CUBAN ECONOMY HURT BY GUSTAV, MAY BE CRUSHED BY IKE

C O N F I D E N T I A L SECTION 01 OF 03 HAVANA 000739

SIPDIS

DEPT FOR WHA/CCA

E.O. 12958: DECL: 09/07/2018
TAGS: ECON PGOV PINR PREL CU
SUBJECT: CUBAN ECONOMY HURT BY GUSTAV, MAY BE CRUSHED BY IKE

REF: A. HAVANA 717

B. HAVANA 722

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Classified By: COM: Jonathan Farrar: For reasons 1.4 (b) and (d)

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SUMMARY
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1. (C) Hit by two major hurricanes in eight days, the
damage to the Cuban economy is extensive and likely to
delay any further economic reforms in the near-term. While
Cuba may have escaped significant harm to its main
exporting sectors (nickel, medicines, and tobacco),other
agricultural sectors key to satisfying domestic demand
(sugar, rice, coffee, poultry, eggs, cacao, and fruit) were
pounded by record high winds and rains. The Government of
Cuba's (GOC) first priorities are to restore electricity to
the state-run stores and secure enough assistance and
imports to feed a country that has grown dependent on
government provided food rations. That may prove difficult
in an environment where the GOC has notified several
creditors that it is unable to pay for past imports and has
refused USG and European Community assistance. END SUMMARY

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LIMITED DAMAGE TO EXPORTS FROM GUSTAV; IKE TBD
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2. (U) While extremely destructive (Ref A),hurricane
Gustav managed to land in western Cuba in between tobacco
harvesting seasons thus limiting the damage to Cuba's
number three export (USD 236 million in 2007). According to
GOC media, Gustav destroyed 3,306 tobacco curing barns,
leaving 906 tons of tobacco leaves (export value around USD
10
million) wet in Pinar del Rio, the province that produces
over 70 percent of Cuban tobacco. It is likely that much
of the wet tobacco will be re-dried and sold in cheaper
tobacco products. In addition, any damage to seeds and the
tobacco fields will delay but not necessarily reduce export
revenue from this key sector.


3. (U) Hurricane Ike landed on September 7 in Holguin
province, the source of Cuba's largest export sector -
mining (USD 2.15 billion in 2007, 58% of export revenue).
However, the eye of the storm hit northern Holguin, missing
the main mines in the southern part of the province and
likely limiting any serious harm. Transporting products to
ports will become the main challenge due to blocked roads
and flooding, but once again this should only delay export
revenue and not cause any long-term damage to the sector.

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HEAVY DAMAGE TO INFRASTRUCTURE AND FOOD SUPPLY
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4. (U) The overwhelming focus of the GOC media after
Gustav is the effects of the hurricane on infrastructure,
in particular housing and electricity. Gustav, which only
crossed 3 of Cuba's 14 provinces and special municipality,
damaged or completely ruined an estimated 100,000 homes,
including 80-85% of the homes on the Island of Youth. In
addition, media and civil society sources have confirmed
that, despite GOC claims and promises, some Cubans in these
areas still remain in "temporary" housing following
hurricane Charley in 2004 and hurricane Michelle in 2001.
Pinar del Rio was knocked off the national electricity
grid, and although part of Pinar del Rio now has
electricity thanks to de-centralized diesel and fuel oil
generators, the GOC estimated (prior to hurricane Ike) that
it will take more than 30 days to completely restore power
to Pinar del Rio alone. The Island of Youth will not be so
lucky as nine days later there is still no electricity on
the island. It will likely take months before power
is restored, especially now that resources will need to be
diverted to more productive provinces damaged by Ike.


5. (SBU) According to GOC media, Gustav ruined more than
32,000 acres of crops, including rice, vegetables, and

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bananas. 42,000 cans of coffee were destroyed and farmers
euthanized 930,000 chickens and 161,000 pigs. Hurricane
Ike will cross the heart of Cuba, potentially damaging
sugar plantations and factories. Unlike the export
industries, these losses are felt immediately by Cubans.
(Note: We have already heard reports of shortages in
bananas and eggs in Havana. End Note.)


6. (SBU) Following Gustav's run through western Cuba,
Fidel Castro estimated in one of his "reflections" the cost
of alleviating Cuba's basic needs as 30 or 40 times 100
million dollars (USD 3-4 billion). The GOC media highlighted
aid from Russia and Venezuela and teams of specialists from
other provinces that traveled to Pinar del Rio and the
Island of Youth to help their comrades. Meanwhile,
Hurricane Ike is on track to cover most of the provinces in
Cuba and will require many of the Cubans sent post-Gustav
to assist western Cuba to return home to rebuild their own
provinces. Already stretched resources will soon run dry.
Prior to this hurricane season, GOC officials had reported
their intent to increase infrastructure investment by 15
percent in 2008 and significantly reduce their reliance on
imports. The impact of Gustav and Ike will likely result
in the opposite outcome.

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POTENTIAL DAMAGE TO RELATIONSHIPS AND REFORMS
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7. (C) International media reported, and we confirmed with
our Japanese contacts, that the Cuban Central Bank informed
the Government of Japan-backed Nippon Export and Investment
Insurance agency in early August that it was unable to make
timely payment of recent imports due to a shortage of
foreign exchange. A September 5 Reuters article claims
that Cuban debt increased by USD 1.1 billion in 2007 to USD
16.5
billion (the GOC had failed to update this figure in their
2008 annual statistics report),and that Cuba has informed
at least two countries that it is unable to pay its import
bills on time. We expect the GOC to use this season's
hurricanes as a further excuse to restructure short-term
debt with other countries.


8. (C) On September 7, the GOC formally declined the USG
offer to send a team of experts to assess the damage from
hurricane Gustav (Ref B),without any mention of our offer
of USD 100,000 in immediate assistance. The article in the
GOC-run newspaper Granma said that the Cuban experts had
basically already completed the task of assessing the
damage. (Note: The same edition of Granma highlighted the
visit of Venezuelan Minister of Defense Gustavo Reyes
Rangel Briceo leading an assessment team to view the
damage in Pinar del Rio. End Note.) Rather than focusing
on the dire needs of its citizens, the GOC once again used
the opportunity to call for the end of U.S. embargo.

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COMMENT
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9. (C) While one contact has suggested that significant
damage to the agricultural sector and high international
prices may lead to more desperate, and therefore, expansive
reforms, we believe the regime is more likely to devote all
resources on fixing the significant short-term problems
caused by this hurricane season rather than gambling on
long-term solutions.


10. (C) Some planning models have posited the potential
effects on stability in Cuba of two near-simultaneous
hurricanes. Gustav and Ike fit that scenario almost
perfectly. However, the GOC under Raul, with Fidel a
continued presence, is pursuing traditional means of
dealing with disasters, showing only slightly more
flexibility in accepting outside assistance. The twin
threats to domestic food production and economic reform,
together with a significant increase in gas prices
announced today (septel) may begin to increase pressure on
the GOC to be open to more aid. Tougher conditions at home
also hold the potential to generate more migration in

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fairly short order.
FARRAR