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

Emilio Morales* (Café Fuerte)

El malecón de Holguín.  Foto: Caridad
Photo from Holguin, Cuba by Caridad

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

 

Photo from Holguin, Cuba by Caridad

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.

Self employed worker in Holguin. Photo: Caridad

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.


9 thoughts on “Cuba, the Crisis in Venezuela and the Specter of the Special Period

  • April 23, 2013 at 2:53 pm
    Permalink

    Thank you for posting that very interesting financial analysis. Further on that same point, the disparity between the true value of the CUC and the arbitrary value has lead to a distortion in the economy such that any enterprise that operates in CUC (or dollars) is automatically much more profitable than one which operates in CUP, regardless of the efficiency or lack thereof. A business can be very inefficient, but so long as it brings in CUC, it will be highly profitable. This contradiction only adds to the structural problems of the Cuban economy.

  • April 22, 2013 at 11:49 am
    Permalink

    Thats peanuts. China don’t really care about what a small restaurant owner does and Cuba shouldn’t either. If thats your idea of prosperity and a future for Cuba, Cubans are in for a big deception.

    In the other hand, if the Government keeps holding monolithic power over the main industries, and those are the ones that will make or break the country. Following your logic, the ones whose in charge of those will gravitate towards communism, so it isn’t really that different as what China is doing right now.

    Also, you are wrong regarding the small entrepreneurs causing a shift in the political landscape of the country and if Fidel had the same idea, he was wrong too. Allowing limited private enterprise is not an issue, the issue is the abysmal disparity amongst the CUC and CUP and is a side effect of trying to be a “camajan” and milking their foreign partners by artificially increasing the cost of the Cuban labor in the mixed sector.

    To put it simply, the CUP to CUC ratio is arbitrary and since its inception, completely inflated and THAT is what strengthens economically the people receiving help from abroad. That strength relative to the general population is what gets translated directly to their politic position.

    To see things in perspective take a look at the average purchase power parity (PPP) percapita for a Cuban citizen (2010 estimates are $9900 USD) and compare it with the actual percapita in Cuban pesos (~$6500 CUP).

    http://www.indexmundi.com/cuba/economy_profile.html

    That roughly tells you that 1 CUP should be equivalent to 1.52 USD, while the official exchange rate is 25 CUP for 1 USD. So every single dollar you send to your family in Cuba becomes 25 CUP, while the real value should be close to .67 CUP and thats more than 35 times their value in a fair exchange. Even if I made a mistake of one order of magnitude in my calculations (highly unlikely), thats still would be 3,5 times the actual USD value in CUP.

    And of course, thats the real reason why pocket change for foreigners make that much of a difference to Cubans.

    Note:
    Take all these numbers with a grain of salt, after all the Cuban economy is a mess and an accurate computing of the PPP is almost impossible, and even if you compute it, is not meant to be used this way, yet it serves to illustrate how the CUP should ideally fare against the USD.

  • April 22, 2013 at 10:16 am
    Permalink

    I sincerely wish what you say comes true, but I am not so optimistic. The government can revoke the paladar or casa licence at any time. For this reason, the business operator is compelled to toe the government line. It has been reported that several very successful paladars are run by loyal Party officials, the licenses given as reward for their service.

    More importantly, the huge state-owned enterprises, such as GAESA (owned by the FAR), control the majority of the Cuban economy. Small self-employed operations are compelled to buy supplies from these corporations, which also control banks, telecommunications, transport and tourism. Thus the Cuban state prospers on the backs of these small businesses.

  • April 22, 2013 at 9:29 am
    Permalink

    Griffin, I encourage you to consider this: The Chinese-style capitalism is largely driven by Chinese government investment and subsequent approval of connected party favorites who choose to engage in business activities. As a result, party loyalty is a critical component of who is permitted to succeed in business. Cuban entrepreneurs, on the contrary, are funded by family members who live abroad, most of whom are practicing capitalists fully-vested in democratic principals. What I am suggesting is this: As a Chinese businessman prospers, he is compelled to be more not less communistic in his public views if not his private thoughts. By comparison, a Cuban restaurant owner in Vedado, funded by his family in Miami, does not grow more “Fidelista” publicly or privately. Yes, the Castro regime will resist this trend. For fear of this outcome, Fidel curtailed entrepreneurship in paladares and casa particulares that began to flourish economically in the 1990’s after he saw political opposition growing stronger (see Varela Project) and after he was able to find an economic nursemaid to Cuba in Chavez. Unlike the Chinese, as Cuba grows more capitalistic the nature and source of that growth will direct Cuba toward democracy, whether the Castros like it or not.

  • April 21, 2013 at 9:04 pm
    Permalink

    I agree with you. The economic reforms introduced by Raul are moving Cuba toward a more Chinese style economy. whether one calls that capitalistic or not is debatable, but there is no intention to introduce democracy to Cuba, just as China continues with a single party dictatorship. That’s the Raulist program, and it’s a sad future for Cuba.

    Looking closely at the figures above, it’s interesting to see the dramatic drop in spending on education and healthcare. Going by the numbers, the social programs that the Revolution still boasts of are now a thing of the past.

  • April 21, 2013 at 8:04 am
    Permalink

    Except for two little things: China is more “capitalistic” than the US and stills there is no democracy in sight and the low productivity and import/export ratio you mentioned will place them in a Dominican style of capitalism (aka, still poor, crappy leadership, limited or inexistent social safety net, etc).

    The question is, of course, whether the Cubans want to go in that direction, and the answer so far is no. They want a more capitalistic economy while keeping and improving their social achievements, or at least a viable path to something in that direction.

    Also, stop sprouting the same nonsense, the embargo is hurting them badly. The increase in import from the US is a political maneuver from the Cuban government to make the case to drop the embargo desirable to some sectors of the US, but even so, the terms are onerous. So far is only food, fully payed in advance, most likely via third country bank wiring (that of course will charge a % for the transaction) and I’m not sure how the transporting is working with the provisions in the Torriceli act at all.

    And don’t be a fool, “younger leadership” not necessarily means “better leadership” and for the most part all the candidates are unpredictable at this point. You are putting a lot of faith in them being more approachable and friendly to your intentions, but there is no guarantee that’s going to be the case. Also keep in mind that those young leaders climbed the power ladder during the worst times for the country, so they may very well being simply a bunch of corrupt, power thirsty hypocrites willing to establish a real dictatorship at the expense of the wellbeing of their fellow citizens.

    At least the old folks earned their wings with their own deeds and are respected by the population. Their descendants leave a lot to be desired, generally raised as spoiled brats, sheltered by their parent influence and living in the utopian paradise of the ruling elite, to the point of being mostly a source of embarrassment to their parents and only in very rare circumstances following the tracks of their parents.

  • April 21, 2013 at 7:49 am
    Permalink

    In a very sense, Cuba is subsidizing Venezuela, providing health care services that no one else is willing or able to provide. When in the power, the current “opposition” (including parties of the extreme right) showed little interest in doing so. The honey-coated, false promises of the “opposition” notwithstanding, the majority of Venezuelans now understand this. They also now understand that health care and other social services are not just commodities for sale to the highest bidders, they are fundamental human rights. Without these subsidies from Cuba, Venezuela would likely collapse into civil war.

  • April 20, 2013 at 8:06 am
    Permalink

    Good analysis. I have seen other studies that placed the US as the fifth largest trading partner ahead of Mexico and Canada. Nonetheless, even at #7, what embargo? Further proof that Cuba has everything to gain by claiming a hardship owed to the embargo that does not exist. The real problem in Cuba is low productivity and the low export/import ratio. Obama should continue to allow the situation in Cuba to evolve without making any unilateral moves to improve relations. As reforms continue, Cuba becomes more capitalistic and more likely to accept democratic principals. Venezuela’s subsidies will likely be reduced forcing Cuba to replace this support from other sources in the market with hard currency. Again, giving Cuba more incentive to accept democracy. Finally, with every new year, a less energetic “historic generation” is forced to allow younger leadership to make decisions. Cuba, due to biology or economic necessity will have it’s first Walmart Superstore with a Starbuck’s and a McDonald’s inside the food court any day now.

  • April 19, 2013 at 7:55 pm
    Permalink

    A good clean transparent collection of pertinent facts.
    People should be aware of potential problems based on truth!

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