Key political risks to watch in Cuba

HAVANA Fri Aug 3, 2012 12:49pm EDT

HAVANA Aug 3 (Reuters) - Cuba is moving along with reforms aimed at boosting its economy, but has also laid out new taxes that angered many and pose a threat to the growth of small businesses critical to the government's economic plans.

The government's hopes for offshore oil development and possible energy independence are in limbo.

ECONOMIC REFORMS

The government said it would loosen its grip on some state companies, convert 222 small and medium-sized state businesses into cooperatives and lease more than 1,000 small cafeterias to their employees, as it has done earlier with barber shops, hair dressers and other minor services.

The changes will permit an unspecified number of state companies, previously part of various government ministries, to function more like private firms in their day-to-day management, be self-financed and evaluated on their profitability and productivity, reform czar Marino Murillo told the National Assembly. Under the old system, most state companies have been money losers.

The changes are part of a five-year reform plan to move away from direct government administration of almost all the economy so the state can focus on managing and maintaining control of the "basic means of production," President Raul Castro said.

The government, saddled with $22 billion in foreign debt and expensive social programs, said a new tax code will go into effect next year that eventually will require Cubans to pay income and property taxes as they did before the 1959 revolution.

Also, new customs duties up to 300 percent of the cost of goods brought in will start taking effect in August, following a renewal of taxes on food imports that began in June.

The new import measures have prompted widespread complaints because many items are not available on the island or are extremely expensive.

Many of the new private businesses Castro is encouraging depend on imported goods, which is why people are generally mystified by the tax hikes. One theory is that the government wants to force people to buy from state stores instead of abroad.

The government has said there are now more than 390,000 Cubans who are working for themselves or for other self-employed, nearly triple the number before Castro began encouraging private ventures in September 2010.

Their continued growth is critical because the president wants to cut a million jobs from state payrolls by 2015 and will need alternative employment for those laid off.

Another 200,000 Cubans have leased government land to become farmers under his reforms.

The government said that in the first half of the year Cuba's gross domestic product grew 2.1 percent compared to the same period in 2011. The goal is 3 percent GDP growth in 2012.

What to watch:

- Results of the reforms to the state companies.

- The effects of the new taxes.

- Agricultural production.

OIL PLANS

The first major exploration for oil in Cuba's offshore started badly when the initial well, drilled by Repsol in consortium with Norway's Statoil and India's ONGC, was unsuccessful. The company also came up dry in an earlier well in 2004.

Malaysia's Petronas and Russian partner Gazprom Neft, using the same Chinese-built rig as Repsol, began drilling another well in late May in Cuba's western waters, but there was no word yet on results. The rig was to be passed on to Venezuela's PDVSA for a third well, but plans after that are unclear.

The drilling rig, the Scarabeo 9, is one of the few in the world that can drill in very deep water and does not violate the longstanding U.S. trade embargo against the island. It is owned by Italian oil services firm Saipem and scheduled to stay in Cuba until July 2013.

Russia's Zarubezhneft has contracted a rig from Norwegian firm Songa Offshore to begin drilling in late November in its offshore leases, which are east of Havana and closer to shore and in shallower water than the other wells.

Cuba, which says it may have 20 billion barrels of oil offshore, is banking on the offshore exploration to free it from dependence on Venezuelan oil.

Venezuela sends about 115,000 barrels a day to the island in an oil-for-services deal. Cuba uses the oil to meet two-thirds of its daily energy demand.

The U.S. Geological Survey has estimated 5 billion barrels, but its study does not include all of Cuba's part of the Gulf of Mexico.

What to watch:

- Results of exploratory wells by Petronas, PDVSA.

- Future drilling plans for Cuba offshore.

FOREIGN RELATIONS

Venezuelan President Hugo Chavez has been a generous ally whose investment in assorted other projects and strong political support have helped Cuba emerge from the worst of the so-called "special period" that followed the 1991 collapse of former top benefactor the Soviet Union.

He has been treated in Cuba since an undisclosed type of cancer was found in his pelvic region last year, but of late has said he is cured of the disease. He said the same thing before only to have a recurrence.

Chavez is running for re-election in October, with most polls showing him well ahead of opponent Henrique Capriles.

If he were unable to continue in office or failed to beat Capriles, it would threaten Cuba's main political and economic alliance, with difficult consequences for island.

Whether it was related to concerns about Chavez is not known, but President Castro visited old communist allies China, Vietnam and Russia in a July trip.

Official U.S.-Cuban relations are at a standstill due to the imprisonment of American contractor Alan Gross for illegally installing Internet networks on the island.

The U.S. presidential election in November could determine much about the immediate future of relations between the long-time ideological foes. Presumptive Republican Party presidential nominee Mitt Romney is supported by most Cuban-American lawmakers who seek to roll back measures by President Barack Obama to increase U.S. contacts with the island.

What to watch:

- Chavez's health.

- The U.S. presidential election.

FINANCIAL HEALTH

After drawing a record 2.7 million tourists in 2011, Cuba said more than 950,000 visitors came to the island in the first quarter of 2012, up 5.3 percent from the previous year.

The rising numbers reflect in part an increase in American tourists taking advantage of relaxed travel restrictions under Obama.

Tourism and nickel exports are among Cuba's top foreign currency earners. Sherritt International Corp of Canada, a joint venture partner in Cuba's nickel mining, said in its second quarter earnings report that nickel prices for the period were $7.88 a pound, down from $10.56 a year ago.

A tourism ministry official said 13 golf course projects were in various stages of approval and it was hoped construction on a first one would begin next year.

Some of the projects, which are aimed at bringing wealthier, bigger-spending tourists and residents to Cuba, have been pending for several years.

What to watch:

- Sustainability of tourism boom.

- Nickel prices.

- Signs of increased foreign investment.

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