Castro's Venezuelan Bonanza

The "Integral Cooperation Accord" signed by Fidel Castro and Hugo Chavez in October 2000 laid the groundwork for a quasi-barter exchange of Venezuelan oil for Cuban goods and services that has since become a lifeline keeping Havana afloat. Amidst ongoing political storms in Venezuela and a Cuban economy that is treading water, the Caracas-Havana pact channels vital economic aid enabling the Cuban government to stay above water. In a case of mutually assured survival, the economic stability of the Castro regime depends to a great extent on the fate of Chavez's rule in Venezuela.

For Castro, the benefits of the cooperation accord are eminently tangible in the subsidized petroleum and hard currency that flows regularly into Cuba courtesy of the Venezuelan taxpayers. In return, the presence of approximately 12,000 Cubans in Venezuela providing an array of free medical and social services in marginalized urban and rural areas has done much to radicalize the underclass and consolidate its loyalty to Chavez. Moreover, the less visible but efficient work of Cuban political advisers and intelligence operatives has proved invaluble in obstructing and defeating every attempt to date by Venezuela's democratic opposition movement to oust Chavez from power. As one European diplomat in Caracas remarked following the populist revolt by Chavez's core constituents who restored him to the presidency after a 48-hour coup in April 2002, "I don't know which was a bigger factor in returning Chavez to power: the ineptitude of his enemies or the effectiveness of the Cubans, but I do know that both played a role."(1)

OIL FOR OINTMENTS

The original agreement (2) sealed by Castro and Chavez in Caracas in 2000 allowed for the sale, at market prices, of up to 53,000 barrels per day of crude oil and derivatives (diesel, gasoline, jet fuel, etc.) by PDVSA, Venezuela's state-owned petroleum company, to its Cuban counterpart, CUPET.

Under the accord, PDVSA extended preferential payment terms to CUPET, including 90-day short-term financing instead of the 30 days offered to its other customers and, in lieu of a standard letter of credit backed by an international bank, PDVSA accepted IOUs from Cuba's Banco Nacional, the central banking entity responsible for servicing Havana's foreign debt. Last but not least, the accord established a long-term financing plan, at a token interest rate, on up to 25 percent of the value of oil shipments to the island.

For its part, Havana committed to sending its physicians and other healthcare specialists to work in underserved areas in Venezuela, at no additional costs to Caracas other than room and board for Cuban personnel. The Cuban government would also supply a wide variety of products and services, ranging from vaccines and skin ointments to free medical treatment in the island for Venezuelan citizens.

CASH ONLY

Less than a year after the implementation of the cooperation treaty, Fidel Castro returned to Venezuela in August 2001 to celebrate his 75th birthday in the company of President Chavez. During a ceremony in honor of Castro's visit Chavez amended the 2000 accord so that Venezuela would thenceforth begin compensating the Cuban government in hard currency for any and all Cuban products and services originally intended as in kind payment for Venezuelan oil.(3) As Cuba's ambassador in Caracas explained, "Venezuela will now pay Cuba for medical, sports, and technical services on a conventional commercial basis." By September 2001 Cuba had already charged Venezuela as much as US$12 million for goods and services rendered under the modified accord. (4)

The revision to the so-called "Integral Cooperation Accord" has also secured a captive market in Venezuela for Havana's state-owned enterprises and their generally uncompetitive products. Cuban exports of goods and services to Venezuela have climbed from US$34 million in 2001 to more than US$150 million in 2003.(5) Venezuelan ministries are contracting with Cuba for everything from generic pharmaceuticals to pre-fabricated housing and dismantled sugar mill equipment.(6) The rapid growth in Cuban sales to Caracas has now established Venezuela as the island's third largest export market, ahead of Spain which it surpassed in 2003. (7)

FREE TRADE

In early April Chavez exulted over recent setbacks to the U.S.-proposed Free Trade Area of the Americas (FTAA). "Rest in peace...thank God, the FTAA is dead," stated Chavez at the signing of a new cooperation accord with China.(8) His opposition to the FTAA notwithstanding, Chavez has been trading ever more liberally with Cuba since the 2000 deal with Castro went into effect.

As stipulated in the official text (9) of the October 2000 accord between Havana and Caracas, PDVSA's shipments of crude oil and refined petroleum products to Cuba could not exceed a combined total of 53,000 barrels per day (bpd). Accounting for roughly a third of Cuba's current energy consumption, the allotment of Venezuelan oil essentially cut Cuba's cash purchases on the spot oil market by half.

Yet, by November 2003, internal PDVSA documents leaked to the Venezuelan press indicated that as many as 82,000 bpd were being shipped to the island, mostly in the form of more valuable derivatives such as gasoline.(10) As has been Chavez's practice since coming to power, de facto practices have eventually been codified through executive decreees. In March 2004 PDVSA approved an increase of 25,000 additional barrels per day for Cuba under the preferential terms of the ever-expanding 2000 accord.(11) With some 80,000 bpd now guaranteed by Caracas, and with Havana's CUPET producing the equivalent of 85,000 bpd of the island's own high-sulfur heavy crude and natural gas, the Cuban government's hard-currency expenditures on the spot oil market have been dramatically reduced to about US$82 million a year (approximately 7,000 bpd at US$32 per barrel). (12)

BROTHERLY LOVE

Above and beyond the large quantities of subsidized oil, Chavez's solidarity with Cuba has reached new hights as evinced by his willingness to look the other way as Castro's regime accrues an astronomical debt in unpaid petroleum imports from Venezuela. In November 2001, alleging severe economic damages caused by hurricanes and the sharp decline of international tourism following the September 11 terrorist attacks, the Cuban government solicited and obtained from PDVSA the first of at least three refinancings to date of its payment obligations under the already lenient conditions of the 2000 accord.(13) With Chavez under presssure by PDVSA's then independent management to obtain redress for Cuba's mounting debts, and with the cessation of oil shipments to the island from April through August 2002, the Cuban government allowed Chavez to save face by making several lump-sum payments totaling some US$80 million by the end of the year.(14)

Following the protracted strike headed by PDVSA's management in late 2002 and early 2003, Chavez reorganized the petroleum company by dismissing as many as 19,000 white and blue-collar workers and replacing them with government loyalists. For Cuba, the reorganization proved to be a boon. In 2003 alone Cuba benefitted from at least US$500 million in oil imports that have gone unpaid or have been deferred as long-term debt. In 2004 Cuba will save even more, upwards of US$800 million, thanks to Chavez's charity.(15) With the complicity of the new management at PDVSA that now answers directly to Chavez, the generous price subsidies built into the original accord with Cuba have become outright donations. Though apparently there is no urgency to collect on the part of the Chavez administration, Cuba's total oil debt to Venezuela now hovers at about US$1 billion.(16)

In January President Chavez appointed his brother and personal secretary, Adan Chavez, to head Venezuela's embassy in Cuba. At a recent gathering in Havana in commeration of the counter-coup that returned his brother to power on 13 April 2002, Adan Chavez expressed his government's "wholehearted and eternal gratitude to our Cuban brothers" for their unflinching support.(17)

A few days earlier Ambassador Chavez announced new projects and programs to strengthen and broaden cooperation with Cuba in 2004. The new acts of fraternalism will include the opening of a branch office in Havana of Venezuela's Banco de Comercio Exterior in order to provide financing for bilateral trade with Cuba; a joint venture to set up a pharmaceutical plant in Venezuela; and the immiment possibility of a large-scale investment of as much as US$500 million by Venezuela's PDVSA in an idle, Soviet-built petroleum refinery in the port city of Cienfuegos on the island's Caribbean coast.(18) The latter project, if realized, would substantially increase Cuba's capacity to supply its own demand for fuel, particularly considering that much of the oil that the Cuban government continues to buy at a premium from trading companies is in the form of refined products (e.g., gasoline and diesel). (19)

It is thus little wonder that Fidel Castro has hailed Hugo Chavez's self-styled "Bolivarian Revolution" as an "irreversible process" from which "there is no going back." For the Cuban regime, the loss of its Venezuelan bonanza would be economically, if not politically, unbearable. And that is something Castro is not about to let happen.

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CUBA'S HARD CURRENCY EARNINGS FROM COOPERATION WITH VENEZUELA

Cuban Exports to Venezuela:

2001: US$34 million (20)

2002: US$25 million (21)

2003: US$154 million (22)

Payments to the Cuban Government for Services of Cuban Physicians in Venezuela:

US$50 million per year [2004] (23)

Payments to the Cuban Government for Services of Cuban Consultants and Trainers in

Venezuela & Training and Education Programs for Venezuelans in Cuba:

US$88 million [2002-2003] (24)

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NET VALUE OF VENEZUELAN OIL SUBSIDIES TO CUBA

2003: US$503 million (25)

2004: US$826 million (26)

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CUBA'S RISING OIL DEBT TO VENEZUELA

2001: US$96 million (27)

2002: US$144 million (28)

2003: US$380 million (29)

2004: US$992 million (30)

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NOTES

1. Quoted in Moises Naim, "A Venezuelan Paradox," Foreign Policy, March/April 2003.

2. For the complete text in Spanish of the original accord signed in Caracas by Fidel Castro and Hugo Chavez on 30 October 2000, see "Convenio Integral de Cooperacion entre la Republica de Cuba y la Republica Bolivariana de Venezuela," available online at [http://comunidad.vlex.com/pantin/ccuba.html].

3. Cf. "Fidel Castro celebro su 75 cumpleanos en Venezuela," Diario del Pueblo (China), 14 August 2001, and "Venezuela firma con Cuba anexo del Convenio Integral de Cooperacion," Diario del Pueblo, 14 August 2001.

4. Cf Patricia Ventura Nicolas, "Venezuela adeuda entre $10 y $12 millones a Cuba," Caracas, El Universal, 24 September 2001.

5. Trade figures are as reported by Julio Montes, Venezuela's ambassador to Cuba from 2000 through 2003. Cf. Fernando Ravsberg, "Petroleo venezolano llega a Cuba," BBC Mundo, 13 September 2002; The Associated Press, "Asegura embajador que Cuba paga el petroleo a Venezuela," Havana, 2 May 2003.

6. Cf. Mauricio Vicent, "Cuba traslada a Venezuela fabricas y tecnicos azucareros," Havana, El Pais (Spain), 11 July 2003.

7. Cf. Marta Veloz, "Se prepara el comercio exterior cubano para nuevas metas," 16 February 2004, interview with Foreign Trade Minister Raul de la Nuez on Cuba's Foreign Trade Ministry (MINCEX) website, [ http://www.mincex.cu/news/newsdetail.php?new=25 ].

8. Cf. Reuters, "Americas Trade Plan 'Dead,' Venezuela's Chavez Says," Caracas, 2 April 2004.

9. See Note 2 above.

10. Cf. "Aumentan envios de crudo a Cuba," Caracas, El Universal, 23 November 2003.

11. Cf. "PDVSA suma 25 mil nuevos barriles diarios para Cuba y llegan a cien mil," Caracas, El Nacional, 17 March 2004.

12. According to a recent public statement by CUPET Vice President Juan Fleites, Cuba's domestic oil and gas production has now reached 85,000 bpd and accounts for half of the island's total current energy consumption. (Cf. Rasia Pages, "Comenzaran a explotar primer pozo de petroleo en zona exclusiva de Cuba en el Golfo de Mexico," Havana, Granma Internacional, 15 April 2004.) Thanks to the 78,000 bpd now being supplied by Venezuela, and assuming a total internal demand of 170,000 bpd, Cuba's oil deficit has fallen to about 7,000 bpd.

13. The Cuban government refinanced its short-term debt to PDVSA in November 2001 (US$96 million) and again in May 2002 (US$144 million). For a detailed analysis of Cuba's chronic payment problems and mounting arrears to PDVSA, see a 2002 auditors' report to PDVSA shareholders and other related documents published online by Venezuela's El Nacional newspaper at: [ http://www.el-nacional.com/referencia/documentos/pdf/PDVSA.pdf ]. In January 2003 PDVSA again agreed to reschedule Cuba's unpaid oil debt which by then had surpassed US$400 million. Cf. EFE, "Venezuela investiga mejora calidad y produccion crudo cubano," Havana, 26 December 2003.

14. Cf. Marianna Parraga, "Cuba acumula deuda de $891 millones con Venezuela," Caracas, El Universal, 14 January 2004. Also see Alexei Barrionuevo and Jose de Cordoba, "For Aging Castro, Chavez Emerges as a Vital Crutch," The Wall Street Journal, 2 February 2004.

15. Throughout 2003 CUPET made few if any payments to PDVSA on new oil deliveries. For its part, PDVSA has been remiss by billing Cuba for only 20 of 92 shipments. (Cf. Marianna Parraga, "Cuba acumula adeuda de $891 millones con Venezuela," Note 14 above.) With the Cuban government apparently paying down no more than US$15 million a month on its account with PDVSA (cf. EFE, "Venezuela investiga mejora calidad y produccion crudo cubano," Note 13 above), there is a negative transfer taking place that amounts to a massive annual subsidy for the Cuban economy. In 2003, with Venezuelan crude oil at about US$26 a barrel, the 53,000 bpd for Cuba saved Havana approximately US$503 million. The projected value of Venezuelan oil for Cuba in 2004, assuming 78,000 bpd at US$29 per barrel, amounts to an estimated US$826 million. Moreover, even if Cuba is indeed paying US$15 million on a regularly monthly basis to PDVSA to settle its old "short-term" debts, it is accruing new obligations at an even faster rate.

16. The figure includes US$752 million in short-term debts and US$240 million in long-term obligations that came due in December 2003. Cf. M. Parraga, "Cuba acumula deuda de $891 millones con Venezuela," and A. Barrionuevo and J. de Cordoba, "For Aging Castro, Chavez Emerges as a Vital Crutch," at Note 14 above.

17. Adan Chavez as quoted by the offical Cuban press. Cf. "Afirma Fidel Castro que proceso venezolano es irreversible," Havana, Granma Internacional, 14 April 2004.

18. Cf. Reuters, "Venezuela-Cuba set to bolster economic ties," Havana, 9 April 2004. Last year Julio Montes, then Venezuela's ambassador to Cuba, estimated the cost for PDVSA to modernize the Cienfuegos oil refinery at US$500 million. Cf. Associated Press, "Asegura embajador que Cuba paga el petroelo a Venezuela," Havana, 2 May 2003.

19. Cf. "Aumentan envios de crudo a Cuba," Caracas, El Universal, 23 November 2003. Also see Felix Lopez, "El ahorro de combustible tiene que convertirse en trinchera de la resistencia," Havana, Granma, 25 February 2003, and Gabriel Molina, "Island to produce 90 % of its own electricity by year's end," Havana, Granma Internacional, 27 April 2001.

20. Figure for imports of goods and services from Cuba in 2001 as given by Julio Montes, at the time Venezuela's ambassador, to the foreign press in Havana. Cf. Fernando Ravsberg, "Petroleo venezolano llega a Cuba," BBC Mundo, Havana, 13 September 2002.

21. Venezuelan ambassdor's figure for import of goods and services from Cuba in 2002, as cited by The Associated Press. Cf. AP, "Asegura embajador que Cuba paga el petroleo a Venezuela," Havana, 2 May 2003.

22. The figure for 2003 as projected by Ambassador Julio Montes in September 2002. Cf. Fernando Ravsberg, "Petroleo venezolano llega a Cuba," Note 20 above. The projection has been corroborated by the fact that in 2003 Venezuela surpassed Spain to become Cuba's third largest export market. (Spain imported about EUR 130 million from Cuba in 2003.)

23. By late 2003 more than 10,000 Cuban physicians had arrived in Venezuela to staff the Chavez administration's "Barrio Adentro" (Inside the Barrio) program providing medical services in urban slums and impoverished rural areas. Chavez himself put the total number of Cuban doctors in Venezuela at 10,169 as of mid-December 2003 (cf. Associated Press, "Chavez thanks Castro for doctors," Caracas, 15 December 2003). Contrary to the original understanding in the 2000 cooperation accord, Havana is not donating the labor of its physicians. Cuba collects a monthly fee of about US$300 per doctor from the Venezuelan government. In addition, Venezuelan authorities pay each doctor's monthly salary, some 400,000 Venezuelan bolivars per month (approximately US$200 at the current exchange rate), directly to the Cuban government. The Cuban doctors actually receive only about US$100 on a monthly basis, with another US$50 a month given to their dependents in Cuba. Each Cuban physician serving in Venezuela also accrues an additional US$50 every month as a bonus to be disbursed only upon completion of the tour of duty. (Cf. Maria Isabella Salas, "Barrio Adentro fue distorsionado," Caracas, El Universal, 30 September 2003; Cuban-American National Foundation News, "Medico cubano que deserto en Venezuela hace importantes revelaciones," 14 February 2004). As stipulated in the 2000 accord, the Venezuelan government is also responsible for arranging room and board as well as domestic transportation for every Cuban participating in the Barrio Adentro program, all at no cost to the Cuban government. The total direct cost to Caracas -- excluding room, board, and transportation -- adds up to US$50 million a year, comprised of an estimated US$36 million in employment fees and US$24 million for salaries, all of which is paid directly to Havana.

24. Cf. expose by Francisco Olivares, "Cuba adentro," Caracas, El Universal, 17 August 2003, online at [ http://www.eluniversal.com/especiales/expediente/cuba/ ].

25. The market value of Venezuela's subsidized oil exports to Cuba in 2003 is estimated at US$503 million (53,000 bpd at US$26 per barrel). For 2004, the projection is based on 78,000 bpd at US$29 per barrel.

26. The figure has been rounded to nearest million and represents only short-term debt. Cf. A. Barrionuevo and J. de Cordoba, "For Aging Castro, Chavez Emerges as a Vital Crutch," The Wall Street Journal, 2 February 2004. Also see the extensive audit released in 2002 by Venezuela's El Nacional newspaper, Note 13 above.

27. Ibid.

28. The figure has been rounded to the nearest million and includes only the short-term debt. Cf. "Se triplico la deuda petrolera de Cuba con Venezuela," Caracas, El Nacional, 5 June 2003.

29. Includes US$752 million in unpaid or deferred short-term debt as of January 2004 and US$240 million in long-term debt that came due in December 2003. Cf. Barrionuevo and De Cordoba, "For Aging Castro, Chavez Emerges as a Vital Crutch," Note 26 above, and Marianna Parraga, "Cuba acumula deuda de US$891 millones con Venezuela," Caracas, El Universal, 14 January 2004.