February 1, 2011 / 5:21 PM / 8 years ago

FACTBOX-Key political risks to watch in Cuba

HAVANA, Feb 1 (Reuters) - Reforms aimed at modernizing Cuba’s troubled economy will be key as President Raul Castro tries to ensure that the communist system put in place five decades ago survives once its aging leaders are gone.

The debt-ridden government is short of cash and is looking to reduce its role while maintaining control of an economy with a bigger private sector and less state spending.

It could get long-term help if offshore oil exploration begins as planned in mid-2011 [ID:nN07233718], although ongoing rocky relations with the United States could interfere.

ECONOMIC REFORMS

Castro has begun slashing 500,000 jobs from state payrolls in a process that was supposed to conclude by March, but looks likely to take longer.

About 200,000 of those jobs are expected to shift over to employee-run cooperatives converted from businesses now operated by the state or rental arrangements for such things as taxis.

The government also has begun issuing 250,000 new licenses for self employment and for the first time, the self-employed are able to hire workers.

At least 75,000 permits have been granted so far, and new small businesses selling food, pirated DVDs or other items have begun popping up. [ID:nN25272243]

Self-employment was allowed in communist Cuba after the 1991 collapse of the Soviet Union, the island’s main ally. In 2009, there were 143,000 licensed self-employed, and many more illegal ones.

The government now hopes to create jobs quickly enough to absorb the laid-off government workers. After the first 500,000 jobs are cut, it plans to slash another 500,000 in the next few years, with more private sector expansion likely to come.

In April, the ruling Communist Party will hold its first Congress since 1997 to ratify the reforms, many of which are already in action. Cubans are now debating them at forums across the island. [ID:nN09241030]

Raul Castro, who succeeded his brother Fidel Castro as president in 2008, has said the reforms are critical to maintaining the communist system installed after the 1959 revolution. But it is unclear whether they will increase productivity and strengthen the economy as he hopes.

Many Cubans are interested in working for themselves but are concerned that regulations, taxes and lack of credit will kill their businesses. [ID:nN25269725]

Also, there are worries that planned job cuts may lead to social problems in a country where people basically have been guaranteed employment for decades. [ID:nN06122809]

Castro has made other reforms, particularly in agriculture where he wants to raise output to cut dependence on budget-draining food imports. But food production has declined as farmers complain they are still too stifled by the state.

What to watch:

— The numbers and performance of the newly self employed.

— The effects of government layoffs.

— Agricultural production.

CASH PROBLEMS

Cuba, drained of cash by hurricanes in 2008 and by the global financial crisis, defaulted on payments and froze foreign business bank accounts two years ago. [ID:nN02159253]

The situation has eased but is not yet resolved [ID:nN24211495] and Castro has cut spending, slashed imports by a third and sought more state income to avert future cash shortages.

Cuba is hoping to collect taxes from the newly self-employed and boost revenues from old standbys like nickel exports and tourism, two of its top hard currency earners.

The government has said it will allow construction of golf course developments, with the goal of attracting wealthier tourists. [ID:nN04118234]

U.S. President Barack Obama recently eased prohibitions on U.S. travel to Cuba [ID:nN14205232], but most Americans still cannot visit due to a trade embargo imposed since 1962.

What to watch:

— Nickel prices, start of golf course projects.

— Efforts to tax self-employed.

OIL PLANS

Havana has big hopes for future oil development and is anxiously waiting for a consortium led by Spanish oil firm Repsol YPF to drill an exploratory well in Cuba’s part of the Gulf of Mexico in 2011. The rig contracted by Repsol is expected to arrive in Cuban waters in late June or early July.

U.S. Congressman Vern Buchanan of Florida has introduced legislation that would authorize punitive action against companies who drill in offshore Cuba, saying exploration there poses environmental dangers. U.S. oil companies are forbidden by the trade embargo from operating in Cuba. [ID:nN24203352]

Other companies such as Malaysia’s state-owned Petronas — in partnership with Russian firm Gazprom Neft — and a unit of India’s ONGC plan to use the same Chinese-built rig to drill in their offshore Cuban leases. Russian state oil company Zarubezhneft said it would explore in two blocks off Cuba’s coast in 2011 but is looking for partners. [ID:nN03329371]

Cuba, which depends heavily on imports from its oil-rich socialist ally Venezuela, says it may have 20 billion barrels of oil in its waters, although the U.S. Geological Survey has estimated 5 billion barrels of oil.

A unit of China National Petroleum Corp is set to begin a $6 billion upgrade of Cuba’s Cienfuegos refinery, with financing mostly by China’s Eximbank, backed by Venezuelan oil. [ID:nN22266891]

What to watch:

— Repsol’s exploratory well in Cuban waters.

— Fate of U.S. legislation on Cuba drilling.

— China’s growing presence in Cuba’s energy sector.

U.S.-CUBA RELATIONS

U.S.-Cuba relations have thawed slightly under Obama, but prospects for further improvement are hindered by Cuba’s detention of U.S. aid contractor Alan Gross. [ID:nN24221723]

Gross has been jailed since December 2009 on suspicion of espionage and providing illegal satellite communications equipment to government opponents.

Washington says he was merely helping Jewish groups set up Internet access but Cuba is suspicious because he was working for a U.S. program promoting political change on the island.

A U.S. official recently expressed cautious optimism that Gross will be tried, then freed. [ID:nN13112064]

The Cuban government is in the process of releasing political prisoners and sending them to Spain to resolve one of its biggest problems with the international community and to get its opponents out of the country. [ID:nN2223242]

While U.S. reaction has been guarded, the European Union has instructed its foreign affairs chief to explore improved relations with Cuba.

Cuba has steadily built relations with other key countries, among them China, Brazil, Russia and Spain. It has a special relationship with top trading partner Venezuela, whose President Hugo Chavez is close to Fidel Castro and agreed in November to extend economic cooperation for another 10 years.

What to watch:

— Fate of Alan Gross.

— Continued release of political prisoners.

— U.S. and EU reaction to Cuban reforms.

Editing by Kieran Murray

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