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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

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    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

`