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3C Report: Cuban Economic and Political Crisis Raises Concerns for U.S. Intelligence Authorities

Mark Kleszczewski and Kevin Bocaj, Illicit Finance and Economic Threats (IFET) Team

Week of Monday, July 12, 2021


Cuba devalued its peso at the start of 2021, deepening an economic crisis that has brought the Cuban people into distress and onto the streets[1]


Geographical Area | Cuba, North America

Countries Affected | Cuba, United States


Summary:

An accelerating liquidity crunch and deteriorating living conditions have led to the outbreak of street demonstrations in more than 50 towns and cities across Cuba on Sunday, July 11, 2021. The protests have renewed international attention to the country and its deepening economic crisis. Despite years of preparation, the fiscal fallout and inflationary spiral accompanying the elimination of the dual currency system are rapidly deteriorating beyond the government's control.[2] Compounded by the ongoing effects of the COVID-19 pandemic, pervasive shortages of food and basic necessities have fueled angry protests against the state-run economy and post-Castro leadership. Current events in the country present a highly increased likelihood of a further financial breakdown in an already-stressed domestic economy and a heightened security risk within Cuba, with a possible political impact on the U.S. and its foreign policy.


Areas of High Security Concern: Food shortages; protests and government crackdowns that may turn violent; lack of hard currency leading to black markets; possible resumption of illegal migration to the U.S.; rising tensions between Cuba and the U.S., especially focused around Florida’s Cuban exile and immigrant communities in Miami and Tampa.


Focal points: Civil unrest caused by an economic crisis which may lead to regime change; financial collapse due to a liquidity crunch and currency crisis.


Current Claims:

  • Cuba imports more than 50% of its fuel, food, and many other vital inputs. Severe economic decline, coming on top of a 15% drop in 2019, has resulted in scarcity and long lines for even the most basic products, from food and medicine to fuel.[3]

  • Cuba’s economic minister, Alejandro Gil, admitted in December 2020 that the country's already cash-strapped economy shrank 11% in 2020 due to the COVID-19 pandemic, tougher U.S. sanctions, domestic inefficiencies, and planned receipts of hard currency coming in at only 55% of expectations.[4]

  • January 1st of this year was known as “Day Zero” in Cuba. After almost three decades of operating with a dual currency, Cuba’s national peso (CUP) and its convertible peso (CUC) were unified as part of a broader process of “monetary ordering.” This also involves major price adjustments, eliminating “excessive [state] subsidies and undue gratuities,” and significant changes in salaries, pensions, and social assistance benefits. As of Day Zero, the CUC was no longer accepted in many Cuban businesses; it could only be exchanged in banks or CADECAs, or used in certain shops for six months.[5]

  • In response to increasingly intolerable levels of daily hardship, demonstrators have expressed frustration with shortages of essential goods, economic reforms put in place by the Cuban government regarding dual currency, the elimination of USD remittances, and crackdowns on civil liberties.

  • The World Health Organization (WHO) is likely to be concerned about the danger that mass gatherings in the country pose, given that a relatively low percentage of the Cuban population has received a vaccine against COVID-19.

  • The Cuban government blames the U.S. as the source of a social media manipulation campaign.[6]


Current Conflicts:

  • Civil unrest represents a security concern due to violent incidents that could arise.

  • The government’s response has included arrests and detention of protesters and civil rights activists.

  • Rationing and limited cash flow pose a major financial concern as they incentivize a parallel economy and informal, black currency market, defying legally established channels and jeopardizing domestic economic stability. This follows an economic pattern seen in the years leading up to the collapse of the centrally-planned command economies of the Soviet Union and Warsaw Pact countries.

  • Tensions between the Cuban and U.S. governments, both of which have a historical and ideological rift, remain persistent. The decades-long U.S. trade embargo remains in place. More recently, tensions were amplified in January 2021 when the outgoing Trump administration restored Cuba to the U.S. list of state sponsors of terrorism. This political move weakened the Biden administration's ability to improve relations with the Cuban government.


Insurgencies: Dissidents and civil organizations are being joined by increasing numbers of unaffiliated individuals across the entire island; they express extreme dissatisfaction with worsening conditions and pressing for change from the single-party authoritarian regime in place since Cuba’s 1959 communist revolution.


Affiliated groups: U.S.-based demonstrators and solidarity groups may continue to increase tensions between both governments by putting pressure on the U.S. to take action or taking matters into their own hands, not excluding delivery of weapons into Cuba in the hopes of triggering an armed insurrection. Recent demonstrations and sympathetic protest events by groups such Miami SOS Cuba could trigger domestic divisions in Florida.[7]


Groups Involved in Conflict: The Cuban people as a whole are the main party affected by worsening living conditions. Although informal groups (aided by social media) sprang up to protest economic reforms, food and medicine shortages, and electrical blackouts, they have been aided by organized opposition and activist groups. Among the most prominent is the San Isidro Movement (Movimiento San Isidro or MSI in Spanish), which has been particularly active in countering government attempts to silence the protests. Other dissident groups include 27N - composed of artists, thinkers, and journalists, as well as a coalition of Cuban and U.S.-based rappers behind the viral protest anthem Patria y Vida.


Major Capital Industries:[8]

  • Telecommunications (NAICS 517);

  • Credit intermediation and related activities (NAICS 522);

  • Finance and Insurance (NAICS 52);

  • Health Care and Social Assistance (NAICS 62)

  • Cane sugar manufacturing (NAICS 311314)

  • Tourism


Potential Industry Concerns:

  • Telecommunications: impacted since the government took control of the national internet and electricity network to interrupt all communications and impede the use of social media to spread awareness about protests. However, high access fees charged by the state telecom monopoly are an important source of foreign exchange.[9]

  • Credit/financial activities: of major concern since most institutions do not have enough credit to allow regular monetary flow after the reform to the dual currency system. Related inflation is leading to rising prices, accompanied by a rapid decline in customers’ purchasing power. U.S. personal cash remittances and USD deposits in the country’s banking system have been shut down, thus blocking inflows of vital sources of hard currency for most of the population.

  • Health Care: Cash to purchase medicine and import key inputs has been severely reduced. The country’s substantial export of medical personnel and material is being impeded by the domestic unrest and the incapacity of the government to fund its exports.

  • Sugar production and exports: As of the end of April 2021, production had reached 68% of the country’s planned target of 1.2 million tonnes of raw sugar, resulting in a harvest of only 816,000 tonnes - the lowest since 1908. The harvest was also hit hard by a shortage of foreign exchange to purchase fuel, agricultural inputs, and spare parts due to the COVID-19 pandemic and severe U.S. sanctions. Mills were temporarily shuttered due to fuel and cane shortages, as well as COVID-19 outbreaks.[10]

  • Tourism: Pandemic-related restrictions, the continuation of a 2019 Trump-imposed U.S. ban on recreational ships from stopping in Cuba, and an overall decline in tourism have led to significant losses of revenue (and hard currency) generated by the sector.


A protest against the Cuban government in

Copley Square, Boston, Massachusetts on July 13, 2021[11]


Areas of Caution:


GEOGRAPHICAL HAZARDS: N/A


RELIGIOUS RISKS: N/A


ILLICIT TRADE

  • Potential increase in the theft and resales of domestic goods and the smuggling of foreign goods to compensate for the lack of food and essentials.

  • Parallel, illicit markets in contrast to government-imposed prices or subsidized goods.

  • Revenues collected illicitly could be redirected to terrorist activity or drug cartels in the region.


CIVIL UNREST AND VIOLENCE

  • Protests in the country represent a security concern that affects all industries since it leads the government to crackdowns.

  • Commercial activities are targeted and might face unexpected closures in the middle of food shortages.


HUMAN TRAFFICKING

  • Potential increases in prostitution and human trafficking of Cuban nationals who may attempt to enter the United States illegally and do not qualify for humanitarian relief.


U.S. IMPACT

  • Miami-based demonstrators and activists - some of whom have attempted to transport small weapons to support Cuban protests - may heighten already tense diplomatic relations.

  • Warning statement about groups of Cuban immigrants planning to travel in boats with supplies to Cuba.


FOREIGN REACTIONS

  • Other than general statements made in support of the humanitarian aspects or civil liberties, the international community has not taken any tangible steps or kinetic positions in response to Cuba’s economic crisis; foreign reactions have remained non-specific or muted.

  • Throughout 2011-2014, China, Japan, Mexico, and Russia had restructured or forgiven portions of debt held by Cuba with those countries.[12] None of those have indicated any intention of offering additional debt relief at this time.

  • Attention in the region has been focused on the upheaval and instability stemming from the assassination of Haiti’s president Jovenel Moïse on Wednesday, July 7, 2021.


Predictive Analysis:

  • Who: Population of Cuba (11.3M, est. 2020); national governments of Cuba and the U.S.; U.S. Coast Guard; Florida state and local governments. At present, no outside states or terror organizations are known to be involved. Former regional supporter and socialist ally Venezuela is facing its domestic problems and is not expected to restore oil-based aid or support to Cuba in the foreseeable future.

  • What: Economic crisis; civil unrest leading to security threats, both internally and externally; increased pressure on the Biden administration to react more actively to developments in Cuba.

  • Why: Economic reforms, including currency devaluation, have not successfully harmonized the state-run economy with market-like structures or assured imports of essential goods. Despite preparation, reforms have deeply affected the Cuban people, as well as their purchasing power and free access to goods. The economic threat is likely to drive a widespread black market for hard currency (USD and EUR) and stolen or smuggled goods; increasingly desperate residents may seek to engage in illicit financial operations and transactions that are difficult to trace. Attempts at human trafficking of migrants wanting to leave the island are likely to increase. Parallel illegal markets increase the chances of illicit trade operations, which disrupt the normal flow of goods, already hampered by the cautious approach international companies have toward Cuba because of the U.S. trade embargo.

  • When: High probability threat of increased spontaneous protests and possible escalation into riots and looting as most Cubans continue to be deprived of basic necessities.

  • How: Domestic groups are likely to continue organizing against the government and its policies. The security threat assessed is represented by the very likely recurrence of protests against the leadership, which has historically resumed tight control over the Cuban economy and population. Yet, government restrictions and surveillance of the population prove to be less effective than in past years.

  • Other: Deterrence of black markets for goods and currency and the restoration of personal remittances would immediately increase the supply of much-needed hard currency. However, such measures would not constitute a reform of the economy, provide widespread increases in personal income or reduce growing income inequality and poverty often occurring along racial lines. It will not increase production or raise productivity. Obtaining larger-scale support from foreign investors or private banks is hampered by the ongoing U.S. embargo. The Biden administration has announced the addition of new U.S. sanctions on Cuba, targeting those responsible for the crackdown on protesters.[13] It is nearly certain that further such sanctions will be forthcoming in the near term, however, it is likely that despite the civil unrest, Cuba, in general, will continue to remain a lower priority relative to other countries. Assistance (even of a technical nature) from multinational institutions such as the IMF is not feasible. Cuba is not a member of the IMF, but even if it were to express a desire to re-join, it would take years to implement and would require verifiable sharing information on its economy - something the current Cuban government presumably would be very resistant to do. If left unresolved, the crisis and possible security threat are highly likely to affect U.S. foreign policy in the longer term, especially in the run-up to U.S. elections. Although the Democratic People's Republic of Korea (DPRK) is not directly involved, it is likely that the authoritarian DPRK - which faces its economic contraction and impact from COVID-19 - is closely observing developments in Cuba and reactions in the region, especially from the United States. Also, the Vietnamese government released a statement asking the U.S. to stop their “hostile policy”, and called for normalizing their diplomatic relations.[14] Structural difficulties and disruptions in Cuba are nothing new. However, the older generations, who have been traditionally in support of the results of the 1959 revolution or were afraid to speak out against the prevailing regime, will continue to shrink in numbers. It is not impossible to consider that this generational shift and the recent protests - reinforced by social media - could be the beginning of an unexpected collapse or transformation of the current one-party Cuban state.


CTG Recommendations

Agencies, organizations, and companies (AOCs) are assumed to be more aware of the economic crisis in Cuba based on recent media reports than before last week’s demonstrations. Florida businesses, institutions, and law enforcement should be prepared for possible new disruptions by sympathetic protesters, especially in the shutdown or blocking of highways. If the situation were to escalate further and become more desperate in Cuba, the state might face a possible influx of migrants who may attempt to enter the United States illegally and do not qualify for humanitarian relief. More extensive attempts by local Florida residents to influence events directly and without permission from state or federal authorities may also occur. In the extreme scenario, the Cuban economy and government may face collapse.


The Counterterrorism Group (CTG) is committed to Detect, Deter and Defeat terrorism. Although no terrorist acts have been connected to or identified with recent events in Cuba, CTG remains highly sensitive to social and financial disruption, political instability, security threats, and dangers to human life. Therefore, CTG will continue to monitor and share domestic and foreign media reports, and social media trends regarding the deteriorating economic situation in Cuba, and U.S. government responses.

[1]Cuban Peso” by Ricardo IV Tamayo, licenced under Unsplash

[2] Roaring inflation compounds Cuban’s economic woes, Reuters, June 2021, https://www.reuters.com/world/americas/roaring-inflation-compounds-cubans-economic-woes-2021-06-16/

[3] As Cuba turns page on Castro era, economic reform gains urgency, Aljazeera, April 2021, https://www.aljazeera.com/economy/2021/4/17/as-cuba-turns-page-on-castro-era-economic-reform-gains-urgency

[4] Cuban economy shrank 11% in 2020, government says, Reuters, December 2020, https://www.reuters.com/article/cuba-economy/cuban-economy-shrank-11-in-2020-government-says-idUSL1N2IX1V9

[5] Day Zero: how and why Cuba unified its dual currency system, London School of Economics blog, February 2021, https://blogs.lse.ac.uk/latamcaribbean/2021/02/10/day-zero-how-and-why-cuba-unified-its-dual-currency-system/

[6] Cuba’s Food Shortages and Pandemic-Fueled Economic Woes Drive Biggest Protest in Decades, Forbes, July 2021, https://www.forbes.com/sites/siladityaray/2021/07/12/cubas-food-shortages-and-pandemic-fueled-economic-woes-drive-biggest-protest-in-decades/?sh=3d89653372fb

[7] Miami demonstrators block highway to support Cuban protests, AP, July 2021, https://apnews.com/article/lifestyle-cuba-miami-boating-eae2b37e75e40861e1754cde45d41d65

[8]List of industries, IBIS World, July 2021, https://www.ibisworld.com/united-states/list-of-industries/

[9]A revolt against the revolution: The Cuban government cracks down on protesters, The Economist, July 2021, https://www.economist.com/the-americas/2021/07/15/the-cuban-government-cracks-down-on-protesters

[10] Coronavirus slashes Cuba sugar harvest, piles on economic woes, Reuters, May 2021, https://www.reuters.com/article/cuba-economy-sugar/coronavirus-slashes-cuba-sugar-harvest-piles-on-economic-woes-idUSL1N2MX2PH

[11]Protest in Boston” by Whoisjohngalt, licensed under Creative Commons Attribution-Share Alike 4.0 International

[12] Putin Writes Off $32 Billion of Cuba's Debts to Russia, The Atlantic, July 2014, https://www.theatlantic.com/business/archive/2014/07/russia-writes-off-32-billion-in-cuban-debt/374284/

[13] Biden says 'just the beginning' on Cuba sanctions for crackdown on protests, Reuters, July 2021, https://www.reuters.com/world/americas/biden-says-just-beginning-cuba-sanctions-crackdown-protests-2021-07-22/

[14] Vietnam calls on Washington to lift Cuba embargo, Reuters, July 2021


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