Issue #14 Cuba’s International Economic Strategy Pays Off

Rather than rely on expanded market-based reforms, Cuba has embarked on a series of long-term international economic initiatives geared toward strengthening the state economy and increasing trade, aid, and investment. Several of these initiatives have come to fruition in recent months, with promising potential for energy and mineral production, targeted investments, and foreign exchange earnings. Their expected revenues could easily dwarf the revenues denied to the Cuban government by the new economic sanctions applied by the United States last year.

China. Last November, when Chinese premier Hu Jintao and an entourage of Chinese business executives toured Latin America, they stopped in Havana and signed a wide-ranging economic agreement based, Hu said, on the “complementarity” of the Cuban and Chinese economies.

The agreement features a ten-year postponement of payments on debt Cuba contracted between 1990 and 1994; new credit for the purchase of one million television sets; a $6 million loan for purchase of hospital equipment; a $3 million donation of x-ray devices for Cuba’s customs service; a $6 million donation of material for schoolchildrens’ uniforms; technical assistance in aquaculture, meteorology, and other fields; and a plan for
continued work by the tourism authorities of both countries to develop Chinese tourism in Cuba following China’s designation of Cuba in 2003 as an official tourism destination for Chinese citizens.

But the agreement of greatest strategic importance involves nickel production. Cuba possesses the third largest nickel reserves in the world, behind only Australia and Russia. Cuba ranks sixth in world nickel production after a decade of expanded production driven by a joint venture with Canada’s Sherritt International. Sustained high demand for nickel and high prices — nickel’s price on the London Metals Exchange has increased 166 percent in the past seven years — make nickel a very promising investment opportunity for Cuba and its partners.

China has agreed to enter a new joint venture for a nickel processing plant at Camarioca in eastern Cuba. The plant, built by socialist Czechoslovakia and financed by socialist bloc credits, was partially completed and not yet operational when the socialist bloc collapsed, and it has been mothballed ever since. China will complete it and activate it with an estimated investment of $500 million. Projected annual output is 22,500 tons.

The agreement also anticipates a Chinese investment of $1.3 billion to help Cuba exploit an untouched reserve in Camaguey province, with a projected output of 50,000 tons per year.

Together, these investments will nearly double Cuba’s current nickel production. In addition, Cuba is in discussions with Sherritt about new investments to expand production at the site of its current operations, Moa, also in eastern Cuba.

Oil. Cuba expanded its domestic energy production in the past decade by applying new extraction techniques to old oil wells, and by capturing (rather than flaring off) the natural gas that comes with crude oil. But imports still account for about half Cuba’s petroleum needs, an important economic vulnerability in a time when oil costs more than $40 per barrel.

Cuban crude oil is extracted from wells on the north coast near the Varadero beach resort. The oil is thick, sulfurous, and difficult to refine, of a quality that “would be used for asphalt anywhere else,” in the words of an industry expert. It is used for power generation, not fuel production.

Cuba’s dream is to discover lighter, higher quality crude such as is found in American and Mexican waters in the Gulf of Mexico. For more than a decade, Cuba has tried to interest the international oil industry in exploring for oil off the island’s western shore. A wedge-shaped area embracing the shorelines of western Cuba and extending into the Gulf of Mexico, its tip pointing northwest toward Texas, was divided into 59 tracts where companies could acquire drilling rights and, if oil was found, extract and sell it in partnership with the Cuban government.

The French company Total explored offshore in 1990, as did Brazil’s Petrobras in 1998, both without success. Then, last fall, the Spanish company Repsol announced that it found offshore oil 19 miles north of Havana. The find was too small to be commercially viable, but the oil was of good quality, and Repsol announced that it will continue exploration. The American Association of Petroleum Geologists listed this among the “significant finds” of 2004, “an important well in that it is the first to be drilled in Cuba’s deep water, and also because light oil was found.” Brazilian and Chinese companies are now considering joining the exploration effort. The Chinese oil company Sinopec has signed an agreement to produce oil in western Cuba.

In late December, Cuba announced that a commercially viable offshore oil field had been found 34 miles east of Havana near Santa Cruz del Norte. The exploration was conducted by the Canadian company Pebercan in a joint venture with Sherritt and the Cuban government. Initial estimates peg the field at 100 million barrels — enough to cover more than three years of Cuba’s oil imports — and it could be producing oil next year. The oil is classified as heavy but of a better quality than the oil Cuba now uses for power generation.

Venezuela. Cuba and Venezuela have developed close ties ever since President Chavez took office and began his “Bolivarian revolution.” Thousands of Cuban doctors are working in poor neighborhoods in Venezuela, and more than one thousand Venezuelan students are studying medicine in Cuba. Sports and education programs are also flourishing.

Of critical economic importance to Cuba, Venezuela supplies most of the island’s oil imports at below-market prices and, according to press reports, on soft credit terms. In an agreement reached last month, Cuba agreed to a minimum price of $27 per barrel.

The agreement goes further: The two countries eliminated all tariffs on their trade and announced a model of economic integration with an emphasis on social welfare, and an intention that this model will be an alternative to the hemisphere-wide free trade area that has been under construction for a decade.

While the agreement is short on dates and figures, it signals Venezuela’s intention 1) to invest in a new thermoelectric power generation project in Mariel, 2) to provide coal to power the Chinese nickel joint venture, and 3) to modernize and reactivate the Cienfuegos oil refinery, another facility that has been in mothballs since the Soviet bloc dissolved.

Iran. On January 17, Iran granted Cuba a 20 million Euro credit for energy, water, agriculture, and other projects. Cuba is selling pharmaceutical products to Iran and is assisting Iran in pharmaceutical production.

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These initiatives have long been under development, and it remains to be seen how quickly investment and aid commitments will be fulfilled and economic benefits realized.

The initiatives were not designed to respond to specific U.S. policies, but they come to fruition at a time when the United States is toughening economic sanctions to deny Cuba hard currency and using other measures to bring about an end to socialism.

The Administration estimates that its new sanctions, levied mainly against travel and family assistance, will cut Cuba’s foreign exchange earnings by $500 million annually. That estimate could prove high if Cuban Americans, who are often praised for entrepreneurial ingenuity, find ways to evade the new sanctions by going through third countries to visit their relatives and provide them cash assistance.

Regardless of any new international economic support, the new sanctions are undercut by two immediate factors. The Administration estimates that the Cuban economy, with gross domestic product of $32 billion, is growing at a rate of 2.6 percent annually, which translates into a gain of $835 million per year. Also, Cuba’s new currency policies have created a strong incentive for citizens to move their dollar holdings into bank accounts; they probably increased the central bank’s dollar holdings by $500 million or more.

Cuba’s new international partnerships are unlikely to solve all its economic problems. But as nickel, oil, and other projects go into operation they will earn new foreign exchange and add to Cuba’s growth.

At the margin, then, Washington’s new economic sanctions are very unlikely to have a strong or decisive impact on the Cuban economy in general. Instead the strong impact will fall on Cuban families whose relatives are barred from visits or sending cash assistance.