READING TIME: approximately 11 minutes.
Cuba, the longest communist-ruled country in the Western Hemisphere, has perhaps entered its most critical period since Fidel Castro's rise to power. During the past ten years, a combination of multifaceted developments has created an exceptionally complex landscape that could significantly impact the country broadly in the near future; everything from performance levels in major economic sectors to the manner in which its long defaulted debt problem will be addressed by Havana and its creditors.
Although holding substantial promise economically (e.g., it has large, mostly untapped strata of strategically valuable minerals), Cuba is acutely underdeveloped and, at foundation, ranks as one of the poorest nations in the world. The Caribbean island has recorded positive economic growth in just three of the last five years - in 2020, the Cuban economy actually plunged by 10.9 percent - and, it appears that regression is continuing. In this span of time, economic freedom trended downward from already low levels, and Cuba scores near the bottom in all reputable investment and economic freedom indexes (https://www.heritage/org/index/country/cuba). Further, it is unable to secure financing via conventional capital markets, due to its abysmal loan default record and, secondarily, the actions of Havana's hard line dictatorial regime. Compounding matters, the government's response to the COVID-19 pandemic was one of the least effective globally (ranking 129th as regards stringency), further impairing the nation economically and sowing the seeds for social unrest, as witnessed during the summer of 2021 (https://www.heritage.org/index/country/cuba).
The island government's level of economic desperation finally led to the enactment of several new (but rather nebulous) laws in 2022 which allow for foreign investment in both wholesale and retail industries. Nonetheless, given how the Cuban regime has behaved historically towards western origin capital, implementation is hardly guaranteed. (Reason - Cuba Liberalizes Economy as Economic Crisis and Protests Grow. 17th August 2022).
Russia, as the old Soviet Union, nearly exclusively sustained the Castro regime's economy and military for over three decades. However, the Cuban army's adventures in parts of Francophone and Lusophone Africa during the 1980s to early 90s struck a negative chord with Kremlin leadership resulting in relations cooling. Moscow's backing then dropped dramatically on all fronts after the collapse of the Soviet Union, and along with it most trade links that Havana maintained with the Eastern bloc countries.
The assistance vacuum left by Russia has been filled extensively by Chinese economic aid in various forms. China clearly understands that Cuba, due to its geographically strategic position, is of high importance and appears determined to exert a dominant sway there - perhaps even establishing a military presence of sorts on the island - thus providing it with a "monitoring post" in the southeastern approach to the United States. The region is quite significant because it contains a variety of routes leading to major southern ports such as Houston, New Orleans, and Miami.
Importantly, it should be noted that, since 2018, cutting-edge surveillance technologies provided by Beijing have proven essential to the Cuban regime's ability to control dissent and maintain power. In particular, Chinese telecommunications entities are playing a leading role in building Cuba's transmission infrastructure. A system that Havana makes extensive use of to regulate its population and disrupt the activities of anti-government elements; equivalent to what the Chinese Communist Party (CCP) does consistently within its own borders.
China's influence in Cuba has grown at an impressive pace since the signing of an economic development agreement in 2021 based, at foundation, on its Belt and Road initiative. The Belt and Road program provides extensive infrastructure financing to developing and less developed countries at highly favorable interest rates and, generally, with exceptionally long maturity schedules, albeit, containing unorthodox and oftentimes burdensome terms which can include extra-normal guarantee and collateral components. Moreover, lending documentation usually contains stipulations giving Chinese financial institutions and government agencies repayment priority over all other creditors (The College of William & Mary - AidData's New Dataset of Chinese Development Project Worth $843B Reveals Major Increases in Hidden Debt. 29th September 2021).
Besides, infrastructure support, under the Belt and Road scheme and independently of it, Chinese corporations (in reality, quasi-governmental enterprises), are supplying seriously needed technical services as well as industrial equipment such as heavy machinery, agricultural apparatuses, trucks, advanced computer technology and considerably more, with only modest amounts in the form of "free aid."
A large percentage of the financing granted by Chinese corporate entities are believed to be, so-called, "hidden loans" that do not comprise part of official records and go unreported to multilateral agencies such as the IMF. This intimates that Cuba's true indebtedness numbers to China are far higher than what has been promulgated by Beijing and Havana. Given the way things have materialized thus far, on many levels, it is not hard to visualize Cuba steadily transforming into a quasi-client state of China, replacing Russian standing to a very considerable degree.
Beijing's investment boost / financial aid - this includes debt forgiveness of approximately USD 6 billion granted in 2019 (Forbes - China has Forgiven Nearly $10 Billion in Debt. Cuba Accounts For Over Half. 29th May 2019) - comes at a time when much of Cuba's basic infrastructure is in disrepair, including transportation, energy distribution, water services, sanitation operations, shipping fleets and seaports. Practically all the nation's key systems are intrinsically unreliable with little capacity to provide for even modest levels of economic progress and societal well being.
Recent intelligence suggests strongly that a major focus of the Chinese Belt and Road effort in Cuba is the modernization and expansion of primary (and geo-strategic) ports such as Havana, Santiago de Cuba, and Cienfuegos. Cuba has an extensive coastline of approximately 2,200 miles with 70 ports, many of which are in dire need of repair and modernization due largely to a consistent lack of funding for technical training, facilities maintenance, replacement of specialized machinery and spare parts (Townhall - Is Communist China Colonizing Cuba? 11th January 2022). Is direct Chinese management of key Cuban seaports a central goal for Beijing?
Keeping in mind a good portion of the above content, let us now turn to Cuba's defaulted commercial debt; obligations so old and exotic that over the past decade or so they were hardly a topic of conversation among international finance professionals, let alone traded. In fact, Cuban debt has rarely been offered for sale in recent years.
One might ask where Cuba's defaulted debt issues fit into the current portrait of the country we have just presented: its hard-core authoritarian regime, a regressive, derelict economy and the extensive long-term commitments China has been making in the country recently. The answer to this question is not all that simple but, one thing is certain: China's dominant presence in the island and Havana's outsized dependence on the financial assistance Beijing provides could well complicate matters in ways we may not yet appreciate fully, including the handling of the nation's outstanding foreign debt by both Havana and its creditors.
Most of Cuba's debt accumulated since the early Castro period was owed to the U.S.S.R. and its Eastern European allies ( the Eastern bloc). Nearly all was generated under a "countertrade" / barter settlement system where a trading partner's negative yearly differential was reconciled in hard currency, or sometimes by supplying the participant holding the positive transactional position with additional goods and services. The debt incurred by Cuba via this arrangement was either forgiven or renegotiated under highly advantageous terms.
Cuban borrowings from western governments and financial institutions that are presently outstanding were, in great part, issued during the 1970s and 1980s. These claims account for only 15 percent (roughly) of the the state's total debt load and fall mainly into two categories: Paris Club (bilateral debt) and London Club (commercial debt). The vast majority of Cuba's borrowings originate from China and Russia, and the percentages are substantially weighted towards the former. Little, if any, London Club obligations remain with original creditors, rather, nearly all (estimated at about USD 7 billion) are held by non-U.S. (American citizens / entities are legally barred from doing most business with Cuba) alternative investment concerns, or offshore special purpose vehicles (SPVs), established by a variety of hedge funds - many U.K. based - and private investor pools. In 2021, Paris Club creditors agreed that debt repayments should be skipped for the remainder of that year; to help lessen the economic and social impacts of COVID-19. However, Cuba's serious lack of foreign exchange and a steadily shrinking economy continues to put future Paris Club debt performance in question and default is certainly quite possible, as has happened several times in the past.
In recent weeks, there has been one very notable revelation regarding Cuban defaulted loans that fall into the London Club category: detailed news of a lawsuit brought in the summer of 2022 by a specialized Cayman Islands based investment fund, CRF1 (originally called the Cuba Recovery Fund) in a U.K. High Court. Arguments are currently ongoing. CRF1 is suing Cuba for the equivalent of USD 72 million (nearly all of Cuba's commercial debt is denominated in Deutsche marks, a currency that no longer exists) of principal along with past due and penalty interest on two loans in its distressed debt portfolio. This represents the first time that Cuba has faced legal action on any of its impaired commercial borrowings. According to CRF1, upper management and their legal team attempted to negotiate a settlement of the debt with Havana, but all proposals were rejected outright by the government who has consistently accused the outfit of being "an illegitimate debt holder" and acting as a "vulture fund"; meaning an entity that purchases impaired loan assets at steep discounts with the sole purpose of suing for recovery (Undervalued Shares - "The Cuba Files - Court Documents for Distressed Debt Investors. 2nd September 2022). More than likely a futile defense tactic for Cuba.
Havana has also promulgated the notion that its western commercial bank loans were sold off illegally to CFR1 (and others), asserting that the original lenders did not have rights of transfer / assignment to third parties and, additionally the defense has implied that corruption was somehow involved in a number of initial financing negotiations, .i.e., during the 1970s and 1980s, primarily (Financial Times - Cuba Pledges Engagement with "Legitimate" Creditors. 7th February 2023). These last two allegations have not been backed by any concrete evidence and are generally viewed as meritless by legal experts.
If HRF1 prevails in its legal efforts - currently, that appears to be a distinct possibility - it could well open the door to additional lawsuits from any number of creditors who are holding billions in defaulted Cuban debt. No doubt, a nightmare scenario for Havana. But, for claimants to realize on court judgments against Cuba will not be a straightforward matter. Potential roadblocks await, especially when one takes into account the extent of the Chinese factor and the highly atypical lending methods employed by Beijing in countries with vulnerable economies. As commented on above, the reality is that China's aid / loan agreements, from both government agencies and corporations, are not very transparent - few details are available publicly - and usually contain a variety of onerous, unorthodox collateral clauses that can jeopardize borrower ownership / management control of essential national assets, should a default occur or even if interest payments fail to be executed in a timely manner. Furthermore - and this is a crucial point for defaulted commercial debt holders to consider in their search for Cuban hard currency sources - it entirely possible that Havana's access to revenue streams from Chinese completed projects are being restricted to insure that loan repayments are met as per agreed schedules. Thus, even if Cuba decided to undertake settlement talks with the likes of CRF1, because of commitments to China lenders, it may not have sufficient funds from ventures that generate hard currency income to arrive at an agreement. A possible example: a Chinese led port modernization project that results in new revenues from foreign tour ship arrivals - income would be earmarked to pay Chinese funders first.
Instances of what may go wrong for debtor countries can be found in recent sovereign defaults where Chinese lending was heavily involved, e.g., Sri Lanka and Zambia. In the case of Sri Lanka, China assumed control of the nation's primary seaport (via a 99-year lease that is very Chinese dominant in revenue benefits) since it was pledged as loan collateral for engineering services, construction work and other costs (New York Times - How China Got Sri Lanka to Cough Up a Port. 25th June 2018). With respect to Zambia, there are strong suspicions that China gained several mineral extraction sites after the country was forced to halt interest payments to all its creditors. These are but two instances of the hazards developing nations face when borrowing from China and financial distress develops.
The lending arrangements China has with Cuba could be very similar in composition to what was conveyed in the previous two paragraphs (i.e., loan documentation probably includes major asset pledges, as well as specific constraints on project cash flows) and therein lies one of the greatest pitfalls for creditors seeking debt recovery through asset seizures - outside Cuba since in-country capture is virtually impossible for obvious reasons - which presently may be the only avenue available to them since Cuba is cash strapped (and will be for some time) and refuses to negotiate with any debt holder that it does not recognize as an original lender - Havana has stated it is open to negotiating with entities it deems as being "legitimate creditors" (Financial Times - Cuba Pledges Engagement with 'Legitimate' Creditors. 7th February 2023).
Another consideration is that, in terms of global strategy, Beijing views Cuba as a highly valuable political ally. Consequently, China has a vested interest in maintaining the island's communist regime as it currently stands by making it reliant on Chinese aid as much as possible. Also, more food for thought, besides providing economic assistance, will China help Cuba frustrate western commercial creditor settlement / recovery ambitions? There are certainly a few ways that can be accomplished, if China so chooses.
Reflecting on the main points discussed, what are some of the basic things one can deduce about Cuba going forward, politically, economically, and as regards relationships with both Chinese and western creditors? First, on the political end, there will continue to be near-zero tolerance of internal opposition to the current administration in Havana; enforced ruthlessly by enhanced population surveillance techniques and other control methods that, as indicated, are being provided in abundance by Chinese government security agencies and corporate enterprises. Concerning Cuba's economy, in a word, it is tumbledown, in acute need of modernization and serious reform. Even with massive Chinese infrastructure financing and other aid, few segments of the Cuban economy are forecast to improve even modestly over the remainder of the decade, particularly if the regime fails to open the economy substantially to western capital. An arduous task for Havana since it is perceived by most large-scale investors as decidedly untrustworthy and less than reliable. Lastly, on the question of the country's defaulted debt - a weighty albatross on Cuba's neck that prevents it from gaining any access to traditional capital markets and multilateral aid - there is little clarity. The ongoing lawsuit by CRF1 in the U.K. may alter the dynamics of Havana's dealings with creditors (provided the claimant prevails) but nothing we have seen suggests that the regime has the willingness or even minimal financial ability to negotiate with holders of its distressed commercial loan obligations. Any entity that wins a final, non-appealable court ruling on the Cuban debt it owns, to have any reasonable chance of collecting will, in all likelihood, have to pursue the capture of fixed assets outside the country since most (possibly all) of Cuba's hard currency is not held in western banks and nearly impossible to lien (e.g., how does one seize Cuban bank accounts housed in China?). In addition, internationally mobile physical state property of appreciable value, such things as cargo ships, fishing trawlers and aircraft, could be encumbered in some manner, backing loans to, say, China or Russia. We simply do not have sufficient detailed knowledge about Cuban loan documentation structures with currently active lenders (mostly Chinese), so anything is possible.
The cardinal feature to consider in all this is that Cuban leadership, for all intents and purposes, is extraordinarily dependent on China to strengthen its crumbling economy and continue thwarting any serious opposition to its rule. On the flip side, Cuba represents a major geopolitical opportunity for Beijing to eventually counterbalance U.S power in the western hemisphere somewhat and put Washington more on the defensive. Therefore, we can expect the Chinese to grow their strategic footprint in Cuba as much as possible, mostly through the mechanisms presented in this article.
For Havana, China provides a critical lifeline and may end up playing a dominant part in transforming, to a modest extent, a near-moribund economy but, as a whole, the support surely comes with some stringent conditions, given what we know about Chinese aid / lending parameters to economically underdeveloped countries. However, a less-explored potential relationship benefit for Cuba (touched on earlier here) is that China could somehow act as a buffer to fend off (at least in the short-to-medium term) creditor efforts to collect on its defaulted loans. Although quite doubtful as things stand today, Beijing may even end up participating (via background involvement) in the negotiation of settlement agreements for Cuba.
Bottom line: Cuba ranks as most significant for China and is being treated as a high priority partner. Beijing's dealings with Havana are symbiotic but, at the same time, certainly not founded on principals of equal reciprocity. The predictable outcomes of this relationship are: Expansion of geopolitical influence for China and, on the Cuban side, possible economic improvements and the strengthening of the political status quo in Havana. As for the defaulted debt creditors, the Sino-Cuban connection likely translates into increased litigation and difficult, expensive attempts at asset retrieval. In other words, no near-term relief should be expected for debt holders.