Key political risks to watch in Cuba - 11-2011

Key political risks to watch in Cuba
Tue Nov 1, 2011 2:28pm GMT
By Jeff Franks

HAVANA Nov 1 (Reuters) - The Cuban government has been quietly cutting
its bloated payroll and stepping up plans to boost agricultural
production as part of reforms aimed at strengthening its socialist
system for the future.

Its long-delayed offshore oil exploration project in the Gulf of Mexico
is expected to start in January after the arrival of a Chinese-built
drilling rig now on its way from Singapore.

If oil is found, it will reduce or eliminate Cuba's reliance on oil
imports from Venezuela, whose President Hugo Chavez -- the island's top
ally and economic partner -- is battling an undisclosed type of cancer.
He is receiving treatment in Cuba.

ECONOMIC REFORM

Cuba has begun a government reorganization that will include replacement
of its sugar ministry with a state holding company [ID:nS1E78S0AG] and
the creation of new energy and mining ministries. Other ministries may
be eliminated.

Most state companies are controlled by ministries and lose money, but
will be given greater independence in hopes of improving their
performance. [ID:nS1E78T0I8]

Cuban media reports say there are now 338,000 people working in the
self-employed sector, the growth of which is being encouraged because
the cash-strapped government wants to slash a million jobs from its
payrolls.

So far, just under 150,000 people have lost their jobs, government
insiders say. [ID:nN1E7940HC] The goal is to have a third of Cuba's work
force of 5.2 million working in the "non-state" sector by 2015, up from
15 percent in 2010.

Cuban media said many state-owned small service businesses would be
leased to employees in October to run essentially as private businesses,
an extension of an experiment begun last year with barber shops and
beauty salons. So far, there has been no announcement of the change or
evidence it has begun.

Still to be announced are reforms, promised by President Raul Castro,
that will liberalize the sale of homes and loosen restrictive travel and
immigration rules. [ID:nN1E7701VN]

Cuba has been handing out idle land for farming and, looking to increase
output, has decided to increase the maximum size of plots to 165 acres
(67 hectares), up from the current maximum of 33 acres (13 hectares.
[ID:nN1E79I0BN]

Food output is up this year but still below 2005 levels and farmers
complain reforms are slow in coming. [ID:nS1E78R08J]

Two Canadian trading companies [ID:nS1E78F16C] and a British investment
firm [ID:nN1E79F034] are under investigation as part of Castro's
campaign to crack down on corruption that he says is a drag on the economy.

What to watch:

-- The pace and final version of reforms.

-- The numbers and performance of the newly self-employed.

-- Agricultural production.

FINANCIAL HEALTH

Cuba still is recovering from a liquidity crisis that led to a default
on payments and freezing of foreign business bank accounts.
[ID:nN24211495] President Castro said the bank accounts issue will be
resolved by year's end, but many companies say they are still owed money.

The government has said tax payments from the self-employed have
increased revenues, while its top hard currency earners -- tourism and
nickel exports -- have improved.

Castro has said Cuba's economy should grow 2.9 percent this year, up
from 2.1 percent in 2010. Cuba's reserves at the Bank for International
Settlements stood at $5.75 billion in March, double what they were at
the end of 2008. [ID:nN1E79U0I0]

Long-awaited golf course developments, aimed at attracting wealthier
tourists, remain on hold. [ID:nN04118234]

The first American tourists to visit Cuba under more flexible travel
rules ordered by U.S. President Barack Obama began arriving in August.
Experts say the new rules could bring as many as 100,000 additional
Americans this year. [ID:nN1E77F13C]

What to watch:

-- Resolution of bank account access for foreign businesses.

-- Effects of global economic problems.

-- The growth of American travel to Cuba.

OIL PLANS

A Chinese-built drilling rig, the Scarabeo 9, is expected to arrive in
Cuban waters by late December [ID:nN1E790U0], where it will be used in
the first major exploration of Cuba's part of the Gulf of Mexico.
[ID:nN1E77P03U] Spain's Repsol YPF and its partners will get the rig
first, followed by Malaysia's Petronas and its partner, Russia's Gazprom
Neft.

The project has drawn opposition in the U.S. Congress [ID:nS1E78R1P9],
but Repsol has rejected accusations it is breaking U.S. law
[ID:nL5E7KU118] and said it will let the United States inspect the rig.
[ID:nN1E79H1XN] U.S. oil companies are forbidden from operating in Cuba
by a long-standing U.S. trade embargo.

Cuba depends on imports from its oil-rich ally Venezuela, but says it
may have 20 billion barrels of oil offshore. The U.S. Geological Survey
has estimated 5 billion barrels.

China has signed an agreement to play a major role in increasing Cuban
oil production [ID:nN08140650] and its state oil company is said to be
considering leasing exploration blocks in Cuban waters. [ID:nN1E76C1S6]
China and Cuba are also negotiating contracts for a $6 billion expansion
of Cuba's Cienfuegos refinery and a liquefied natural gas project.
[ID:nN22266891]

What to watch:

-- Arrival of drilling rig.

-- Results of Repsol's exploratory well.

-- U.S. pressure to stop the drilling.

-- China's growing involvement in Cuban oil development.

FOREIGN RELATIONS

A major concern for Cuba is the health of Chavez, whose government
provides 114,000 barrels of oil a day and investment to Cuba.

He has been undergoing chemotherapy in Cuba and recently declared
himself cancer free [ID:nN1E79J13X], but his death or departure from
office would be a big blow to the island. Chavez is very close to former
leader Fidel Castro, who is 85 and increasingly frail.

U.S.-Cuba relations, which thawed briefly under Obama, have been frozen
by the imprisonment of U.S. aid contractor Alan Gross. [ID:nN24221723]
He is serving a 15-year sentence for providing Internet gear to Cuban
groups under a U.S. program promoting Cuban political change.
[ID:nN12265306]

Cuba is angry that five Cuban agents have been jailed in the United
States since 1998, and has given no indications that Gross will be
released early.

What to watch:

-- Health of Chavez.

-- Continued imprisonment of Alan Gross. (Additional reporting by Marc
Frank; Editing by Kieran Murray)

http://af.reuters.com/article/commoditiesNews/idAFRISKCU20111101?sp=true