FACTBOX-Key political risks to watch in Cuba

By Jeff Franks

HAVANA, Nov 1 (BestGrowthStock) – The success or failure of Cuba’s
economic reforms will be the key issue to watch in the next
year as the government moves to strengthen the economy and
ensure survival of the island’s communist system once the
current aging leadership is gone.

The cash-strapped government is looking for ways to cut
spending while increasing income, and could get long-term help
if offshore oil exploration slated to begin in 2011 is
successful. [ID:nN05129084]

All this occurs against a backdrop of only slightly
tempered hostility with the United States, including an ongoing
dispute over a U.S. contractor held by the Cubans on suspicion
of spying. [ID:nN24221723]

ECONOMIC CHANGES

President Raul Castro has taken aim at Cuba’s chronic
economic problems with plans to slash 500,000 jobs from state
payrolls by March while expanding the private sector and
encouraging less reliance on the state.

About 200,000 of those jobs are expected to shift over to
employee-run cooperatives that will be created at businesses
currently operated by the state. The government also says it
will issue 250,000 new licenses for self employment and for the
first time, the self-employed will be able to hire workers.
[ID:nN13223894]

Self employment was first allowed in communist Cuba during
the economic crisis that followed the collapse of the Soviet
Union, the island’s main ally, in 1991. As of end 2009, there
were 143,000 people licensed to work for themselves, and many
more doing so illegally.

The government’s bet is that it can create enough jobs
quickly enough to absorb the laid-off government workers, most
of whom it says were not in productive positions. After the
first 500,000 jobs are cut, it plans to slash another 500,000
over the next few years, likely meaning more private sector
expansion lies ahead.

There are many questions surrounding the reforms, which are
the biggest since Raul Castro succeeded brother Fidel Castro as
president in 2008 and promised economic change.

Among them are whether the cumbersome government
bureaucracy can move quickly to implement the plan and whether
the new entrepreneurs will be too handicapped by regulations,
taxes and lack of credit to succeed. [ID:nN25269725]

Also, do the planned job cuts present the danger of many
people ending up without work and if so, what will the
consequences be in a socialist country where people basically
have been guaranteed employment for decades?

But the key question is whether the reforms will accomplish
what Castro wants — more productivity, a stronger economy and,
ultimately, the survival of communism, installed after his
brother took power in a 1959 revolution. Castro has said
maintaining the system is key to protecting national
sovereignty and that it must be preserved by future leaders.

Other reforms have been made, particularly in agriculture,
with the same goal in mind. Castro, trying to increase output
and reduce dependence on budget-draining food imports, has
leased fallow lands to private farmers, decentralized
decision-making and given farmers more leeway in producing and
selling their products. Despite that, agriculture production
was down 7.5 percent in the first half of the year, as farmers
complain that they are still too stifled by the state.

What to watch:

— How quickly government moves to implement reforms.

— Numbers and performance of the newly self employed.

— Effects of government layoffs.

— Agricultural production.

— Further reforms.

CASH SQUEEZE, SOURCES OF REVENUE

Cuba, hit hard by hurricanes in 2008 and by the global
financial crisis, has been so short of hard currency that it
stopped paying most of its bills and froze Cuban bank accounts
of many foreign businesses two years ago. [ID:nN02159253]

The situation has eased, but is not yet resolved.

To avoid future cash shortages, Castro has cut spending and
sought more income for the state, which controls 85 percent of
Cuba’s economy. He has slashed imports by about 30 percent and
will reduce outlays for employees with the planned job cuts.
Cuba recently said its budget deficit had diminished.

Taxes from the newly licensed self-employed are being
looked upon as a new source of money, and Cuba is hoping to
boost revenues from old standbys like nickel exports, and
tourism, two of the island’s top hard currency earners.

The government has said it will allow construction of golf
course developments, with the goal of attracting wealthier
tourists. [ID:nN04118234] The courses will be a small piece of
the tourist industry in Cuba, but, given golf’s image as the
leisure sport of the rich, they are a larger symbol of how far
Cuba is prepared to go to improve its economy.

The government also hopes one day to get more American
tourists, should the U.S. ease or eliminate the ban on most
travel to Cuba under its 48-year-old trade embargo against the
island. Expected Republican gains in the U.S. Congress in the
Nov. 2 mid-term congressional elections could weigh against any
moves to ease the embargo.

In a potentially game-changing development, a consortium
led by Spanish oil firm Repsol YPF (REP.MC: ) is expected to
drill a second exploratory well in Cuba’s part of the Gulf of
Mexico sometime next year. It previously drilled an offshore
well in 2004, but said it did not find oil in commercially
viable quantities.

The drilling rig it will use, which has been under
construction in China, will then be passed on to other
companies such as Malaysia’s state oil firm Petronas and the
offshore unit of India’s ONGC (ONGC.BO: ) to explore in the
blocks they have leased in Cuban waters.

The U.S. Geological Survey has estimated Cuba has about 5
billion barrels of oil offshore, but Cuba says it may have 20
billion barrels. A discovery of that magnitude would make Cuba
energy independent, and likely an oil exporter, whereas now it
depends on imports from its oil-rich socialist ally Venezuela.

Russia’s state oil company Zarubezhneft has said it also
plans to begin exploration next year in two blocks adjacent to
Cuba’s coast. [ID:nN03329371]

What to watch:

— Possible U.S. moves to ease its ban on travel to Cuba.

— Movement of nickel prices, start of golf course
projects.

— Repsol’s second deepwater exploratory well in Cuba.

U.S.-CUBA RELATIONS

Cuba’s relations with the United States have dominated
events on the island for more than a century. During the last
five decades of open hostility, the United States has tried to
unseat the Castro brothers through subversion, assassination,
coercion and a half-baked invasion. A 48-year-old trade embargo
meant to topple the Castros through economic strangulation
remains in place despite its lack of success. Cuba has used it
to gain international support by casting itself as David versus
an overweening Goliath, and at home as a scapegoat for its
economic problems. [ID:nN26150816]

Despite some modest changes at the beginning U.S. President
Barack Obama’s administration, U.S.-Cuba relations have thawed
only very slightly and near-term prospects for improvement look
dim due to Cuba’s detention of American aid contractor Alan
Gross since December.

Gross is being held on suspicion of espionage and providing
illegal satellite communications equipment to government
opponents, but has not yet been officially charged with a
crime. The United States says he was only helping Jewish groups
set up Internet access, but Cuba is suspicious because he was
working for a U.S. federally-funded program seeking to promote
political change on the island.

The U.S. government says it will take no major initiatives
to improve relations with Cuba as long as Gross is held. Cuba
may want to hold him until it gets something in exchange, such
as the return of five Cuban agents imprisoned in the U.S. or an
end to the programs like the one that sent Gross to Cuba.

The Cuban government is in the process of releasing
political prisoners and sending them to Spain to resolve one of
its biggest problems with the international community and to
get its opponents out of the country. [ID:nN2223242]

The United States and Europe have demanded the release of
Cuba’s political prisoners for years, but U.S. reaction to the
recent releases has so far been guarded.

The 27-nation European Union instructed its foreign affairs
chief to explore an improvement in relations with Cuba, but has
maintained its common position requiring progress on human
rights and democracy before normalization of ties.

Meanwhile, Cuba has steadily built relations with other key
countries, among them China, Brazil, Russia and Spain. It has a
special relationship with top trading partner Venezuela, whose
President Hugo Chavez is close to Fidel Castro.

What to watch:

— Fate of Alan Gross.

— Continued release of political prisoners.

— U.S. and EU reaction to Cuban reforms.
(Editing by Anthony Boadle and Kieran Murray)

FACTBOX-Key political risks to watch in Cuba