U.S. Geopolitics and Cuba: The Cuban Thaw: by Bill O’Grady of Confluence Investment Management

On Wednesday, December 17, 2014, President Obama surprised the country by announcing a prisoner exchange and negotiations to begin establishing diplomatic relations with Cuba. Given that the Eisenhower administration broke off diplomatic relations with Cuba in January 1961, even considering resuming relations is a major change in policy. In this report, we will discuss the importance of Cuba to the geopolitics of the U.S and offer a short history of the island along with a summation of the lessons of that history. We will analyze the limits of the current thaw and why this attempt at rapprochement is occurring now. As always, we will conclude with potential market ramifications.

U.S. Geopolitics and Cuba

U.S. Geopolitics and Cuba: The Cuban Thaw

This map highlights the U.S. central river system, the “crown jewel” of American geography. The Mississippi River acts as a central corridor that connects the Ohio, Missouri, Tennessee, Arkansas and Red Rivers, allowing for large scale farming of the central plains. Much of this land came under U.S. control with the Louisiana Purchase and was completed when Texas joined the Union in 1845, although it wasn’t secured until after the Mexican-American War ended in 1848.

The key to effectively utilizing the central U.S. river system was protecting New Orleans and ensuring that no outside power could bottle up shipping in the Gulf of Mexico and the Caribbean. For much of the 1800s, the U.S. fended off encroachment from both Spain and Britain. Andrew Jackson routed the British at the Battle of New Orleans in 1814, a battle that was part of the War of 1812. The U.S. ousted the Spanish from Florida, organizing the area into a territory; again, Andrew Jackson led a campaign against the Seminole Indians in what is now eastern Florida in the First Seminole War in 1817-18.

Despite a secure American mainland, European powers still threatened U.S. shipping from New Orleans in the Yucatan Straits. The narrow passage between the Florida Keys, the Yucatan Peninsula and Cuba could be used to interdict American shipping. Thus, the U.S. needed to ensure that Cuba was not controlled by a hostile power.

It should be noted that President Jefferson considered possessing Cuba and conducted back channel negotiations with the Spanish governor to annex the island in 1805. In 1823, then Secretary of State John Q.

Adams argued that Cuba should be in U.S. hands and strenuously fought against British incursions in the Caribbean.

By the 1870s, after slavery was abolished in Cuba, industry had been transformed. Without low cost labor, sugar and other crops were industrialized, supported by American capital. Although Cuba remained in Spanish hands, its economy was becoming increasingly dependent on the U.S.

By 1881, Jose Marti began mobilizing Cuban exile support in the U.S. for independence. Marti, a Cuban hero, opposed continued Spanish rule but also wanted to prevent American annexation. Over the next 15 years, Marti and other revolutionaries attempted to overthrow the Spanish colonial government, but these efforts failed to oust the Spanish government. To defeat the rebels, Spanish troops deployed harsh methods, including executions, exile and the destruction of private property. These atrocities created
great sympathy in the U.S. for the rebels’ struggles, reminding many Americans of its founders’ conflicts with the British for independence.

As the civil conflict escalated, the U.S. became concerned about the safety of Americans living in Cuba. President McKinley sent the U.S.S. Maine to Havana in 1898. The ship exploded in Havana’s harbor; although there is still dispute over how the ship was destroyed, the American press implied it was Spain that was responsible and wanted war.

President McKinley did not want a conflict but did want to send U.S. troops to Cuba to end the civil war. Congress overwhelmingly supported sending troops. However, part of the agreement to send troops included the Teller Amendment, which stipulated that the U.S. could not annex Cuba but only leave “control of the island to its people.”

As the U.S. Navy deployed a blockade, American troops moved into rebelcontrolled areas in Cuba. The Spanish- American War was underway. After several months, Spain surrendered and by the summer of 1898 had sued for peace with the U.S. Cuba was no longer part of the Spanish Empire. However, due to the Teller Amendment, it wasn’t part of the U.S. either. Still, the McKinley administration established an occupying government led by the U.S. Army. Representative institutions established by Cuban revolutionaries were disbanded.

By the turn of the century, American investment had begun to pour into Cuba. Railroads were built with American capital and the sugar cane industry was expanded and modernized. By 1902, 40% of sugar cane production was controlled by North Americans.

Into the early 20th century, the U.S. military began the process of establishing a Cuban government. Political parties were established and municipal elections were held.  However, the Platt Amendment, which was part of the legislation to end  military occupation, severely restricted Cuban independence. It gave the U.S. the power to intervene in Cuban affairs and limited Cuba’s power to deal with other foreign governments or investors. It also established a U.S. naval base in Guantanamo Bay.

Into the 1920s, the U.S. sent troops into Cuba on several occasions, ostensibly to protect American investment and to quell unrest. Elections were held until Gen. Gerardo Machado, who was first elected in 1925, decided to stay in power, making Cuba a dictatorship. He was ousted in a revolution in 1933; the U.S., likely distracted by the Great Depression, did not interfere. A new government, led by Dr. Ramon Grau San Martin, took power. He liberalized labor laws and rejected the Platt Amendment. This new government didn’t last long; by early 1934, a coalition of right wing civilian and military elements took power, led by Fulgencio Batista and supported by the U.S. He won elections in 1940 but was replaced by Grau in the 1944 elections. Carlos Prio Socarras won the presidency in 1948. Eduardo Chibas, the leader of the Orthodox Party, was expected to win in 1952, running as an anti-corruption candidate. The young Fidel Castro considered Chibas his mentor. However, Chibas committed suicide after he promised to reveal high-ranking political figures’ corrupt activities on his weekly radio show but then failed to do so. In the political vacuum, Batista led a bloodless coup to take control.

It should be noted that by the early 1950s, Cuba’s GDP was roughly the size of Italy’s and its industrial wages were the eighth highest in the world. Its agricultural wages exceeded those of West Germany and France. It had more doctors per capita than the U.K. and the lowest infant mortality rate in Latin America. Cuba’s close connections with the U.S. economy were the primary reason for its strong economic performance.

By the late 1950s, Batista’s corruption and dictatorial behavior led to rising opposition, including from Fidel Castro. Although Castro was not initially successful in his efforts to overthrow the government, widening discontent with Batista, along with the Eisenhower administration’s decision to impose trade restrictions to encourage the dictator to leave the country, led to Castro’s revolution.

Castro became increasingly radicalized; although some historians have argued

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