and other basic institutions that have hitherto depended on generators during blackouts, but it’s not enough. As multiple energy experts agree, significant imports of solar panels only help so much when the dual problems of storage and transmission of energy are still largely unaddressed. In a March paper on the issue, Cuban economist Ricardo Torres estimated that Cuba needs an infrastructural investment of “at least” $6.6 billion just in new investment in its generation capacity, “not including additional resources needed to modernize the energy grid.”

Beyond the obvious problem that keeping the lights on in the 21st century is the bare minimum for a functioning economy in the digital age, you also have the huge headache of transport. Despite significant investment and loans to build up Cuba’s train infrastructure a decade ago, much of the country runs on combustion engines. This applies to both people and goods, so even if their workplaces have power (still a long ways off) getting both workers, inputs, and merchandise to places of business is a huge problem that will maintain Cuba’s fuel import dependency indefinitely.

The longer-term crisis of oil supply dates back at least a decade, to Venezuela’s economic crash in the mid-2010s following the collapse of the commodities boom, which was later followed by a collapse in oil production capacity in Venezuela in recent years, and finally an end to Venezuelan oil shipments by US fiat after the kidnapping of Maduro in January. Interim Venezuelan President Delcy Rodríguez seems unwilling to cross Trump on this issue, and as such Cuba was without subsidized or free oil for several months of this year. Trump compounded this by imposing a fuel blockade (something usually considered an act of war) which he only relented on several months in so that a Russian fuel ship could dock.

He has also permitted private companies in Cuba to import fuel, but this isn’t really a fix. They lack the storage capacity and the overall volume to address Cuba’s energy shortages, plus a lot of the problems they face are more about lack of energy at a central level (power plants, the bus fleets, the various state and private trucks that ferry goods and people, etc.).

All of this reinforces how Cuba’s energy import dependence isn’t going anywhere. While Russia has sent one ship, promised another, and may send another after that, this is not the reliable basis on which to build a functioning economy. As prices soar amid Strait of Hormuz Crisis, Russia will also have strong incentives to send as much fuel as possible to markets that pay well, rather than Cuba that cannot pay, much less ‘well’. This is a conjunctural crisis that may or may not last a while and Russia’s buckling economy demands urgent attention. As such, there’s a tension between playing sugar daddy for Cuba for positive PR and wanting to maximize cash flow given that they have no idea how long the present crisis will last. Given that Ukraine is now in the practice of hitting Russian energy infrastructure, scaling up production isn’t exactly easy either. As Russia wins big from the Iran War’s fallout, Ukraine also has added incentives to go hard and fast against the Russian oil sector. The big headline grabbing news that ‘Russia breaks US fuel blockade against Cuba’ has also already achieved the maximum PR returns Moscow could hope for, diminishing the incentives to keep directing meaningful amounts of oil to the island outside of wanting to keep Havana in power as a thorn in the US’ side (a standard not likely to mean the same thing as ‘functioning economy’).

Finally, you have the problem of a moribund tourism industry. This has come up a couple of times already, what with fuel shortages already limiting flights and the country’s energy infrastructure collapse making the island less than an idyllic place to go on vacation. Tack onto this the older problem of Trump putting Cuba on the list of State Sponsor’s of Terrorism, which makes people ineligible for the simplified entry process for visiting the US provided by ESTA Visas, and you have a serious problem on your hands when it comes to tourism from developed economies. Add to that noxious cocktail a dose of global recession, thanks to the looming global oil shock, and it’s hard to figure when Cuba’s tourism economy will recover.

This is not just a question of low returns on investment, but also one of credit. During the pandemic Cuba poured a ton of money into building hotels, and it is unclear how much of that was cash it had stored up and how much was on credit. As bills come due from both its tourism sector and its looming older debts, it’s hard to see Cuba making the case for new ones that are not either de facto forms of aid where there is no intent of being paid back. With Cuba’s economy paralyzed, getting credit for the massive investments required to jumpstart the economy again would be important in helping the island get past the present crisis in something like a reasonable timeframe.

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As always, I don’t have a crystal ball and can’t tell you how things will play out. What I can say, rather safely, is that up to now the looming oil shock and the crisis in Cuba have been discussed as separate issues. In future, the shadow of Hormuz will fall over Cuba and lord knows when it will lift again.