Sunday, December 19, 2010

2009 cable: Cuban economy stronger than in the 1990s

This 2009 cable says Cuba is not as vulnerable to economic crisis as it was during the 1990s.
It says the Cuban government sets low expectations, mentioning even the possibility of blackouts, to fend off civil unrest.

Reference ID Created Released Classification Origin
09HAVANA322 2009-06-04 13:01 2010-12-16 21:09 CONFIDENTIAL US Interests Section Havana

DE RUEHUB #0322/01 1551354
R 041354Z JUN 09

C O N F I D E N T I A L SECTION 01 OF 05 HAVANA 000322



E.O. 12958: DECL: 06/03/2019

¶B. 06 HAVANA 8017
¶D. 07 HAVANA 761

Classified By: COM Jonathan Farrar for reasons 1.4 (b) and (d)


¶1. (C) The combination of new warnings of potential
blackouts, serious liquidity issues, and potential (if not
already) reduced financial support from Venezuela has sparked
rumors on the street and in the international media that Cuba
may be headed toward another "Special Period". The reality
is that Cuba and Cubans are not as vulnerable as they were in
1989 before the end of Soviet subsidies. However, the Cuban
economy remains remarkably dependent on external markets and
access to credit. While the level of foreign reserves is a
well guarded secret, some analysts and USINT contacts believe
the GOC could run out of cash later this year without a
significant change of course. Energy austerity measures
officially began on June 1, starting with state companies and
then potentially moving to households. We expect a reduction
in non-fuel imports as a next step. End Summary

Are We There Yet? No, But...

¶2. (C) The standard of living for Cubans, while still not as
high as twenty years ago before the end of Soviet subsidies,
remains much better than the darkest days of the 1990 to 1993
period when GDP fell more than 35 percent. While we expect
zero to negative GDP growth in 2009 (Ref A), Cuba's latest
challenges have yet to seriously affect the average Cuban.
The GOC blames its current macroeconomic woes on the world
economic slowdown, the U.S. embargo, a particularly
destructive 2008 hurricane season, and general inefficiency
and waste. The GOC is quick to point out that no Cuban will
be evicted for failure to pay a mortgage and Cuban jobs
remain secure while rich countries are experiencing massive
layoffs. Nevertheless, the GOC has previewed other
difficulties that could soon reach Cuban households.

Liquidity Crunch

¶3. (C) Cuba has been in a perennial state of late-payment
for decades; sometimes due to legitimate cash shortages and
at other times simply as a negotiation tactic. Cuba has long
pointed to the crisis of the day to renegotiate short term
official debt, and we can not rule out that the GOC is simply
using the current world economic crisis to improve its cash
position. However, diplomatic contacts agree that Cuba's
current liquidity crunch is much deeper than in recent years.
Foreign companies are waiting three to six months to receive
payment, and some have already agreed to sell their assets
back to the GOC (Pebercan) or restructure their accounts
receivables (Sherritt) into medium to long term government

¶4. (C) The latest holdup appears to be at the banking level,
as Cuban state companies are reportedly making payments on
time but the payment transfers are delayed by the bank for
months before being released to the foreign enterprise.
Alternatively, the funds are deposited in the foreign
company's account for use within Cuba but they are not
permitted to transfer the funds abroad or into a foreign
currency. Initially, Cuban officials blamed the need to
divert resources to assist in the recovery from last year's
hurricanes, but now the main culprit appears to be the world
economic crisis. A reported collapse in all of Cuba's main
sources of foreign currency (nickel exports, tourism,
remittances) and an increase in the quantity and price of
Cuban imports have magnified an already increasing debt
burden. It is clear that the GOC is hemorrhaging cash.
Whether it has reached the crisis point or not is less clear.
Either way, the Cuban banking sector has lost much of the
credibility it had built in recent years, which has led some
to speculate that long time Central Bank President Francisco
Soberon may finally be on his way out.

¶5. (C) CIMEX, Cuba's largest and most diversified holding
company, reported on May 20 that payments for some imports
have suffered delays, but the "will of the country" was to
meet its financial obligations. CIMEX also reported that
remittances were down so far in 2009. CIMEX controls Banco
Financiero International, the most important Cuban bank for
foreign trade related transactions, and the relationship with
remittance providers including Western Union and Canada's
Transcard through Financiera CIMEX. According to Reuters,
the GOC has called government ministries to cut spending by 6
percent and limit imports. European and Canadian diplomats
report reduced exports to Cuba so far this year, especially
for machinery and other non-food items. Ironically, and to
the visible dismay of our diplomatic colleagues, U.S. exports
to Cuba through the first quarter of 2009 were higher than
even last year's historic level. This dismay is heightened
by the fact that U.S. companies are paid on time while others
must wait as reported above. U.S. exports make up much of
the food consumed by Cubans and sold in the income generating
tourist industry, and U.S. law requires payment in cash in
advance. However, there are recent reports that Cuban
purchases of U.S. meat products have been cut through the
rest of 2009.

Threatened Blackouts

¶6. (SBU) In 2005, Fidel Castro announced that his new Energy
Revolution would put a stop to blackouts in Cuba by the end
of 2006. The GOC took several measures over the next few
years to limit future blackouts (Ref B), including increasing
household electricity bills, swapping out refrigerators and
light bulbs, and importing hundreds of small generators.
Despite these steps, the official press announced on May 22
that "exceptional measures to save electricity shall be
applied throughout the country starting 1 June in an effort
to curb overconsumption, bring every center, municipality,
and province in line with their plan, and prevent power
cuts." The GOC identified 1,700 state enterprises as high
electricity users, 3,000 examples of waste in the public
sector, and four provinces with increasing home consumption.
The GOC is taking extreme measures to prevent countrywide
blackouts. A new austerity plan is being implemented by each
municipality and state enterprise to conserve energy. Local
energy councils are monitoring the daily use of electricity
and local authorities are conducting surprise inspections.
In the first few days of the new plan, provinces have been
strict in their stated intention to shut off a company's
electricity if it exceeds its budgeted allowance. There are
reports that the Holguin province shut off the electricity
for the offices and warehouses of the three nickel plants due
to overconsumption, although the plants themselves continue
to operate.

¶7. (SBU) Although households are not included in the formal
austerity program, the official press has highlighted fines
levied on residents caught rigging electricity meters, urged
personal energy savings, and threatened countrywide blackouts
if the situation doesn't improve. The summer 2005 blackouts
were a serious strain on Cuban households and the possibility
of a return to those days despite years of supposed reform in
the sector has clearly disappointed our Cuban contacts.
Frequent but short-lived power outages already take place on
a daily basis, but many Cubans refuse even to speculate on a
return to scheduled blackouts. Blackouts mean spoiled food,
no air conditioning during the brutal summer months, and no
cooking since the GOC recently swapped most gas stoves with
an electric version from China. According to GOC officials,
the root of this summer's energy crisis is not a lack of
generation capacity (as in 2005) but a shortage of fuel.
Cuba uses much of its own heavy crude oil for domestic
electricity production, but also relies on imports, in
particular Venezuelan deliveries of refined products to power
the (diesel) gas guzzling generators.

--------------------------------------------- ------------
Potential Triggers: Venezuela, Hurricanes, or Insolvency
--------------------------------------------- ------------

¶8. (SBU) Venezuela: In addition to oil deliveries, Cuba and
Venezuelan oil conglomerate PDVSA have significant joint
ventures in Cuba, Venezuela, and other Petrocaribe countries.
Within Cuba, these ventures are focused on building and
expanding oil refining capacity, oil prospecting, gas
production, maritime transportation (crude oil and
byproducts), housing construction, agricultural production,
access to potable water, fishing, and transportation
services. Potential future operations include increasing
storage capabilities, enlarging cargo docks and navigation
channels, and constructing a network of pipelines, roads, and
services infrastructure. Venezuela has taken over from China
a joint venture to build a new nickel plant within three
years. In addition, Cuba and Venezuela are working on a
fiber optic cable with an ever changing completion date,
currently some time in 2010.

¶9. (C) The GOC started hinting that all was not rosy with
its economic relationship with Venezuela when, in an
unusually public display, the front page of the Communist
Party newspaper Granma reported on May 21 that Venezuela
would experience a 50 percent drop in petroleum revenue in
¶2009. The GOC reference to a lack of fuel rather than
generation capacity to explain energy shortages could
indicate either a reduction (or delay) in fuel supplies from
Venezuela or disappointing refining results through the
Cuba/PDVSA joint venture projects. A French diplomat told us
that a French company inquiring about its overdue accounts
receivable from a Cuban bank was told that the bank had to
wait until funds arrived from Venezuela. Cuba is not yet as
dependent on Venezuela as it was on the Soviet Union.
However, a potential loss of even partial support for the
many activities Venezuelan enterprises are now involved in
would severely impact several facets of the Cuban economy. A
reduction of oil shipments in 2010 (Ref C) could bring the
economy to a halt.

¶10. (SBU) Hurricanes: The 2008 hurricane season devastated
many parts of the island (Ref D), but it mostly missed the
foreign income generating regions of Havana (tourism and most
industry), Matanzas (tourism), and Moa (nickel). It also had
only a modest effect on the sugar and tobacco industries.
The 2009 hurricane season, which began on June 1, is expected
to be less severe than 2008. However, one or two hurricanes
that target these regions would cut Cuba's foreign earnings
even further and raise serious questions around Cuba's

¶11. (C) Insolvency: Cuba effectively ran out of reserves in
1992 at the height of the Special Period. At that time,
Cubans experienced extensive cuts in their rations (food,
clothing, electricity, and fuel), a near end to public
transportation, and strict black market crackdowns. Since
the end of the Special Period, Cuba has built up some foreign
reserves, but, as one European diplomat with good ties in the
Cuban banking sector told us, the exact number remains one of
two key national secrets (along with the details of Cuba's
financial arrangement with Venezuela). The Central Bank of
Cuba has implemented strict new measures limiting foreign
currency transactions by foreign companies and further
controlling transactions by state companies. The French
Commercial Counselor expects Cuba to reach bankruptcy or near
bankruptcy by the end of the year.

Is Cuba Better Prepared This Time?

¶12. (C) Cuba's over-reliance on credit to pay for critical
imports and dependence on Venezuela for more than just oil
remain Cuba's primary vulnerabilities. In contrast to 1989,
however, Cuba has diversified both its trading partners and
sources of foreign currency. Whereas the former Soviet Union
represented 80 percent of Cuba's total trade in 1989, Cuba's
top five trade partners in 2007 represented only 60 percent
of total trade (in goods) with Venezuela on top at 20 percent
(followed by China with 18 percent, Canada with 10 percent,
Spain with 8 percent, and the United States with 4 percent).
Detailed 2008 numbers have not been released yet. All of
these partners, with the exception of the United States,
offer Cuba extensive credit. The Spanish Commercial
Counselor told us that Spain is close to concluding a
renegotiation of its short term debt with Cuba. Spain and
Cuba have already agreed on the new structure of the debt
(some cancelled, the rest longer term) and the applicable
interest rate. The only remaining obstacle is how much new
credit Spain will offer Cuba.

¶13. (C) Some of the reforms that helped bring Cuba out of
the Special Period will also provide a cushion for the Cuban
economy today. Even with an expected fall in tourism this
year, Cuba may receive close to 2 million more tourists than
the 340,000 that arrived in 1990. Earlier this year, Cuba
re-started licensing private taxi cabs. Local paladars
(small, private restaurants) frequented by USINT staff remain
profitable self-employment ventures. Although remittances
are reportedly down so far this year, presumably due to the
world economic crisis, money and visits from family members
living abroad remain an important source of income for many
Cuban families. In addition, foreign investors remain
interested in key sectors like hydrocarbons and tourism in
spite of Cuba's liquidity problems, possibly in order to keep
a foot in the door before a hypothetical opening to U.S.
business. Furthermore, the Cuban government is much better
at capturing foreign currency than before 1990 through
customs, fees, taxes, and hard currency stores.

¶14. (SBU) The Special Period is still fresh in the minds of
all Cubans. For most, the problem was not one of income but
rather of a lack of supply. There was simply nothing to buy
and very little provided by the state. As a result, Cubans
have spent the past twenty years learning how to "escapar"
(literally to escape but usually meant to survive) without
relying on GOC assistance. The 2008 hurricanes returned many
families in eastern Cuba, Pinar del Rio, and the Isle of
Youth to desperate conditions with insufficient government
assistance. According to the World Food Program, most
hurricane assistance has now been delivered, so victims will
have to rely on their own efforts for sustenance (see septel
for information on the pending European Community aid package
which includes some humanitarian assistance). The
destruction caused by last year's hurricanes means that some
Cubans don't have as far to fall to reach standards of living
similar to the Special Period.

¶15. (SBU) On May 24, state newspaper Juventude Rebelde
reported on interviews conducted to determine how Cubans see
the effects of the global economic crisis on the country.
Most of the interviewees urged readers to "work harder" and
"soldier on" to help the country through this difficult time.
One retiree said he didn't think this is going to get as bad
as in the worst of the days of the 1990s. Several
respondents said Cubans were better prepared since they have
been trained to live through similar crises. The article
sought to dampen rumors of "catastrophic overtones" including
"no oil, soap, and other staples, (and) that the blackouts
will come back and that they will be long." The GOC and
official press have yet to offer any solutions other than a
call on the patriotic duty of all Cubans to save more and
spend less. Several GOC officials have echoed a 2005 quote
by Central Bank President Francisco Soberon turning the
political motto "Fatherland or Death" into its economic
equivalent of "Savings or Death".


¶16. (C) Daily life for most Cubans remains extremely
difficult primarily due to a backward and mismanaged economy
and the lingering effects of last year's hurricanes. The
summer months promise even more hardship as the world
economic crisis finally makes its way to Cuban households.
Nevertheless, today's Cuban economy is less vulnerable to a
return to the lows of the Special Period thanks to more
diversified sources of income and credits, a more resourceful
Cuban population, and an actual (remittances and travel) and
theoretical (end of the embargo) opening of U.S.-Cuban
relations. By even mentioning the possibility of blackouts,
the GOC is trying to set the expectations of Cubans as low as
they can possibly go without triggering public unrest. If
the GOC can show that Cubans working together can
successfully prevent massive blackouts, then it can at least
show level of competence and socialist pride. Further risks
remain, however, as hurricane season approaches and both
Venezuela and Cuba face their own financial crises.

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