Created: 9/9/1991

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The Director of Centra!c Whs*5

NIC number



Soviet Economic Assistance to Cuba: New Estimatesnd the Outlook

o Based on detailed trade data recently released by Moscow, the Intelligence Community has retroactively revised downward the dollar value of Soviet economic aid to Cuba by aboutercent to an average of5 billion annually.

o Soviet economic assistance is declining substantiallyhe economic and political turmoil in Moscow is making it impossible for the Soviets fo honor Its aid commitment and shipments of key goods are falling well short of promised levels.

o We believe that Soviet economic assistance will dry up completely next year, although some tradetrictly commercial or barter basis will continue.

o The drop In Soviet assistance willecline In the Cuban

economy of at leastercent thisutoff of aid next year will reduce economic activity to about two-thirds of itsevel.

o Castro is unlikely to adopt meaningful economic reforms and Cuba's living standards will worsen significantly, increasing the prospect for regime threatening political Instability in tbe near term.

This Executive Brief was requested by Assistant Secretary of Suae for Inter-American Affairs Bernard Aronson. It presents die findings of Intelligence Community representativeseetingeptember

t was produced by the National Intelligence Officer for Ijjtin America and the National Intelligence Officer fee Economics with the assistance of the National IntetBgcnce Officer for USSR and coordinated uvh representatives of State/INR, DIA, NSA, ClA. and the Services. The new costing metiiodology was developed by OA's Office of Soviet Analysts.

All ixwtions classified

Based on more detailed trade data recendy released by the Soviets forperiod, tbe Intelligence Community has retroactively revised downward its estimate of the dollar value of Soviet economic assistance by aboutercent Our new estimates indicate that economic assistance to Cuba averaged5 billion annually during the five-year period.

Our new estimate does not imply any reevaluation of the importance of Soviet support for the Cuban economy. In gauging tbe critical role of Soviet aid to Cuba, the Intelligence Community focuses on the quantities of key commodities exchanged rather than the value of such goods because in the past value estimates have been dependent on distorted currency exchange rates. Soviet exports of these keywheat and flour, and machinery--to Cuba was relatively constant, although oil deliveries probably dropped somewhat

The New Costing Methodology

We calculate Soviet aid as the difference between the world market value of goods exported to Cuba and the market value of Cuban goods imported by the Soviet Union. In the past we have been able to apply world market prices to Soviet oO and wheat exports and to Cuban sugar and nickel exports-about two-thirds of totala lack of data on the other one-third of trade forced us to derive dollar values for these goods by converting Soviet ruble data at the official ruble/dollar exchange rate. New data now enable us to assign world market values to the remaining commodities, either by directly applying known world market prices or by estimating them (shadow prices).

The new methodology is better because we no longer have to convert questionable Soviet ruble data to dollars at an overvalued official exchange rate. Criticism of our previous estimates often focused on the exchange rate problem:

Sergo Mikoyan, former editor of the leading Soviet journal on Latin America, has argued, for example, that our aid estimates were overstated for tins reason. Our new methodology eliminates tins problem, although because Soviet intermediate and manufactured exports to Cuba probably are lower quality than comparable goods trading on the world market, our estimated aid numbers could soil overvalue some Soviet exports.

Soviet Aid Falling Dramatically

Ironically, the development of the new methodology coincides with the onset of precipitous declines io Soviet economic assistance.1 Soviet-Cuban tradeone-year pact negotiated late last year-sharply reduced Moscow's export commitments. The Soviet's own mounting economic problems are making it impossible for Moscow to honor even its scaled back aid program.

o Oil shipments, for example, will probably be no moreillion tons this year,ramatic drop from the approximatelyillion tons delivered annually60 and well short of theillion tons promised.

o The number of merchants ships departing Soviet Black Sea ports witb non-oil exports for Cuba has droppedercent

o Various reports indicate Havana has been increasingly buying wheat on the world market probably because the Soviets have not been able to meet agreed-upon deliveries.

We believe that Soviet economic assistance to Cuba will dry up completely next year. It is likely that the harsh economic realities in the republics will largely dictate the shape of the economic relationship that will be redefined over the coming months.

o Id the wake of the failed coup, Castro's strongest supporters in Moscow have been purged and many of the new powerwielders apparently believe that the Soviet Union paid toorice for propping up his regime.

o Leaders of the republics will become even more preoccupied with internal political aaa economic problems; some, mduding Boris Yeltsin, already have indicated that thev favor ending economic aid to

o Havana's inability to pay its debt to the Soviet Union-estimated to be highiilion-wiU further disindine republic leaders fromcontinuing to subsidize Cuba.

Nonetheless, we believe Soviet trade with Cuba willat substantially reduced levels-because Cuba and tbe republics need each other's goods. Cuban trade officials have already worked out some arrangements with several republics and will be scrambling to work out new deals as1 agreement lapses.

o The republics are likely to insisttrictly cash and carry commerdal basis or on barter agreements since they, like the Cubans, arc strappedfor hard currency.

o In particular, republic leaders are likely to peg the value of Cuban sugar at the world market rate-currently about nine cents per pound-rather than theents conceded in1 trade agreement

Damaging Impact on Cuban Economy

The substantial drop in Soviet economic aid and trade isramatic, deleterious impact on Cuba's economy. We believe economic aaivity-which declined an estimated five percents likely to drop by at least anotherercent thisotal cutoff of

Soviet economic assistance would likely reduce economy activity next year to no more than two-thirds ot itsevel.

The economic shocks are being felt in all sectors.

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shut down or are experiencing slowdowns, induding the huge nickel processing plant at Moa and tbe major steel plant In Havana.

ite Castro's highly toutedrogram, planned in production of pork, chicken, eggs, and milk have not materialized and Havana isnough to cover the in imports of these traditional staples of the Cuban diet

o Even Cuban sugar production is likely to steadily decline if Havana is forced to trade at world market prices; many of Cuba's inefficient sugar mills could not operate profitably at market prices. Output is declining for other reasons as welL Thisillion tons were harvested, but next year's sugar crop will probably fall to aboutillion tons.

Castro's limited Options

Castro is unlikely to adopt meaningful economic reforms to cope with the crisis. He has been preparing the country over the last few years for sharply reduced Soviet aid, initially through the draconian "Special Period in Peaceume" and now the even more severe "Zeron the short term the latter plan calls for:

o Further reductions of imports and even more stringent austerity measures at home.

o Increasing use of "agricultural brigades" to absorb unemployed industrial workers and increase food production.

o Promoting tourism to gamer hard currency.

Implications of the "Zero Option"

Cuba's sharply declining living standards will worsen significantly without Soviet economic aid. Non-sugar agricultural output in particular is likely to decline under the Zero Option plan as cost-cutting measures take their toll on important Inputs such as feed, fertilizers, and farm machinery.

Nonetheless, the Intelligence Community believes that Castro can fill Cuba's basic nutritional requirements in the short term. With annual exports worth approximately S3 billion, the regime should have sufficient hard currency to maintain imports of foodstuffs near traditional levels0 million).

We believe that the deterioration of the Cuban economy and quality of life under the Zero Option plan will further undennioe the legitimacy of the Castro regime at home and abroad, and that the expected cutoff of Soviet aid will substantially increase the prospects for regime threatening political instability.

Textbox: Declining Soviet Military Assistance

Soviet military deliveries dropped by more thanercent during the first half of this year, and the number Soviet mOitary advisors has been cut in half to. Although wc can't say exactly when, we believe the Soviet center will begin removing the Soviet brigade, both for cost saving reasons andesture to the United States. Tbe SIGlNT site at Loudres might also be closed, but more likely it will be mamtained until the new center's military policies are more clearly defined The Intelligence Community believes that Castro, antidpating the withdrawal of the Soviet military presence and the end to both economic and military aid, could move preemptively byoviet withdrawal from tbe island.

Original document.

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