To help get through a difficult economic period, Cuba is asking for financial assistance from Russia in the form of cheap new oil imports. Given Cuba’s recent embrace of the U.S., Russia’s decision is not so easy this time.
An oil well pump operates in Boca de Jaruco, Cuba, Friday, July 11, 2014. Photo: AP
Cuba, just like it did during the Soviet era, is once again asking for Moscow’s help. It needs Russia's cheap oil to keep the island country’s economy afloat. But will the Kremlin be able to assist its Cuban partners this time?
The leader of Cuba, Raul Castro, personally asked Russian President Vladimir Putin about the possibility of a steady supply of oil to the island. This request had to deal with the sudden decrease of supply from Venezuela, which is on the brink of an economic catastrophe.
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For many years, Venezuela was the main sponsor of Cuba. During the golden age of relations between the countries (when its former President Hugo Chavez was in power), Venezuela sent about 105,000 barrels of oil a day to its Cuban partners. After Chavez’s death, the stream declined to 90,000 barrels a day, and most recently, by another 40 percent.
According to researchers at Columbia University in New York, the outflow of oil from Venezuela this year shrunk by 300,000 barrels compared to the same period in 2015. The report states that, “The decrease in exports of oil from Venezuela threatens the entire global oil market for 2017.”
But this geopolitical risk has become a serious problem for Cuba right now. The island has been gripped in a panic, reminiscent of a certain period in the 1990s after the Soviet Union was no longer supplying aid or giving subsidies to the island.
According to Cubans, in the years immediately after the collapse of the Soviet Union (1991-1994), it was like the island nation returned to the Stone Age. Beasts of burden replaced tractors, bicycles replaced cars and millions of Cuban citizens began to starve.
But not all experts believe the present situation is that dire. According to the Cuban-American economist Carmelo Mes Lago, “During the Soviet period, Cuba was 70 percent dependent on the U.S.S.R. and 75 percent dependent on the Warsaw Pact and Soviet region as a whole. However, Cuba’s present dependency on Venezuela is only about 44 percent.”
The present situation is complicated for Cuba not only by the decrease in oil supplies, but also by the fact that it has stopped receiving money for the work of its doctors in Venezuela. And funding for its doctors has dried up from the economically crippled Brazil. Just last year Cuba had gained more than $6 billion from the work of its physicians abroad. This is twice what Cuba made from tourism in the same period.
The island’s position is indeed difficult. Should Russia help Cuba even though it is itself experiencing great economic difficulties, without gaining anything in return? Direct transportation of oil from Russia would be too expensive, because there is no direct and easy way to get the oil to Cuba.
Russia also has no excess oil at the moment. Sergei Pikin, the director for the Fund for Energy Development said that sending oil to Cuba "would mean a loss in revenue” for Russia. At the same time, Russia’s Economic Development Ministry argues that “Cuba’s ability to pay is questionable, and supplying Cuba with oil under these circumstances would be risky.” Some pundits claim that the Ministry suggested using Rosneft to organize the transfer. After all, Rosneft has done business with the country before, but not without problems.
The skepticism from Russian officials is understandable. Cuba never paid its dues to Russia, not during Soviet times, not later. In October of last year, Russia gave Cuba yet another loan for the construction of a thermal power plant, the Maximo Gomez, and part of another power plant, the Eastern Havana. Cuba was supposed to pay back the debt at an interest rate of 4.5 percent a year because it received a huge discount on oil from Venezuela. However, now with Venezuela no longer helping, this scheme is not possible.
Russian specialists believe that it may be more prudent to re-sell Cuba oil that comes from nearby regions. Of course, this will result in Russia bearing a financial loss.
“Relations between Cuba and the United States have recently warmed, and all things considered, it may make more sense to buy oil in the U.S. where it is relatively cheap," Pikin points out. "This scheme would also make more sense in terms of transportation and logistics. But in either case, sending oil to Cuba would be a sort of financial aid to the island, so this is a political decision that needs to be taken seriously.”
Havana hints that, in exchange for oil shipments, Russia can expect political support from Cuba in the international arena. According to Viktor Semenov, an expert from the Institute on Latin American Studies in Moscow, “Russia still sees Cuba as a strategic partner, that is why such a request from Castro to Putin and not to Obama is unsurprising. It is not likely that Washington would look at such a request with any favor.”
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But there may be some dishonesty in such a request. While asking Russia for help, Cuba is no doubt expecting help from elsewhere. First and foremost, Cuba hopes for a wave of American tourists, now made possible by the resumption of air travel between the nations. For the first time in 55 years, an American Airlines flight left Miami and travelled to two Cuban cities, Cienfuegos and Holguin.
After U.S. President Barack Obama lifted the trade embargo with Cuba, there are also expectations of increased remittances from Florida. In 2015 remittances from the United States broke records at $3.35 billion, which equaled Cuba’s revenue from the entire tourism sector in the same period.
In addition to this, other countries are playing a growing part in Cuba’s economy. According to the Spanish Media Agency EFE, Australian company MEO Australia recently found large, high-quality oil deposits near the town of Motenbo, near the border of Matanzas Villa Clara. The deposit may contain as much as 8.2 billion barrels of oil.
If, with the help of multinational companies, Cuba is able to extract its oil near Motenbo, it will guarantee its own energy independence for many years to come. It may even be able to sell oil abroad. This may be the best option for the country, as the deposits were found in open areas, and the decision not to go after them has more to deal with the lack of capital to do so, and Cuba’s generally inefficient centralized economy.
With the newly found oil deposits, Cuba can theoretically get out of its predicament, but in order to do that, it must first get through the difficult period in 2016 and 2017. According to Pavel Vidal, a professor of Economics at the University of Cali, “In 2016, Cuban companies will have to withstand a shock that is connected with the lack of liquid capital in the country, and 2017 is expected to be even more difficult. Cuba’s GDP could shrink by 3 percent, which will bring the country’s economy into the red for the first time in 24 years.”
Cuba can get out of such a crisis only if it launches comprehensive economic reforms, by moving away from its inefficient centralized planned economy and by accepting help from abroad. Russia’s help in this situation may prove to be very valuable, but only together with aid from other nations, which are interested in Cuban investment and in normalizing political relations with Havana.