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CHILL OUT

Here’s the giant loser from today’s US-Cuba deal

By Matt Phillips

It has to sting.

Venezuela is in the midst of a ghastly economic crunch. It has some of the world’s worst inflation. Its main source of revenue—crude oil sales—is collapsing along with the dollar price of a barrel. Its ability to meet its financial obligations is being openly questioned.

And now, its closest ally, Cuba, is making moves to reduce its reliance on the South American nation, amid the ground-breaking thaw in US-Cuban relations. To be sure, normalizing economic relations between Cuba and the US has long been important to economic growth. But a Cuba that does more business with the US would, at the margins, complicate its support for Venezuela. For the record, Venezuelan President Nicolas Maduro praised news of the deal between Cuba and the US.

The linkages between the two countries are hard to overstate. Some 45% of all Cuban exports go to Venezuela, according to Moody’s Investors Service analysis of Cuba published this week. Those exports will likely shrink as the Venezuelan economy contracts sharply. (In fact, Venezuela is in such a mess that it hasn’t published GDP numbers in a year, nor inflation data since August when it was running at more than 60%.)

Moody's

Nor does it seem likely that Cuba will receive the same degree of favoritism from Venezuela that it has in the past. The country has been selling oil to Cuba at below-market rates as part of now-deceased Venezuelan leader Hugo Chavez’s vision to create a power bloc. Moody’s notes that Venezuelan oil shipments have slumped over the last year, meaning that Cuba will increasingly pay market rates for energy, putting considerable strain on the country’s balance of payments. Buying more oil elsewhere will require paying in US dollars, most likely collected from tourists. The US says it will severely ease travel restrictions on Cuba over coming weeks and months.

The US-Cuba thaw will involve some growing pains for Cuba, especially as it veers away from dependence on Venezuela. But then, looking at Venezuela, in the long run this looks like the right call.