The Cuban Money Crisis

The Cuban Money Crisis
The biggest change to the island's economy isn't the thaw in U.S.-Cuba
relations
April 1, 2015
by Patrick Symmes

The currency crisis starts about 75 feet into Cuba. I land in the late
afternoon and, after clearing customs, step into the busy arrivals hall
of Havana's airport looking for help. I ask a woman in a gray,
military-like uniform where I can change money. "Follow me," she says.

But she doesn't turn left, toward the airport's exchange kiosk. Called
cadecas, these government-run currency shops are the only legal way,
along with banks, to swap your foreign money for Cuba's tourist tender,
the CUC. Instead, my guide turns right and only comes clean when we
reach a quiet area at the top of an escalator. "The official rate is 87
for a hundred," she whispers, meaning CUCs to dollars. "I'm giving you
90. So it's a good deal for you."

I want to convert $500, and she doesn't blink an eye. "Go in the men's
room and count your money out," she instructs. "I'll do the same in the
ladies room."

The bathroom is crowded, with not one but two staff and the usual
traffic of an airport in the evening. There's no toilet paper. In an
unlit stall I try counting to 25 while laying $20 bills on my knees.
There's an urgent knock, and under the door I see high heels. "I'm still
counting," I say.

She's back two minutes later and pushes her way into my stall. We trade
stacks, count, and the tryst is over. For my $500, I get 450 CUCs, the
currency that's been required for the purchase of almost anything
important in Cuba since 1994. CUCs aren't paid to Cubans; islanders
receive their wages in a different currency, the grubby national peso
that features Che Guevara's face, among others, but is worth just 1/25th
as much as a CUC. Issued in shades of citrus and berry, the
CUC—dollarized, tourist-friendly money—has for 21 years been the key to
a better life in Cuba, as well as a stinging reminder of the difference
between the haves and the have-nots. But that's about to change: Cuba is
going to kill the CUC. Described as a matter of fairness by President
Raúl Castro, the end of the two-currency system is also the key to
overhauling the uniquely incompetent and centrally planned chaos machine
that is the Cuban economy.

Even in Cuba there are markets, and the effects of Castro's October
announcement of a five-step plan for phasing out the CUC are already
rippling out to every wallet in the country. The government has issued
notifications and price conversion charts, and introduced new, larger
bills to supplement the low-value national peso. Over the next year, the
CUC will be invalidated—what Cuban economists call Day Zero—and then, in
steps four and five, the regular Cuban peso will become exchangeable and
be floated against a basket of five currencies: the yuan, the euro, the
U.S. dollar, and two others to be named later.

Thanks to the expected normalization of relations with the U.S.,
tourism, already the engine of Cuba's current economic boom, is expected
to grow enormously—though by this time next year foreigners will be
required to negotiate their visits with mounds of regular pesos. Raúl
Castro is effectively gambling that he can release some control over the
economy in exchange for growth, ensuring the regime's survival.

The reality, however, may be anything but orderly. During my visit, I
witness the hoarding of dollars, an unstable black market, and a deep
distrust of the government's financial speculations. Get out of CUCs,
the rumors urge, and into dollars. For a 3 percent spread, a woman will
even follow you into a bathroom stall.

In January 1961, a cargo ship arrived in the harbor of Santiago de Cuba
bearing a load of freshly minted cash. Cuba's pre-revolutionary peso had
been stable and valuable for decades, a source of patriotic pride.
Overnight, the Cuban revolution invalidated the old peso and replaced it
with new bills, signed by Che Guevara and worth what the government said
they were worth. The gesture sidelined opponents, reduced the
independence of the professional and middle classes, and effectively
seized the island's remaining wealth in one gesture. In 1967, when Che
died, it was his face that went on the currency, memorably gracing a
3-peso note that would get you lunch and a drink. Today that same bill
is worth 12¢.

The end of Soviet subsidies in 1991 brought real economic desperation to
Cuba. Dollars were traded on the black market. (In a dark Havana alley,
I once got 125 pesos for a single greenback in a hurried transaction
with a frightened man.) By 1994, in an effort to co-opt the black
markets and once again take hold of the island's resources, the
government introduced the CUC. Initially this was strictly for tourists,
the only legal tender for all those mojitos and langoustines. The CUC
was pegged at 1:1 with the U.S. dollar, and just the commissions on
exchanging it—up to 20 percent—earned the Cuban government billions a year.

The CUC turned tourism into a lucrative lifeline during the 1990s, and
at first only a few essential imports—shoes, soap, tires—were sold to
Cubans in CUCs, at a few, heavily guarded stores. Today those misnamed
"dollar stores" exist in every neighborhood, and the CUC, first intended
to insulate Cubans from capitalism, is the only way to buy the majority
of consumer goods.

This is the Cuban dilemma: Salaries are paid in ordinary pesos, and
average just $20 a month, even though the cost of survival runs around
$50 a month, and must be paid for with CUCs at government stores that,
until now, accepted nothing else. As crazily inefficient as the existing
two-currency system appears, it has allowed the government to maintain
near-total dominance of the economy. The Cuban revolution has always
viewed money as a problem, not a solution. That's why the peso of the
old republic had to be destroyed overnight in 1961. Having money let
people be independent and operate outside the system. "It's part of the
DNA that Fidel imprinted on the revolution," notes Ted Henken, a
sociologist at Baruch College who has specialized in the island.

What the government has finally grasped is that the two-currency system
has become economically and politically unsustainable. To get around it,
Cubans steal state resources, work black market jobs, and even arbitrage
the price differential between mangoes at opposite ends of the country.
"Those in the peso-only economy are completely dependent on the
government, which is in control of more than 85 percent of the total
economy," says John Kavulich, president of the U.S.-Cuba Trade and
Economic Council in New York. For the citizenry to "have a legitimate
stake in the economy," he notes, there should be one currency, used for
salaries and all stores, and traded openly. "It needs to happen,"
Kavulich says.

No política. That's what Yamil Alvarez Torres says as he settles onto a
hotel sofa in Old Havana, his Under Armour socks showing a fashionable
amount of ankle from beneath pressed jeans and a striped dress shirt.
Alvarez looks the part of the new Cuban entrepreneur, a successful
restaurant owner who has bourgeois hobbies—dogs and free diving—and an
almost unlimited confidence in the future. But no politics. Like most
Cubans, he avoids talking or even thinking about the nation's closed and
secretive political system too much.

Havana today is in physical bloom. A gallon of paint costs 30 percent of
a typical monthly salary, yet half the houses in the city seem freshly
painted. The once-ubiquitous and fuming thunder chariots of old Detroit
are either shined up with new chrome and paint or, more often, sidelined
by more recent and reliable Korean and Chinese vehicles. The people I'd
known on the edge of starvation over the last 20 years of visiting are
now fighting the creep of their waistlines and the return of pastries
and deep-fried everything at street-corner kiosks. Even in 1991, Cuba
seemed more open than it was, an island without barbed wire or machine
guns, the friendly blue ocean serving as its Berlin Wall. Now the
openness is tangible: In December, Cuba and the U.S. announced that the
two intend to reestablish relations after more than four decades of
enmity. On Havana's streets, there's a charge of anticipation, and one
senses a people eager to embrace the world.

Until a few years ago, Cubans were not allowed to open private businesses.
"It's getting easier and easier to do business in Havana," Alvarez tells
me. "If you get your logistics worked out, you can do it." I'd first
visited his restaurant, Los Mercaderes, two years before, when he'd
opened it as a paladar, or home restaurant, and the place had an empty,
tentative feel. Now he has 50 employees and full tables every night,
with musicians treading out jazz and Buena Vista Social Club hits from a
tiny balcony; he and his wife have moved to another property.

He's nonplussed about the currency change: "If you are running a
business and doing well, you are going to do well with one currency or
two. ... Honestly, I believe that anything you do efficiently and
professionally is going to succeed in Cuba."

Efficiency and professionalism require reversing decades of perverse
Cuban incentives, however. Most waiters are state-trained and paid in
worthless pesos: They often spend more time on break, or talking to
friends in the street, than attending to diners. "They expect to have
their job forever," Alvarez says. "They get used to being bad." So he
hires blank slates: English-speaking college grads, many of whom have
never seen the inside of a nice restaurant before. "The main thing,"
Alvarez says, "is we want zero experience."

He sounds optimistic. "Very," he says. "There are over 250,000
entrepreneurs in Cuba since the new opportunities. … This is a door
opening that isn't going to close."

If the opening has an official advocate, it's Omar Everleny, the lead
economist at the Center for the Study of the Cuban Economy. The center
is in a onetime private residence in an elegant Havana neighborhood,
surrounded by embassies. Despite arriving at the building with an
appointment at 4 p.m., I find it empty; the next morning Everleny meets
me in the library, amid the smell of decaying paper, to walk through the
slow death of the CUC and the likely benefits for Cuba.

Everleny, like many Cubans, can recite the exact date economic reforms
began: Sept. 9, 2010. Raúl Castro had assumed control in 2006, during
his brother's gastrointestinal illness. But his official promotion to
leadership took two more years, and not till the fall of 2010 did he
spell out reforms that expanded self-employment, removed limits on
hiring by small businesses, and protected foreign investors from
expropriation. Joint-venture hotels are routine now, with 60,000 rooms
available. A new container port at Mariel, built by the Brazilian
government, has created export capacity for a country that exports very
little. More important, Brazilian President Dilma Rousseff has gambled
that pharmaceutical production and other tightly controlled businesses
can thrive here.

The most probable scenario is that Cuba will reluctantly follow the
China model. Cuba isn't embracing freewheeling capitalism—Cubans are
still allowed only one business each and are hemmed in on all sides by
monopoly controls—but the back streets of Havana reminded me of no place
more than the grim but awakening Beijing of 1987, when the People's
Republic also had two currencies. Cuba limits self-employment to 201
categories, like Doll and Toy Repair (No. 128) and Breeder/Seller of
Pets (No. 26). Even so, the number of licensed entrepreneurs has grown
from 140,000 in 2010 to more than half a million today. Unlike a
previous wave of self-employment in the 1990s, which was limited to
survival-oriented trades like knife-sharpening (No. 6) or tire repair
(No. 113), about half of today's licensed businesspeople are real
entrepreneurs, concentrated heavily in tourism and restaurants but
including taxi drivers, transport companies, clothing shops,
cooperatives producing baby clothes, and lots of construction.

Raúl Castro has meanwhile removed a series of prohibitions that
infuriated Cubans: They can now own cell phones, buy and sell their
houses, and even stay in the hard-currency hotels (817,000 did last
year) that were once the symbol of foreign privilege. Raúl has also
loosened, if not released, his grip on expression. Dissidents and regime
opponents who were long blocked from leaving the country are now
routinely seen at conferences in Miami, New York, and Brussels. In the
1970s, Cuba had some 15,000 political prisoners; today that number is
between 50 and 60, according to the Cuban Commission for Human Rights
and National Reconciliation.

The currency change is already happening, Everleny notes. Step one was
to tell people, to prepare them psychologically for the coming
transition. Step two, which began a week before my February arrival, was
to roll out new, larger-denomination peso bills, so that people could
pay higher prices without carrying a backpack.

The timing of the remaining three steps remains vague, in the Cuban way.
Raúl had said in his speech that the two currencies had to be reconciled
before the next Communist Party congress. That's scheduled for April 16,
2016. The only thing known was that Day Zero would come before then.

To see how Raúl's changes and the looming currency conversion are
playing out, I travel to Sancti Spíritus, a colonial town in central
Cuba I hadn't seen for 24 years. I'd hitchhiked there in 1991, a two-day
epic that required waiting under bridges with crowds of kind but needy
Cubans and a return trip on a dilapidated train that stopped randomly
for hours. This time I buy a seat in an unmarked Moscovich, a legal
private taxi that roars inland, stopping only to slip behind a barn to
buy black-market gasoline, fuel that was manually cranked into our tank.
"Sorry about the smell," my driver says, "but this is the only way."

Six hours of driving sweep me into the flat, colonnaded city. Many
things are still as I remember them. The streets are sleepy, the bars
bleak, and the local bus network consists of eight-person carts towed by
horse. Yet even here there's fresh paint, a computer repair business,
and private furniture shops. I try to pay for ice cream with CUCs,
making the woman laugh; the price is in pesos, 1/25th as much. The
reverse happens at night, in the town's best restaurant. Because
everyone in the place is Cuban, I expect grim portions and pesos. But
the shrimp are superb, a sommelier shows off a genuine wine cellar, and
the Cubans all pay hard-currency prices, half a month's salary on beer,
beef, and watching baseball. In two decades of visiting, this is the
first time I've shared a real restaurant with Cubans.

In the morning I go to buy a refrigerator. Home appliances are one of
the most desirable items in Cuba, but their sale is restricted to a
narrow range of state stores called electrohogars, and Sancti Spíritus
has two of them off the town plaza. One is shut, the other sleepy and
small, with more floor space given over to selling ice cream and soda
than consumer durables. But in one corner are hair curlers, electric
frying pans, all-in-one laundry machines, and a few Daewoo
refrigerators. Many Cubans are eager to replace their 1950s fridges, but
buying a full-size model means coming up with 910.65 CUC. At the
bathroom-stall conversion rate, that's $1,001, or twice the price of a
similar model on Amazon.com. It's also—as a new price tag says—22,675
pesos, or about four years' worth of the average Cuban salary. "If
you're going to buy a refrigerator," Everleny tells me, "you're not
going to pay for it with 20s. You'd have to carry a trunk." The release
of new, larger denominations of standard peso bills is meant to smooth
such transactions, but a year from now, with the peso possibly floating
against a basket of currencies, there's a risk that hidden inflation and
exaggerated purchasing power could surface. Many people are hoarding
hundred-dollar bills simply to be safe.

On the way back to Havana, I ride on a CUC bus. In the past, regular
people had no choice but to ride peso buses that were scarce, slow, and
crowded. For 23 CUCs I get a seat on a punctual express that fills up
mainly with foreign tourists but also some Cubans, the kind who have
more than an average month's salary to spend on a bus ticket. We pass
quickly through a string of grim cities—Colón, Cárdenas, Matanzas—all
poor and unvarnished yet bustling with shops and commerce I've never
seen before in Cuba. Like a vacuum, the unmet demand of Cubans is
pulling reform to the farthest corners of the island.

Cuba has had a mixed economy for a long time: socialist until the food
ran out, free-market thereafter. Critically, some of those markets are
now legal and enriching, like the new real estate market that has seen
houses in prime parts of Havana trade for hundreds of thousands of
dollars (or CUCs, actually). There are also smaller, more clandestine
markets, even for things like data. Many thousands of Cubans pay a fee
to get what's called el paquete, an assortment of films, TV shows, video
games, glossy magazines, and books from inside and outside the country.
Cuba is ranked alongside Iran and North Korea for Internet censorship,
with only a heavily filtered intranet available at an hourly price. El
paquete is therefore a black-market delivery system, full of
inefficiencies. The information is hand-carried into the country once a
month, and the collection of American, Spanish, Mexican, and even Cuban
media is passed around Havana on a terabyte-sized drive, or shared via
illegal Wi-Fi networks in private homes.

The blogger Yoani Sanchez points out that this black market in
information sticks to a familiar Cuban rule—nothing in el paquete should
be explicitly political, to avoid drawing attention. But even the
apolitical is subversive here, she says; when Cuban readers flock to
lifestyle articles and glossy celebrity magazine covers, they're
imagining themselves in a different country. Everything they see in this
digital realm—churros recipes, listicles on the secrets of
entrepreneurial thinking—is part of a different state of mind, a
terabyte of autonomy and desire.

Even though the economy looks better than at any time since 1991, Cuba
remains deeply, dangerously reliant on Venezuela's collapsing economy.
The heirs of Hugo Chávez have kept the lights on in Havana by granting
Cuba 100,000 barrels of oil a day at about half the market price. That
effectively hides 45 percent of the island's trade deficit. Venezuela
also pays $5.5 billion a year for the almost 40,000 Cuban medical
professionals who now make up half of its health-care personnel. Neither
support can endure unchanged.

When MasterCard announced it would begin accepting charges from Cuba on
March 1, the Cuban government slapped that down. U.S. airlines can now
start flying directly to Cuba, or so Washington says—but there will
likely be years of negotiations over safety, landing fees, and the
reciprocal right of Cubana, a state-controlled, military-operated
airline, to land its planes in Miami. The last thing on the Cuban list
of reforms is sharing power. The Communist Party reflexively insists
that nothing will change in Cuba, ever, but Obama's rapprochement is
certain to have an effect. Dissidents, the politically ambitious, and
human-rights activists believe that some day they'll be legally allowed
to exist and their now-secretive work can become routine. The death of
the CUC may turn out to be Day Zero for more than funny money.

Source: Cuba's New Money - Bloomberg Business -
http://www.bloomberg.com/news/features/2015-04-01/cuba-s-new-money