Business Essentials for Professionals


Price Shocks Linked To The Ukraine Endanger Cuba's Already Sluggish Recovery

Price Shocks Linked To The Ukraine Endanger Cuba's Already Sluggish Recovery
According to economic analysts and merchants, the Russian invasion of Ukraine is worsening Cuba's three-year-old foreign exchange problem as import costs rise, jeopardising an incipient recovery and threatening additional misery for citizens.
Prices for essential imports such as fuel and grains have risen between 25% and 40% this year, putting new pressure on a government that has been chronically short of dollars, according to the businessmen, who include three foreigners with years of experience working in joint ventures and the head of a Cuban factory.
"The Cuban government is feeling the pain, as is the general population and the nascent sector of private Cuban entrepreneurs. Things are looking very difficult for Cuba in the short and medium term," said Canadian lawyer Gregory Biniowsky, who has been a consultant on business and investment in Cuba for decades.
Before Havana's long-time ally Russia attacked Ukraine in February, state enterprises were already functioning in difficult conditions, according to the Cuban businessman, who, like his foreign counterparts, sought anonymity.
"We are getting hit with power, fuel and other reductions to our allocated plans. We were already scraping the barrel to keep going and now it is getting worse,” he said.
Communist-run According to the government, Cuba imports about 60 percent of its fuel and 65 per cent of its food. The increase in import costs risks exacerbating shortages that are already causing people to queue for food, medicine, and other necessities.
In late March, Economy Minister Alejandro Gil warned that increased fuel prices and shipping interruptions were undercutting initiatives to reduce import costs, and that gas shortages and power outages were partly related to rising fuel prices and shipping disruptions.
"Until the month before last ... a 40,000-ton diesel tanker cost us $35-36 million," he said, "and today that same ship costs $58 million."
The price of gasoline and electricity in Cuba is set by the government, which absorbs greater import expenses. When cash is scarce, the government distributes some food through a rationing system, resulting in shortages and skyrocketing prices on the black market.
"The collapse of the Russian economy will severely impact trade and financial relations with Cuba. And you also have more indirect impacts through increased prices," said Cuban economist Ricardo Torres.
The price surges brought on by the war are the latest blow to the country's economy, which have already been hit by sanctions imposed by former US President Donald Trump on US tourists and remittances, as well as the coronavirus outbreak, which shut down tourism from other countries.
“They are taking one blow after another on the chin,” one of the foreign businessmen said.
There was no comment from the Cuban government.
Cuba is not a member of the International Monetary Fund or any other international financial institutions from which it could seek assistance to help it deal with the crisis.
Because Cuban pesos are not convertible outside of the Caribbean island nation, it is reliant on dollars collected through exports and services such as tourism to pay for everything from fuel, food, and medicine to agricultural supplies, machinery, and replacement parts.
Despite failing to meet countless payments to creditors and suppliers, as more than a dozen diplomats and businessmen told Reuters at the time, the cash crunch resulted in a 40 per cent drop in imports during the 2020-21 period, according to the government. It also stopped exchanging foreign currency for pesos on the domestic market.
According to official figures, the Cuban economy declined by 9% in the first two years of the pandemic, with shortages caused by the government's tight budget leading to blackouts and massive protests last July.
According to state media sources, the government forecasted 4% growth this year, but tourism and certain other sectors, such as sugar, fell far short of projections in the first quarter.
“Investors are all very worried because higher prices can only worsen shortages, power outages, transportation woes and our state partners’ ability to pay us,” one of the foreign businessmen said.

Christopher J. Mitchell

Markets | Companies | M&A | Innovation | People | Management | Lifestyle | World | Misc