Posted by Joseph Carroll on 5th Jan 2015

Diplomatic Relations between Cuba and the United States - A Brief Analysis

After 18 months of closed-door discussion and negotiations, President Obama has announced that the United States will immediately re-establish full diplomatic relations with Cuba, including the easing of travel restrictions and the opening of a U.S. embassy in Havana, for the first time in over five decades.

President Obama stated in the announcement made Wednesday, December 17, “We will end an outdated approach that for decades has failed to advance our interests, and instead we will begin to normalize relations between our two countries,” before sharing his hope of increasing solidarity across the regions involved. He stated that the deal will “begin a new chapter among the nations of the Americas.”

Word of the announcement spread quickly and was met with a predominantly positive response. The U.S. embargo against Cuba was first implemented in October of 1960, shortly after the 26th of July Movement, led by Fidel Castro, overthrew the regime of Fulgencio Batista just two years prior.

At the height of the Cuban Revolution, President Eisenhower had effected an arms embargo against Cuba in March of 1958. The Cubans responded in turn by purchasing arms from the Soviet Union. This was at a time when Cold War tensions and fear of the spread of Communism were high. The strengthening of relations between the Soviet Union and Cuba is what ultimately led to the U.S. installing a full-scale economic, commercial and financial embargo against the small island just 90 miles south of the Florida coast.

Since the fall of the USSR, however, many have called into question the relevancy of the Cuban Embargo, as well as its efficacy. U.S. consumers have long had little difficulty finding ways in which to smuggle Cuban goods into the country, and enforcement has been lax.

Following the announcement, one question immediately rocketed to the forefront of every cigar smoker's mind: what does this mean for the future of legally available Cuban cigars in the United States? As of right now this is really a two part answer.

First and foremost, it is important to clarify that the restoration of diplomatic relations between the U.S. and Cuba does not mean the embargo has been lifted. In other words - no, you can’t walk into a cigar shop in the United States and purchase a box of Cuban cigars.

However, there is a small token of reprieve available. U.S. citizens visiting Cuba may legally return with $400 worth of Cuban goods, with up to $100 of that comprised of tobacco or alcohol products. In short, U.S. cigar smokers will be able to bring in a handful of their favorite Cubans, but you will be hard pressed to bring back a full box of anything noteworthy.

Questions remain as to how the $100 limit will be enforced. Most countries regulate the importation based on quantity; Canada, for example, allows its citizens to bring 50 cigars back duty-free, and free of import and tobacco taxes. When regulating a monetary amount several questions quickly arise, and in the case of December's announcement, have not been yet addressed (at least to our knowledge.)

Will the U.S. Customs Department maintain an active and readily available price list to reference when determining the value of the traveler's cigars? If not, will the value be based on a receipt or invoice provided by the consumer?

If the value is to be based on a receipt or invoice provided by the consumer, what is stopping Cubatabaco (the Cuban state tobacco company) from simply undervaluing the declared price?

In a similar vein, if a customer were to purchase several Cuban cigars that would exceed the $100 limit, but legitimately received a discount that brought the total to under $100, would this qualify to be legally brought back into the U.S.?

Is that $100 based off the manufacturer's suggested retail price, or could a retailer with an account with Habanos S.A. (the arm of Cubatabaco tasked with handling exportation of Cuban tobacco products) hypothetically purchase a box at retailer cost that would otherwise be over the $100 limit?

While these questions around the legislation will likely be ironed out in the coming months, the bigger topic to address is how the market will be affected if and when the embargo is actually lifted and full trade commences - which, by the way, can only be lifted by an Act of Congress.

While there are some definitive statements to be made as to how the introduction of Cuban cigars will affect the market and the greater cigar industry as a whole, particularly in the first two years, the full impact will not be understood until we actually experience it. Let’s take a quick look as to what is more or less guaranteed, as well as throw out a few educated guesses.

A sharp increase in both sales and interest in Cuban cigars, and cigars as a whole in the proceeding months will occur - of that, there is little doubt. Two questions are immediately begged, however: how long will that influx last, and what percentage of new smokers will remain after the allure has worn off?

To the first question - I’d bet money that the spike in interest will sustain for one to two years, and will begin to taper off in the proceeding years. I’d estimate that the honeymoon phase, at least from the retailers' perspective, will have more or less become non-existent in about 5 years. That being said, I do think we’ll see Cuban cigars held in high esteem in an analogous fashion to what we see with Swiss movements in the watch industry.

The second question is a bit more difficult to gauge. There is a natural inclination to look back to the years of the cigar boom that occurred in the mid-1990s. There was a huge influx of new cigar smokers introduced to the market, and existing smokers increased their rate of consumption. The now famous cigar boom wound down at the turn of the century, and the market stabilized. To my knowledge, nobody has ever done a conclusive analysis of what percentage of consumers who adopted the hobby during the boom stuck with it in the long term.

There are also several questions pertaining to how Cuban cigars will actually be received by consumers once they become readily available. The most frequent question that cigar connoisseurs encounter is, “Are Cubans all they’re cracked up to be?” The short answer is that only the smoker can truly be the judge of that. The more specific answer is this: Cuban tobacco has a very distinctive set of characteristics. Cubans are known for having flavors that are bold and dominant, whilst simultaneously smooth. Cubans are also known for being exceptionally creamy. The key thing to realize is that every region in every country has its own distinct set of characteristics. A great Cuban cigar is on par with a great Nicaraguan cigar, and so on. In essence, Cubans aren’t inherently better, they’re just different.

A question of particular debate amongst the Cigar King staff is how the smoking population will fare with the strength levels of Cuban tobacco. On average, Cuban leaf is usually Medium+ at a minimum. Cigar King is an ‘A’ level retailer - we sell upwards of several million cigars per year. It is no stretch to say that 70-75% of the market falls into the mild-medium category. I think it will be quite interesting to see how the tastes of the majority of cigar consumers will coincide with the strength of Cuban tobacco.

Finally, you have the fact that Cuban cigars generally retail for $20.00 USD, and only go up from there. It’s not entirely uncommon to see a Cohiba Behike 52 fetch upwards of $50 per cigar, even in countries where Cubans are widely available. Contrast this with the fact that 90% of the existing cigar market in the United States is in the $6 to $9 range; it’s not a huge stretch to think that Cuban cigars will suffer from being simply cost prohibitive.

We find ourselves in an exciting time in history. Not just with the U.S. and Cuba, but the entire world. December's announcement marks the first in a series of pivotal steps in the history of the Americas. We’re still a fair way off from seeing the Cuban Embargo lifted, but for the first time in over half a century we have light at the end of the tunnel.

Ironically enough, with ever increasing tensions between NATO and Russia over the ongoing Ukrainian-Crimean conflict, and Russia aiming to establish a military presence in Nicaragua, maybe we’ll see a reversal of roles between Cuba and Nicaragua? You can’t have a party without at least one ongoing embargo, right?

Rest assured, if and when we do see the Cuban embargo lifted, Cigar King is primed and ready to satisfy all of your Cuban cigar needs. Our philosophy of a customer-centric approach, lightning-quick service, and the best prices around will remain steadfast!