Cablegate: The Prosperous Canada-Cuba Economic Relationship

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RR RUEHGA RUEHHA RUEHQU RUEHVC
DE RUEHOT #2420/01 2241230
ZNR UUUUU ZZH
R 121230Z AUG 06
FM AMEMBASSY OTTAWA
TO RUEHC/SECSTATE WASHDC 3445
INFO RUCNCAN/ALL CANADIAN POSTS COLLECTIVE
RUEHUB/USINT HAVANA 0008
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC

UNCLAS SECTION 01 OF 03 OTTAWA 002420

SIPDIS

SIPDIS

STATE PASS USTR

E.O. 12958: N/A
TAGS: ECON ETRD EAGR CU CA
SUBJECT: THE PROSPEROUS CANADA-CUBA ECONOMIC RELATIONSHIP

REF: A. OTTAWA 2258

B. OTTAWA 1245
C. 05 0TTAWA 3518

1. (SBU) Summary: Canada,s economic relationship with Cuba
began in the late 19th century, long before the U.S. embargo.
Today, Canada-Cuba economic ties continue to be strong. The
annual two-way trade between the countries is around $1
billion USD. About 22 percent of Cuban exports (mostly
nickel, cigars, and seafood) go to Canada, second only to the
Netherlands. Cuba generally imports oil and food, and from
Canada it gets mainly computer equipment, mining and oil and
gas machinery, and wheat. Foreign direct investment in the
form of oil exploration and production is expanding, and at
least one Canadian company, Sherritt International, is
involved. Tourism is also a big part of the economic
relationship, as Canadians make up the largest group of
travelers to the island. The number of Canadians visiting
Cuba also continues to grow. And despite possible sanctions
under the U.S. Libertad Act, around 85 Canadian companies
continue to do business in Cuba. End summary.

BRIEF HISTORY
--------------

2. (U) The economic relationship between Canada and Cuba is
not merely an opportunistic response to the U.S. embargo.
The two countries have enjoyed economic ties dating back to
the late 19th century when vessels from Canada,s east coast
traded cod and beer for rum and sugar. As early as 1910, a
trade commissioner was posted in Cuba to promote Canadian
products. After the Revolution in 1959, Canada was one of
only two countries (Mexico being the other) to maintain
formal relations with Cuba. Cuba,s tourism industry grew
steadily starting in the 1970s, and today Canadians compose
Cuba,s largest group of visitors, with more than 600,000
flocking to the island last year.

CANADIAN IMPORTS FROM CUBA
---------------------------

3. (SBU) Canadian imports from Cuba in 2005 were 456 million
USD, an increase of less than one percent over the previous
year. Almost all, 97 percent by value, was nickel. Other
imports were cigars, seafood, scrap-metal, alcohol, and
coffee. Trade analysts in Canada are fond of pointing out
that Cuba is "one of the few export markets not dominated by
the United States", thanks to the U.S. trade embargo on Cuba.
For Canadian exporters, who see in the U.S. both their
largest market and their largest competitor, this situation
is appealing despite the continuing difficulties of doing
business with a country "constrained by deep structural
problems."

CANADIAN EXPORTS TO CUBA
-------------------------

4. (U) In 2005, Canada's exports to Cuba totaled 369 million
USD, which made up 0.1 percent of its total exports, roughly
equal to U.S. exports to Cuba. The two biggest exports were
computer and peripheral equipment, and mining and oil and gas
field machinery; each accounted for about 10 percent of total
exports. The leap in mining, oil, and gas equipment
shipments (38 million USD in 2005 versus 4.7 million USD in
2000) has been stimulated by the recent offshore oil
exploration effort in Cuba. Wheat was the third largest
Canadian export, accounting for 7.4 percent of the total.
Agricultural products, machinery parts, and sulfur make up
the majority of the rest of the exports.

5. (SBU) The current level of exports to Cuba represents an
increase of 47% over 2004 levels, with much of the growth in
the agricultural sector. The Canadian Wheat Board, the
largest single seller of wheat and barley in the world, is
working with ALIMPORT, Cuba's state importing agency for
Qworking with ALIMPORT, Cuba's state importing agency for
agricultural products, to increase Canadian wheat exports to
Cuba. The Canadian Agri-Food Trade Service of Agriculture
and Agri-Food Canada reports that Canada is currently Cuba's
second largest supplier of wheat after France. At ALIMPORT's
request, the Canadians are also providing information on
Canadian barley and oats for food uses. Agricultural exports
to Cuba are closely linked to the tourism trade, since with
the exception of basic foodstuffs and commodities for the
local population, the government of Cuba imports food
products to meet the demands of tourists, and the demand for
imported food is expected to increase with the tourism trade.
Cuba also lifted a BSE-related ban on Canadian beef exports
in 2005, which may account for some of the increase in

OTTAWA 00002420 002 OF 003

agricultural exports.

6. (SBU) Canadian machinery exports to Cuba, which also
increased between 2004 and 2005, are less likely to continue
to increase. The Canadian equipment sector is geared toward
contract work, so exports to a country can fluctuate
significantly year-to-year, as contracts are filled and are
sometimes not renewed. Export Development Canada lists Cuba
as a notable example of this trend, where exports grew in
2005 but are expected to fall in 2006.

OIL
----

7. (SBU) Canadian oil companies have taken an interest in
Cuba in recent years. While Cuba does produce its own oil,
mostly from a reservoir off the north coast discovered in
1971, that oil is poor-quality &sour8 crude. However,
thanks to foreign investment from places like Canada and
Spain, Cuban oil production has taken off lately. According
to press reports citing public and confidential records,
Cuba,s Economic Exclusionary Zone, which lies in the North
Cuban Basin between Key West and Havana, potentially holds
petroleum reserves amounting to an estimated 4.5 to 9 billion
barrels. While Canadian, Brazilian, and Spanish companies
have carried out test drilling in the zone for years,
although usually with only minimal returns, new exploration
efforts could soon be paying off. In conjunction with its
increased oil investment, Cuba plans the construction of 36
new oil rigs built in partnership with Canadian and Chinese
companies within territorial waters.

8. (SBU) Sherritt International is involved in the oil
production off Cuba,s northern coast. We are also aware of
one other Canadian entity, Pebercan, which exploits offshore
drilling licenses in Cuban waters. The Cuban government has
divided its exclusive drilling zones to the north and west of
the island into 59 deep-water blocks, and Sherritt has
acquired the rights to four of them.

TOURISM
--------

9. (SBU) Like sugar, tourism is a pillar of the Cuban
economy. Canadian tourists to Cuba, attracted mainly by low
cost vacations, account for roughly a third of Cuba,s
tourist trade and compose the largest single group of foreign
visitors to the island. Canadian tourists also are Cuba,s
largest source of tourism revenue. Cuba is the fifth most
popular international destination for Canadians, after the
United States, Mexico, United Kingdom, and France.

10. (SBU) In 2003, approximately 494,000 Canadian tourists
visited Cuba, and that number is expected to increase to
nearly 640,000 this year. Half of Canada,s tourists are
from Quebec. Air Canada currently runs 10 flights a week to
Cuba, including to the island of Cayo Coco and the resort
town of Varadero. During Cuba's busy winter season, Air
Canada increases its operations to 28 weekly flights,
including daily service from Toronto to Havana.

11. (SBU) Canadian companies are active in the Cuban tourism
industry through hotel supply-contracts. Two Canadian-based
tourism-related companies have recently been listed as
Specially Designated Nationals under the Cuban Assets Control
Regulations.

OTHER FDI
----------

12. (SBU) Canada is also the largest foreign investor in
Cuba. There are about 85 Canadian companies operating in
Cuba, including Labatt, a brewing company, and Pizza Nova, a
fast-food pizza chain which has six locations in Cuba. The
U.S.-Cuba Trade and Economic Council lists the companies
which do business or have done business with Canada (listing
available at www.cubatrade.org).

13. (SBU) The largest Canadian investor in Cuba is Sherritt
Q13. (SBU) The largest Canadian investor in Cuba is Sherritt
International, a natural resources company based in Toronto
that earned more than C$100 million in the first quarter of
this year. State-owned Cubaniquel and Sherritt jointly
operate a nickel and cobalt facility in Moa, Cuba, in
addition to Sherritt,s oil production efforts mentioned
above. Nickel accounts for 20% of Sherritt,s earnings. As
of 1997, there were over 200 foreign investment operations,
valued at US $2.1 billion, and over 30 Canadian joint
ventures.

OTTAWA 00002420 003 OF 003

14. (SBU) Canadian contacts say that the mere threat of the
Title III implementation has acted as an obstacle to
investment in Cuba. Because of the high-level of
cross-investment between Canada and the United States, most
major Canadian enterprises already have some legal exposure
to the Libertad Act through their U.S. affiliates (40 percent
of Canadian foreign direct investment overseas is in the U.S.
and U.S. investors account for 64 percent of foreign direct
investment in Canada.) U.S. entry restrictions on key
Canadian corporate officials under Title IV of the Libertad
Act (for example, a number of Sherritt executives are barred
from entry) already create a significant disincentive to
Canadian investment in potentially expropriated properties
and effectively underscore U.S. opposition to such
investments.

15. (SBU) Given Canada's location, and the degree of its
economic, social, and cultural integration with the U.S., an
entry bar to the U.S. is a major logistical and social
headache for a Canadian. Canadian officials have
consistently complained about the extraterritorial reach of
the Libertad Act, and Canada's Foreign Extraterritorial
Measures Act attempts to counteract U.S. laws by enabling a
clawback of any losses awarded in U.S. courts, enforceable
against American assets in Canada (although this provision
has not yet been enforced.)

16. (SBU) Still, fear of Title III implementation is often
not enough to stop Canadian companies from investing in Cuba,
according to the press. For instance, the Ministry of
Economic Development for the Quebec provincial government
leads a trade mission of about 10 provincial companies to
Cuba each year.

17. (U) Since June 1994, Cuba has been eligible for benefits
from the Canadian International Development Agency,s
Industrial Co-operation Program (CIDA-INC). Under CIDA-INC,
Canadian firms can apply for co-financing for feasibility
studies of potential joint ventures or partnerships. The GOC
also guarantees Cuban purchases from Canadian companies
through the Canadian Export Development Agency.

18. (U) Summer intern Andrew Jaynes researched and drafted
this report.

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