For Cuba, Chávez's Health Is a Vital Statistic

Updated June 22, 2012, 11:16 p.m. ET

For Cuba, Chávez's Health Is a Vital Statistic
By NICHOLAS CASEY

MEXICO CITY—For more than a year, Venezuelans have fretted over how they
will fare as their charismatic president, Hugo Chávez, faces dual
battles of cancer and a fall election. But Mr. Chávez's fate may pose an
even greater cause of concern in another country—Venezuela's Communist
ally, Cuba.

In more than a decade of friendship between Mr. Chávez and Cuba's
rulers, Venezuela has sent cash and oil subsidies worth billions of
dollars a year. Those handouts could come under threat without Mr.
Chávez in power to back them—showing how the flip side of Venezuelan
largesse is a deep potential Cuban vulnerability.

In 2010, Venezuela accounted for at least 40% of Cuba's overall trade in
goods, up from 27% the year before. That figure was more than the trade
levels of the next five countries combined.

Overall, Venezuelan assistance and trade with Cuba accounted for up to
22% of Cuba's annual economic output in 2010, according to Carmelo
Mesa-Lago, a professor emeritus at the University of Pittsburgh and an
economist who is writing a book about the Cuban economy.

"It's hard to imagine that another country would enter into such a large
relationship as this," said Philip Peters, a Cuba analyst at the
Lexington Institute, a Virginia-based policy group.

The extreme situation has drawn comparisons to Cuba's relationship with
the Soviet Union, which underwrote the Cuban economy for decades until
its sudden collapse in 1989. What followed was what Cubans call the
"Special Period" of the 1990s, during which the Cuban economy contracted
35% in three years, leading to rationing of food and electricity.

Cuba is on more solid footing than it was then. But it still faces the
U.S. economic embargo, and economists say the ending of Venezuelan
largess would be a massive blow.

"This could be a disaster," Mr. Mesa-Lago said. "If this help stops,
industry is paralyzed, transportation is paralyzed—and you'll see the
effects in everything from electricity to sugar mills."

Mr. Chávez has long called Fidel Castro, Cuba's retired dictator, a
father figure and mentor. For 12 years, the Venezuelan president has
propped up the ailing island's economy with generous subsidies. They
include roughly 105,000 cut-rate barrels of oil a day—about half of
Cuba's energy needs for petroleum, economists believe—and cash payments
for a stream of Cuban doctors, sports trainers and teachers who work in
Venezuela.

Under the arrangement, Venezuela pays the Cuban government $135,000 a
year for each doctor it sends over, 27 times the salary of the average
Venezuelan public doctor, Mr. Mesa-Lago estimates. Cuba gets similar
payments for sending teachers and sports trainers.

The oil arrangement is also unusual: Not only does Venezuela sell the
oil to Cuba at what is believed to be submarket prices, it also extends
Cuba 25-year loans at 1% interest—well below the rate of inflation—that
Havana uses to foot about half of the bill.

Venezuela is also supporting Cuba through investment. From 2000 to 2011,
Venezuela signed deals for 370 investment projects in Cuba for an
estimated $11 billion. They included $1.4 billion to renovate an idle
refinery in the coastal town of Cienfuegos. The plant, from 1991, used
defunct Soviet-era technology and had never operated.

Last year, Venezuela installed an 820-mile fiber-optic cable meant to
bring high-speed Internet to Cuba. It still hasn't been put into use.

Aside from several projects from Brazil and China, few other countries
have been able to establish a firm foothold in Cuba at all. Economic
reforms pledged by President Raúl Castro have focused on changing the
domestic economy—allowing for the sale of homes, for example—but have
done little to attract outside investors.

As for Mr. Chávez, the president says his health is improving but isn't
giving many details. This month he said recent tests after treatments in
Cuba and Brazil had "turned out absolutely fine." But many in the U.S.
government believe his condition has worsened. Mr. Chávez has surprised
critics by appearing on the campaign trail and making plans this weekend
to host Iran's President Mahmoud Ahmadinejad, another old ally.

Mr. Chávez's opponent in the election, Henrique Capriles, trails the
popular president in the polls. But Mr. Capriles has a handy lead over
any of Mr. Chávez's likely successors, polls show. Mr. Capriles hasn't
yet taken a position on the Cuban subsidies, although Mr. Chávez's oil
handouts to foreign countries are broadly unpopular at home.

Cuba is on better economic footing today than it was two decades ago.
Three-quarters of Cuban trade was linked to the Soviet bloc, and the
collapse of the Soviet bloc left Cuba's contracts with state companies
from East Germany to Bulgaria invalidated almost overnight. Fidel Castro
famously urged Cubans to abandon cars for thousands of bicycles he imported.

Since then, Cuba has opened its doors to tourism, which in 2010 was a
$2.2 billion industry that accounted for roughly 4% of gross domestic
product. The Obama administration recently began allowing relatives of
Cubans to send unlimited remittances, which could serve as a lifeline.

Cuba has also made an effort to become an oil producer in its own right,
working with Spanish firm Repsol YPF S.A. to drill offshore oil. A
platform was erected last year, but the size of the deposits is still
unknown. The project suffered a disappointment late last month when
Repsol said it would stop looking for oil in Cuba after an exploratory
well came up dry and had to be capped and abandoned.

Few analysts think a departure of Mr. Chávez would lead to political
revolt in Havana that would threaten the Castros' regime. But it might
force Cuba to accelerate free-market reforms. The crisis of the 1990s
forced Cuba to adopt limited free-market reforms to survive, including
the first licenses for private restaurants. When times got better under
Mr. Chávez, Fidel Castro rolled back the reforms.

"If Chávez were to kick the bucket, then the impetus toward reform would
probably return because there wouldn't be any other alternative," said
Arch Ritter, an economist specializing in Cuba at Carleton University in
Ottawa.

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