THE PROSPEROUS CANADA-CUBA ECONOMIC RELATIONSHIP

UNCLAS SECTION 01 OF 03 OTTAWA 002420 SIPDIS SIPDIS STATE PASS USTR E.O. 12958: N/A TAGS: ECON ETRD EAGR CU CA SUBJECT: THE PROSPEROUS CANADA-CUBA ECONOMIC RELATIONSHIP REF: A. OTTAWA 2258 ¶B. OTTAWA 1245 ¶C. 05 0TTAWA 3518 ¶1. (SBU) Summary: Canada,s economic relationship with Cuba began in the late 19th century, long before the U.S. embargo. Today, Canada-Cuba economic ties continue to be strong. The annual two-way trade between the countries is around $1 billion USD. About 22 percent of Cuban exports (mostly nickel, cigars, and seafood) go to Canada, second only to the Netherlands. Cuba generally imports oil and food, and from Canada it gets mainly computer equipment, mining and oil and gas machinery, and wheat. Foreign direct investment in the form of oil exploration and production is expanding, and at least one Canadian company, Sherritt International, is involved. Tourism is also a big part of the economic relationship, as Canadians make up the largest group of travelers to the island. The number of Canadians visiting Cuba also continues to grow. And despite possible sanctions under the U.S. Libertad Act, around 85 Canadian companies continue to do business in Cuba. End summary. BRIEF HISTORY -------------- ¶2. (U) The economic relationship between Canada and Cuba is not merely an opportunistic response to the U.S. embargo. The two countries have enjoyed economic ties dating back to the late 19th century when vessels from Canada,s east coast traded cod and beer for rum and sugar. As early as 1910, a trade commissioner was posted in Cuba to promote Canadian products. After the Revolution in 1959, Canada was one of only two countries (Mexico being the other) to maintain formal relations with Cuba. Cuba,s tourism industry grew steadily starting in the 1970s, and today Canadians compose Cuba,s largest group of visitors, with more than 600,000 flocking to the island last year. CANADIAN IMPORTS FROM CUBA -------------- ¶3. (SBU) Canadian imports from Cuba in 2005 were 456 million USD, an increase of less than one percent over the previous year. Almost all, 97 percent by value, was nickel. Other imports were cigars, seafood, scrap-metal, alcohol, and coffee. Trade analysts in Canada are fond of pointing out that Cuba is "one of the few export markets not dominated by the United States", thanks to the U.S. trade embargo on Cuba. For Canadian exporters, who see in the U.S. both their largest market and their largest competitor, this situation is appealing despite the continuing difficulties of doing business with a country "constrained by deep structural problems." CANADIAN EXPORTS TO CUBA -------------- ¶4. (U) In 2005, Canada's exports to Cuba totaled 369 million USD, which made up 0.1 percent of its total exports, roughly equal to U.S. exports to Cuba. The two biggest exports were computer and peripheral equipment, and mining and oil and gas field machinery; each accounted for about 10 percent of total exports. The leap in mining, oil, and gas equipment shipments (38 million USD in 2005 versus 4.7 million USD in 2000) has been stimulated by the recent offshore oil exploration effort in Cuba. Wheat was the third largest Canadian export, accounting for 7.4 percent of the total. Agricultural products, machinery parts, and sulfur make up the majority of the rest of the exports. ¶5. (SBU) The current level of exports to Cuba represents an increase of 47% over 2004 levels, with much of the growth in the agricultural sector. The Canadian Wheat Board, the largest single seller of wheat and barley in the world, is working with ALIMPORT, Cuba's state importing agency for Qworking with ALIMPORT, Cuba's state importing agency for agricultural products, to increase Canadian wheat exports to Cuba. The Canadian Agri-Food Trade Service of Agriculture and Agri-Food Canada reports that Canada is currently Cuba's second largest supplier of wheat after France. At ALIMPORT's request, the Canadians are also providing information on Canadian barley and oats for food uses. Agricultural exports to Cuba are closely linked to the tourism trade, since with the exception of basic foodstuffs and commodities for the local population, the government of Cuba imports food products to meet the demands of tourists, and the demand for imported food is expected to increase with the tourism trade. Cuba also lifted a BSE-related ban on Canadian beef exports in 2005, which may account for some of the increase in OTTAWA 00002420 002 OF 003 agricultural exports. ¶6. (SBU) Canadian machinery exports to Cuba, which also increased between 2004 and 2005, are less likely to continue to increase. The Canadian equipment sector is geared toward contract work, so exports to a country can fluctuate significantly year-to-year, as contracts are filled and are sometimes not renewed. Export Development Canada lists Cuba as a notable example of this trend, where exports grew in 2005 but are expected to fall in 2006. OIL -------------- ¶7. (SBU) Canadian oil companies have taken an interest in Cuba in recent years. While Cuba does produce its own oil, mostly from a reservoir off the north coast discovered in 1971, that oil is poor-quality &sour8 crude. However, thanks to foreign investment from places like Canada and Spain, Cuban oil production has taken off lately. According to press reports citing public and confidential records, Cuba,s Economic Exclusionary Zone, which lies in the North Cuban Basin between Key West and Havana, potentially holds petroleum reserves amounting to an estimated 4.5 to 9 billion barrels. While Canadian, Brazilian, and Spanish companies have carried out test drilling in the zone for years, although usually with only minimal returns, new exploration efforts could soon be paying off. In conjunction with its increased oil investment, Cuba plans the construction of 36 new oil rigs built in partnership with Canadian and Chinese companies within territorial waters. ¶8. (SBU) Sherritt International is involved in the oil production off Cuba,s northern coast. We are also aware of one other Canadian entity, Pebercan, which exploits offshore drilling licenses in Cuban waters. The Cuban government has divided its exclusive drilling zones to the north and west of the island into 59 deep-water blocks, and Sherritt has acquired the rights to four of them. TOURISM -------------- ¶9. (SBU) Like sugar, tourism is a pillar of the Cuban economy. Canadian tourists to Cuba, attracted mainly by low cost vacations, account for roughly a third of Cuba,s tourist trade and compose the largest single group of foreign visitors to the island. Canadian tourists also are Cuba,s largest source of tourism revenue. Cuba is the fifth most popular international destination for Canadians, after the United States, Mexico, United Kingdom, and France. ¶10. (SBU) In 2003, approximately 494,000 Canadian tourists visited Cuba, and that number is expected to increase to nearly 640,000 this year. Half of Canada,s tourists are from Quebec. Air Canada currently runs 10 flights a week to Cuba, including to the island of Cayo Coco and the resort town of Varadero. During Cuba's busy winter season, Air Canada increases its operations to 28 weekly flights, including daily service from Toronto to Havana. ¶11. (SBU) Canadian companies are active in the Cuban tourism industry through hotel supply-contracts. Two Canadian-based tourism-related companies have recently been listed as Specially Designated Nationals under the Cuban Assets Control Regulations. OTHER FDI -------------- ¶12. (SBU) Canada is also the largest foreign investor in Cuba. There are about 85 Canadian companies operating in Cuba, including Labatt, a brewing company, and Pizza Nova, a fast-food pizza chain which has six locations in Cuba. The U.S.-Cuba Trade and Economic Council lists the companies which do business or have done business with Canada (listing available at www.cubatrade.org). ¶13. (SBU) The largest Canadian investor in Cuba is Sherritt Q13. (SBU) The largest Canadian investor in Cuba is Sherritt International, a natural resources company based in Toronto that earned more than C$100 million in the first quarter of this year. State-owned Cubaniquel and Sherritt jointly operate a nickel and cobalt facility in Moa, Cuba, in addition to Sherritt,s oil production efforts mentioned above. Nickel accounts for 20% of Sherritt,s earnings. As of 1997, there were over 200 foreign investment operations, valued at US $2.1 billion, and over 30 Canadian joint ventures. OTTAWA 00002420 003 OF 003 ¶14. (SBU) Canadian contacts say that the mere threat of the Title III implementation has acted as an obstacle to investment in Cuba. Because of the high-level of cross-investment between Canada and the United States, most major Canadian enterprises already have some legal exposure to the Libertad Act through their U.S. affiliates (40 percent of Canadian foreign direct investment overseas is in the U.S. and U.S. investors account for 64 percent of foreign direct investment in Canada.) U.S. entry restrictions on key Canadian corporate officials under Title IV of the Libertad Act (for example, a number of Sherritt executives are barred from entry) already create a significant disincentive to Canadian investment in potentially expropriated properties and effectively underscore U.S. opposition to such investments. ¶15. (SBU) Given Canada's location, and the degree of its economic, social, and cultural integration with the U.S., an entry bar to the U.S. is a major logistical and social headache for a Canadian. Canadian officials have consistently complained about the extraterritorial reach of the Libertad Act, and Canada's Foreign Extraterritorial Measures Act attempts to counteract U.S. laws by enabling a clawback of any losses awarded in U.S. courts, enforceable against American assets in Canada (although this provision has not yet been enforced.) ¶16. (SBU) Still, fear of Title III implementation is often not enough to stop Canadian companies from investing in Cuba, according to the press. For instance, the Ministry of Economic Development for the Quebec provincial government leads a trade mission of about 10 provincial companies to Cuba each year. ¶17. (U) Since June 1994, Cuba has been eligible for benefits from the Canadian International Development Agency,s Industrial Co-operation Program (CIDA-INC). Under CIDA-INC, Canadian firms can apply for co-financing for feasibility studies of potential joint ventures or partnerships. The GOC also guarantees Cuban purchases from Canadian companies through the Canadian Export Development Agency. ¶18. (U) Summer intern Andrew Jaynes researched and drafted this report. Visit Canada's Classified Web Site at http://www.state.sgov.gov/p/wha/ottawa WILKINS