WORLD FOOD AND ENERGY CRISIS FORCES CUBA TO ADAPT

C O N F I D E N T I A L SECTION 01 OF 02 HAVANA 000468

SIPDIS

DEPT FOR WHA/CCA

E.O. 12958: DECL: 06/25/2018
TAGS: ECON PGOV PINR PREL CU
SUBJECT: WORLD FOOD AND ENERGY CRISIS FORCES CUBA TO ADAPT

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Classified By: COM: Michael E. Parmly: For reasons 1.4 b/d


1. (C) SUMMARY: The steep increase in world food and energy
prices is driving the Cuban regime to suppress its spending
on investment, a key enabling component of its moderate
economic reform strategy. Even tied to Chavez,s umbilical
cord, Cuba is nevertheless exposed to the real world economy,
and must adapt its central planning accordingly. While its
energy diversification strategy will likely go into
overdrive, it remains to be seen whether it is willing to
accelerate its agricultural reforms. End Summary.


2. (U) Vice President Carlos Lage announced on June 7 that
the GOC will reduce or postpone certain investments because
of the rise in international food and fuel prices. Lage said
the same amount of petroleum that the country consumed last
year would cost 32% more this year. Likewise, he added that
to import the same amount of food as last year would cost an
additional USD 1 billion.


3. (C) Cuba imports about 50% of its minimum fuel and food
requirements. In the absence of new sources of income, for
cash-strapped Cuba this means having to triage among its
planned investment projects in order to cut back on some of
them. The timing is particularly damaging because it happens
right as the GOC is introducing very moderate economic
reforms -- which include the recent announcement of a limited
introduction of salary incentives -- meant to increase
productivity. Limiting some investments will also limit much
of the hoped-for productivity gains.


4. (C) Some food prices, despite being subsidized, have
already increased on the island. Because of the poor state
of Cuban agriculture, the country is extremely dependent on
food imports. The GOC,s solution has been to promote an
import-substitution strategy, enabled by agricultural
reforms. These reforms are thus far few in number, limited
in scope, and only recently initiated. The GOC has reassured
the Cuban people that it will have all the food necessary to
satisfy the minimum requirements of the rationing system.
(Note: The rationing system satisfies only about 10 days out
of Cubans' monthly needs. End Note.) However, for the short
term Cuba will remain very vulnerable to food prices.


5. (C) Cuba is somewhat shielded from international oil
spikes by its "special" relationship with Venezuela. But
even the heavily preferential terms (the exact terms are a
closely held secret) that Cuba benefits from are indexed to
world oil prices. As world prices spike, the price paid by
Cuba increases proportionally.


6. (C) Because the terms include very long repayment periods
at extremely low interest rates, the GOC only feels immediate
pain on the portion it must pay at the time of purchase,
which is already much lower than that paid by other countries
in international markets. Nonetheless, the GOC is well aware
that the cost of continued increases, even if subsidized, is
unsustainable in the long run. The decision to curb some
investments and rumors that the regime is about to increase
fuel prices reflect the degree to which the regime is
challenged by new economic realities.


7. (C) Comment: Before the recent oil spikes, the GOC was
already looking to diversify its energy sources beyond
Venezuela. Likewise with food prices, the GOC,s initial
intent was to try out some limited agricultural reforms, then
expand on these, but only after thoroughly monitoring and
assessing their results. Sudden record prices should put
added pressure on the GOC to accelerate both strategies:
diversification of energy sources and food production. The
GOC will likely intensify its probing of "solidarity"
countries for preferential terms and "special" arrangements
(like doctors for oil). If the GOC decides to pass some of
the fuel price increases onto consumers, the negative
repercussions in Cuba would be felt by relatively few people
-- a few private car owners and Cubans who operate vehicles
owned by state enterprises, in which case the state
enterprise, i.e. the GOC, will absorb the increase.
Increases in food prices, however, would negatively and
directly affect most Cubans. Cuba will remain extremely
vulnerable to world food prices as long as these reforms

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remain in the "experimental" phase. If the country's
economic reform strategy was, at best, tentative before the
oil-food crisis, now it is even more delicate and the need
for real reform more urgent.
PARMLY