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Viewing cable 09HAVANA322, HOW MIGHT CUBA ENTER ANOTHER SPECIAL PERIOD?

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Reference ID Created Released Classification Origin
09HAVANA322 2009-06-04 13:01 2011-02-04 21:09 CONFIDENTIAL US Interests Section Havana
VZCZCXRO0670
RR RUEHAO RUEHCD RUEHGA RUEHGD RUEHHA RUEHHO RUEHMC RUEHMT RUEHNG
RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHUB #0322/01 1551354
ZNY CCCCC ZZH
R 041354Z JUN 09
FM USINT HAVANA
TO RUEHC/SECSTATE WASHDC 4442
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUCOWCV/CCGDSEVEN MIAMI FL
RUEAIIA/CIA WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUCOGCA/COMNAVBASE GUANTANAMO BAY CU
RHMFISS/HQ USSOUTHCOM MIAMI FL
RHMFISS/JOINT STAFF WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
C O N F I D E N T I A L SECTION 01 OF 05 HAVANA 000322 

SIPDIS 

DEPT FOR WHA/CCA 

E.O. 12958: DECL: 06/03/2019 
TAGS: ECON PGOV PREL EFIN CU
SUBJECT: HOW MIGHT CUBA ENTER ANOTHER SPECIAL PERIOD? 

REF: A. HAVANA 308 
B. 06 HAVANA 8017 
C. CARACAS 564 
D. 07 HAVANA 761 

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

------- 
SUMMARY 
------- 

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 
debt. 

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 

HAVANA 00000322 002 OF 005 


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 
--------------------------------------------- ------------ 

HAVANA 00000322 003 OF 005 



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 
solvency. 

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, 

HAVANA 00000322 004 OF 005 


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". 

-------- 
COMMENTS 
-------- 

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 

HAVANA 00000322 005 OF 005 


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. 
FARRAR