Cablegate: Key Trading Partners See No Big Economic Reforms
PP RUEHAG RUEHROV RUEHSL RUEHSR
DE RUEHUB #0084/01 0401849
ZNY CCCCC ZZH
P 091849Z FEB 10
FM USINT HAVANA
TO RUEHC/SECSTATE WASHDC PRIORITY 5178
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 0114
RUEHKO/AMEMBASSY TOKYO PRIORITY 0039
RUEHBS/USEU BRUSSELS PRIORITY
RUEAIIA/CIA WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
RUCOGCA/COMNAVBASE GUANTANAMO BAY CU PRIORITY
RHMFISS/HQ USSOUTHCOM MIAMI FL PRIORITY
RUCOWCV/CCGDSEVEN MIAMI FL PRIORITY
RHMFISS/JOINT STAFF WASHINGTON DC PRIORITY
RHEFDIA/DIA WASHINGTON DC PRIORITY
Tuesday, 09 February 2010, 18:49
C O N F I D E N T I A L SECTION 01 OF 04 HAVANA 000084
STATE FOR WHA/CCA
EO 12958 DECL: 02/08/2020
TAGS ECON, EFIN, PREL, PGOV, CU
SUBJECT: KEY TRADING PARTNERS SEE NO BIG ECONOMIC REFORMS
IN 2010, AGREE CUBA’S FATE HINGES ON VENEZUELA
REF: A. 09 HAVANA 631 (GOC TELLS CUBANS TO FEND FOR THEMSELVES) B. 09 HAVANA 322 (...ANOTHER SPECIAL PERIOD?) C. 09 HAVANA 763 (NATIONAL ASSEMBLY SESSION)
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Classified By: Principal Officer Jonathan Farrar for reasons 1.4 (b) an d (d).
1. (C) SUMMARY: There is little prospect of economic reform in 2010 despite an economic crisis that is expected to get even worse for Cuba in the next few years, according to key commercial specialists, economic officers and Cuba-watchers in Havana. Promised structural reforms remain on hold while the Cuban government wrings its hands in indecision, fearful of the political consequences of these long-overdue changes. The one potentially significant reform implemented in 2009, the leasing of idle land, has not been effective. The Cuban government (GOC) could be forced to speed up reforms in the event of a significant reduction of assistance from an increasingly unstable Venezuela. Otherwise, the GOC will continue to prioritize military-led control and aim for a slow, measured pace of reform focused on agriculture and import substitution. The Cuban people have grown accustomed to tough times and will respond to future government belt tightening with similar endurance. END SUMMARY.
2. (SBU) Pol/Econ Counselor hosted a breakfast with commercial and economic counselors from six of Cuba’s seven largest trading partners, including China, Spain, Canada, (the U.S.), Brazil and Italy, plus key creditors France and Japan. These countries also represent most of the foreign companies investing in Cuba, with the notable exception of Venezuelan state-owned enterprises.
DIPLOMATS ARE MOSTLY PESSIMISTIC
3. (C) The global financial crisis and the inability to service foreign debt will make the dire situation in Cuba even worse in 2010, according to EU diplomats. Brazil was a bit more optimistic noting that Cuba can still withstand more economic hardship. All diplomats agreed that Cuba could survive this year without substantial policy changes, but the financial situation could become fatal within 2-3 years. Italy said GOC contacts had suggested Cuba would become insolvent as early as 2011.
TRADE AND INVESTMENT: NO ROOM FOR IMPORT REDUCTIONS
4. (C) The GOC has responded to the crisis with calls to further reduce imports and increase domestic production. However, Spain argued there is little more room for Cuba to reduce its imports after a 37% reduction in 2009 as the increasing majority are now basic necessities like food and animal feed. (Note: press reports February 9 that Cuba has cut rice imports from Vietnam, its largest supplier, by 11 percent for 2010. End Note.) Exports and other sources of foreign currency (tourism and remittances) are unlikely to increase substantially without a dramatic global turnaround, access to U.S. markets or an opening to U.S. tourists. Two-way trade with China alone in 2009 fell by close to $1 billion. Regarding increasing production, the only significant reform in the last five years, the leasing of idle land to improve agricultural production, has little chance of succeeding as implemented. The diplomats noted that many of the Cubans that were granted land have no farming experience, and the few farmers with experience have limited access to capital, tools and markets.
STILL DEFAULTING ON TRADE PARTNERS
5. (C) Payment problems continue for all countries. Despite once again restructuring all of its official debt in 2009, Japan has yet to see any payments. Even China admitted to having problems getting paid on time and complained about
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Cuban requests to extend credit terms from one to four years. When France and Canada responded with “welcome to the club”, China suggested Canada help secure payment from a Cuban joint venture that includes Canadian firm Sherritt International which is now reportedly receiving its share of profits.
AN UNWELCOMING ENVIRONMENT FOR FOREIGN INVESTORS
6. (C) Foreign investors have been treated poorly in Cuba and new investors will demand additional protections and guarantees, according to the French. The Chinese complained that the GOC’s insistence on keeping majority control of all joint ventures makes no sense. “No matter whether a foreign business invests $10 million or $100 million, the GOC’s investment will always add up to 51%,” China’s commercial counselor said in visible exasperation. He noted a joint venture to produce high-yield rice that produced a good first harvest but was not sustainable at the GOC-mandated prices. Brazilian investors are taking a longer term view on returns, however, noting some success in raising capital for the refurbishment of the port at Mariel.
MAJOR REFORMS ON HOLD
7. (C) Despite the grave analysis, none of our contacts foresee meaningful economic reform in 2010. Immediate reform is neither necessary nor politically advisable since it has the potential of being too politically “destabilizing,” said the Brazilian. Even reforms openly supported in the official press late last year (Ref A), such as the ending of the food ration system, are now on hold due to the initial negative public reaction. Any discussions around Chinese-style reforms, particularly regarding foreign investment, have been difficult and “a real headache” according to the Chinese. The French said the GOC will not act until its face is up against the wall and it runs out of options, which is not yet the case in spite of all the challenges. One cited example of the GOC’s hesitancy is that all proposals for micro-credit programs coveted by the Ministry of Foreign Investment require the Council of State’s approval. To date, only one small project by the Spanish has been approved with little success.
AS VENEZUELA GOES
8. (C) The Spanish see future reforms determined by two factors: 1) foreign pressure that is outside of the regime’s control; and 2) domestic pressure developed after a consensus is reached through internal discussions. All our colleagues agreed that Venezuela is the most important and “increasingly complicated” foreign variable. Without Venezuelan support, the GOC would have to enact significant reforms similar to those that enabled the regime to survive through the Special Period of the early 1990s (Ref B), according to the Spanish. The view from the French is that Venezuela “es en flames” and a source of serious concern for Cuba.
THE DOMESTIC DEBATE CONTINUES
9. (C) If reform is driven by domestic factors it will be slow and hesitant. Unlike former president Fidel Castro, Raul Castro needs the “support of the machine” to make chnges, according to the Canadians.naul Castro’s National Assembly speech in December (Ref C) made it clear that the GOC is in no hurry to reform, argued the Italians. The Spanish noted that the consensus-building process likely explains the numerous official press stories and letters to the editor in support of some sort of economic reforms, without the accompanying government measures. Even though this limited but noteworthy public debate is almost always framed in socialist and revolutionary rhetoric, many of the articles are highly critical of current policies and propose market-oriented reforms. The simple fact that space still
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exists (and appears to be growing) within Cuba for this form of public dissent indicates that the GOC has not completely given up on bigger reforms.
SLOW, MEASURED AND MILITARY-STYLE REFORMS
10. (C) In lieu of structural reforms, the GOC will continue to take small steps to increase domestic production and reduce imports, focusing on lifting agricultural production from its current lamentable state. The GOC has started on a slow and steady path, according to the Canadians. “Unless (or until) the situation becomes unstable, the government is not going to walk any faster.” An example of step-by-step reform is the pilot suburban agriculture project taking place in the third largest city in Cuba. A Reuters reporter told us that he witnessed the GOC clearing land and providing resources to private, collective and state farmers working around the city of Camaguey. As an incentive, the GOC will permit farmers to sell a bit more of the production directly to consumers. The goal is to encourage idle workers to return to farms close to the city and produce enough food to feed the surrounding areas. The focus on local production will also cut down on costs associated with state-run (and thoroughly corrupt and inefficient) transportation and storage. If successful, the GOC will replicate this project in other cities.
11. (C) Even limited reforms could open up private sector opportunities (e.g. permitting cooperatives to operate barber shops, restaurants or retail stores), but in general the military will continue to expand its influence in core economic activities. According to the French, the Cuban leadership believes it can transfer the successes of military state companies that control a good part of the tourism industry to the rest of the economy. Many of our contacts agreed that the military is generally better regarded in Cuba than the political institutions, and reportedly intervened directly in the operation of flour mills earlier this year after bread had disappeared from markets. The Italians noted that the Agriculture Ministry is in the hands of the general most faithful to Raul Castro in Ulises Rosales del Toro. The French argued that the military is seizing all core economic activities of the state. The Cuban economy is increasingly run by military engineers that are capable of running the day-to-day business activities, but do not have the vision to enact reforms or lead the country out of the economic mess of centralized state planning.
12. (C) As a result, several of our colleagues commented that leadership of the Cuban economy is more centralized this year. A side effect of such control is that the economic ministries are restricting access. The French complained that the running of the GOC’s finances has shifted from the Central Bank to the Ministry of Economy and Planning and, with that shift, the French no longer have any access to officials or information. A Reuters reporter said that unlike in past years he was not granted any officials meetings on a recent trip to eastern Cuba despite several requests. All agreed that decision-making circles are small and increasingly isolated.
RELATIONS WITH THE UNITED STATES
13. (C) Many officials in the GOC have reconciled themselves to the inevitability of better relations with the United States, said the Brazilians. The Cubans involved in the Mariel Port project have said that the project is in preparation for the day when U.S. - Cuba economic relations normalize. While the French see the window for improving relations as closed after the GOC could not bring itself to take the necessary steps, the Brazilians argued that mixed signals from the Cuban regime are a reflection of dissent in the power circles about whether to move ahead. Some in the GOC objected to the U.S. role in Honduras and Haiti and decided that better relations were not worth the risk.
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(Comment: the “U.S. role” according to the official Cuban press was to support the coup in Honduras and a military occupation in Haiti. End Comment.)
THE CUBAN PEOPLE WILL SURVIVE
14. (C) In the short term, the GOC will require even more belt tightening from the Cuban people. The Italians and French explained that Cuba cut imports before increasing production, which simply means there are fewer products available for Cubans. The GOC has been clear in its public statements that 2010 will be just as difficult as 2009 and further savings (i.e. cuts) will be necessary. Everyone agreed that the Cuban people could withstand more hardship, although the Italians questioned whether further economic tightening would end up weakening and delegitimizing the GOC further.
15. (C) Despite how badly Cuba needs them, significant economic reforms are unlikely in 2010, especially with the continued delay of a policy-revising Communist Party Congress (Ref C). The GOC’s direction and leadership remains muddled and unclear, in great measure because its leaders are paralyzed by fear that reforms will loosen the tight grip on power that they have held for over 50 years. Faced with political uncertainty regarding future Cuban leadership and relations with the United States, the Cuban people are more likely to endure a slow erosion of state-subsidies than a much-needed radical restructuring. .FARRAR