Cuba, the Crisis in Venezuela and the Specter of the Special Period

Emilio Morales* (Café Fuerte)

HAVANA TIMES – Nicolás Maduro’s electoral victory, recently announced by Venezuela’s National Electoral Council (CNE), has left us with more questions than answers.

In view of the political instability which the South American nation has experienced since Hugo Chávez’ terminal illness was made public, the unsettling figures yielded by the Venezuelan economy and the uncertain future of Chavismo, a number of analysts have argued that Cuba could enter a second “Special Period in Times of Peace”, should Caracas be unable to maintain its oil shipments to the island.

The power cuts recently experienced in Havana and cities in Cuba’s interior have evoked the specter of the oppressive economic crisis of the 1990s, and have awakened fears among Cubans of a return to the times of the oil lamp, bicycle and soy-hash diets.

The response to these concerns, however, is that such a scenario is less than likely. The bitter experience of the Special Period was an exercise in survival that won’t be repeated. At the very least, that’s what President Raul Castro has been demonstrating since he came to power in 2006, when his brother and predecessor stepped down due to illness.

Cuba learned its lesson well in 1993, paying the price, then, for its economic over-reliance on the socialist block and Soviet Union (85 percent of its economy depended on these). Though the island’s economy is today heavily dependent on Venezuelan aid (42.29 % of exports and 28.42 % of imports), the levels of this economic dependence are nowhere near what they were in relation to its former East European allies.

Cuba’s imports and exports in 2011 may be broken down as follows:

Imports				Exports
Ranking	(TP*)	2011	%	Ranking	(TP*)	2011	%
1	Venezuela	5,902,286	42.29%	1	Venezuela	1,716,739	28.42%
2	China	1,281,742	9.18%	2	China	786,200	13.01%
3	Spain	1,019,677	7.31%	3	Canada	718,800	11.90%
4	Brazil	643,082	4.61%	4	Netherlands	656,400	10.87%
5	Canada	479,257	3.43%	5	Spain	165,400	2.74%
6	Mexico	452,850	3.24%	6	Nigeria	102,600	1.70%
7	USA	430,420	3.08%	7	Brazil	82,100	1.36%
8	Italy	388,453	2.78%	8	Russia	67,200	1.11%
9	France	343,996	2.46%	9	Italy	51,100	0.85%
10	Others	3,014,235	21.60%	10	Others	1,694,461	28.05%
	Total	13,955,998	100.00%		Total	6,041,000	100.00%

Note: (TP*) Thousands of Cuban pesos. The figure refers to the official exchange rate for Cuban Convertible Pesos reported by Cuba’s Central Bank. It is published exclusively for use by Cuban companies in their transactions in foreign currency. 1 CUC = 1 US $.

As can be appreciated, Cuban imports and exports are today much more balanced than they were 20 years ago. But these indicators alone do not suffice to conclude that Cuba will not experience a second Special Period as a result of the potential loss of Venezuela as a trade partner.

That conclusion can only be arrived at through the analysis of 30 economic and other factors that should have a significant, middle-term impact on the overall economy of the island. The trend of these factors points more towards change and an economic opening than to stagnation.

The table below, prepared using figures provided by the National Statistics and Information Bureau (ONEI) and other sources, compares figures for 30 economic and social factors collected in Cuba in 1993 and 2012.

No.	Line Item	Year 1993	Year 2012
1	Remittances in cash	242.24 MM USD	2,455.34 MM USD
2	Remittances in kind	150 MM USD	2,500 MM USD
2	Population receiving remittances	12.2%	62.4%
3	Tourists	120,000	2.8 MM
4	Income from tourism	240 MM USD	2,900 MM USD
5	Cubans living abroad	1 MM	2.2 MM
6	People working in the private sector	150,000	650,000
7	Nickel Exports	100 MM USD	1,413 MM USD
8	Medicine Exports	50 MM USD	500 MM USD
9	Tabacco Exports	30 MM	202.2 MM USD
10	Celphones on the island	0	1.5 MM unidades
11	Annual subsidy from USSR (1990)	5,000 MM USD	0
12	Annual subsidy from Venezuela	0	6,000 MM USD
13	Sugar Production	1297.9 (Mt) (2005)	1336.7 (Mt)
14	Relations with USA	Muy tensa	Acercamiento
15	Trade with USA	0	457.3  MM   (2012)
16	Oil Imports	1,629.9 Mt	5,048.7 Mt  (2011)
17	Oil Extraction	1,107.4 Mt	3,024.8 Mt (2010)
18	Natural Gas extraction	574.1 (MMm3)  (2000)	1,072.5 (MMm3)  2010
19	Aviation fuel consumed	4.1 Mt  (2005)	4.5 Mt
20	Non-aviation gasoline consumed	354.2 Mt	225.9 Mt
21	Fuel Oil	5,110.2 Mt	4,940.9 Mt
22	Deep water oil exploration	No	Si
23	Investments in Education	138.4 MMP  (2008)	36 MMP          (2012)
24	Investiments in Health Care	219.3 MMP  (2008)	71.9 MMP       (2012)
25	Investments in Culture and Sports	56.5  MMP   (2008)	44.6 MMP       (2012)
26	Investments in Restaurants and Hotels	450.3 MMP  (2008)	603.3 MMP     (2012)
27	Investments in Business services and Property	183.2 MMP  (2008)	377.8 MMP     (2012)
28	Investments in Transportation, Warehouses and Communications.	368.3  MMP (2008)	522.2  MMP    (2012)
29	Imports	9,497,890 MP (2006)	13,955,998 MP (2011)
30	Exports	2,924,558 MP (2006)	6,041,000 MP  (2011)

	*MM: Millions
	*Mt: Millions of tons
	*MMP Millions of Pesos
	*MP Thousands of Pesos

 

Subsidies, Remittances and Tourism

The figures are crystal clear. The monetary subsidy which Cuba receives from Venezuela is equivalent to what it received from the Soviet Union: 6,000 billion dollars a year from Venezuela, as compared to 5,000 billion dollars from the Soviets, practically the same amount if we bear in mind the rise in prices that has occurred in the course of two decades.

However, when we look at the other indicators, we begin to appreciate considerable differences in the island’s current economic circumstances. For example, Cuba currently takes in 4.955.34 billion dollars in remittances (received in cash or in-kind), as compared to 392.24 million received in the form of these remittances in 1993 – 12.6 times as much. This explosion in remittances stems from the emigration of around 1.2 million Cubans in the last 20 years.

As a result of this migratory factor, 62.4 percent of Cuban homes today receive some form of economic aid from abroad, a figure considerably greater than the 12.2 percent which they received in 1993.

The development of Cuba’s tourism infrastructure has also resulted in impressive economic figures. While some 120,000 tourists visited Cuba in 1993, more than 2.8 million (23.3 times as many) did so in 2012. A comparable rise in revenues has thus been registered in the tourism sector: some $ 240 million collected in 1993 compared to $ 2,900 reported in 2012.

A similar trend can be appreciated in important sectors such as the export of nickel, medications and tobacco, which, together, brought Cuba revenues of US $2.115 billion in 2012, a figure well above the US $180 million reported in 1993.

Relations with the United States

Trade and general relations with the United States constitute a factor that cannot be overlooked in any evaluation of Cuba’s economic circumstances. Twenty years ago, bilateral relations between the countries were at their worst as a result of the balseros (raft exodus) crisis of 1994 and diplomatic tensions arising from the downing of two small planes over the Florida Straits in 1996.

The sale of U.S. food products and other items began in 2001 and has continued to date (though the volume of products sold has had its ups and downs, these trade relations have not been broken off). In 2012, Cuba purchased $ 457.3 million in products from U.S. companies, making the United States, despite the blockade, its seventh most important trade partner.

More recently, as a gesture of diplomatic reconciliation, the Obama administration lifted restrictions on the sending of remittances and travel to Cuba by Cuban-Americans. This led to a considerable increase in the flow of money and products to the island, resulting in some 470,000 trips to Cuba from the United States last year alone.

In addition to this, through people-to-people trips for academics, religious groups and NGOs, some 98,000 non-Cuban U.S. travellers visited Cuba in 2012.

The migratory policy set in motion in Cuba this past January also affords Cubans a means of coming into contact with the outside world, something that was unimaginable 20 years ago and which today represents a source of income for many families.

Domestic Policy

As far as domestic policies are concerned, Raúl Castro’s government has undertaken a series of reforms aimed at transforming the country’s economy. The package of new measures included the authorization of 183 types of small private enterprise and gave Cubans, for the first time in over 50 years, the right to sell houses and automobiles.

A substantial increase in the number of Cubans working in the private sector has resulted from this economic liberalization, something which was a pipe-dream 20 years ago. Today, there are over 650,000 people in the sector, as compared to 150,000 in 1993.

Despite its stumbling blocks and limitations, these small private businesses represent a favorable change towards the economic independence of Cubans and a rise in the living standards of the population. For instance, in 2012, 1.5 million citizens owned cellular phones. Though this figure is small when compared to those of other countries in the region, it is indicative of a notable increase in the population’s purchasing power in the hard currency market.

State investments in subsidized areas, once the showcase of Cuban socialism, have also been considerably reduced. Investments in such sectors as public health, education and sports were of the order of 152.5 million last year, a disbursement far below the 414.2 million destined to these sectors as a whole in 2008.

Investments and Oil

By contrast, a number of economic sectors of strategic importance have seen a considerable increase in investments. Over the same period of time, investments in restaurants and hotels, business and real estate services, transportation, warehouses and communications have been vigorously bolstered. In 2012, these investments amounted to US $1.503.3 billion, as compared to $1.001.8 billion invested in 2008.

In the course of 20 years, oil imports have increased considerably, from 1,629 to 5,048.7 million tons a year, thanks to the 100,000 barrels shipped from Venezuela on a daily basis. Crude oil extraction has grown from 1,107 million tons (1993) to 3,024.8 Mt (2010).

Oil consumption in 2011 was a mere 4,940.9 Mt. If we subtract the amount of oil consumed from the amount of oil available for use that year, we get the figure of 3,132.6 Mt of unused oil. It is not clear whether this unused oil was sold to third countries by the Cuban government, resulting in revenues that may be a considerable part of the $6,000 billion dollar subsidy the country receives from Venezuela every year.

Natural gas extraction indices also rose to 1,072.5 MMm3, nearly twice the figure reported in 2000 (574.1 MMm3). This gas is used in energy generation and contributes to a notable drop in oil consumption.

Signs of Survival

It is very unlikely that Cuba will experience another Special Period. Despite the credit limitations Cuba faces, its government has managed to diversify its exports and imports and to balance its trade equitably.

In the hypothetical event Cuba lost its oil subsidy and the benefits it secures through its medical aid to Venezuela, the island’s economy will no doubt face a rather complex situation. But this situation, and the absence of an economic alternative, will serve to hasten and intensify the reform process.

In any event, if Maduro wishes to keep Chavismo alive, he will have no option but to begin repairing the house from within, sacrificing the gifts Venezuela has been handing out to several Latin American countries, a generosity that is today unsustainable because of internal unproductiveness and inflation.

In the new, Post-Chávez age, Maduro has no choice but to re-invest millions in key economic sectors, undertaking emergency measures to keep afloat a country divided and exhausted by a misguided open checkbook policy. Otherwise, his administration will no doubt capsize in the turbulent waters ahead.

Cuba will no doubt suffer the consequences of a political crisis or economic debacle in Venezuela, but will not endure the catastrophic onslaught of a new Special Period.

*Cuban economist. Former head of the Marketing Strategy Planning Department of Cuba’s CIMEX corporation and author of the books “Cuba: A Silent Transition to Capitalism?” (“Cuba: ¿tránsito silencioso al capitalismo?”) and “Marketing Without Advertising: Brand Preference and Consumer Choice in Cuba”. He is the current president of the Havana Consulting Group based in Miami.