The US and Cuba announced an agreement between the two countries that will be a first step toward normalizing relations. PICTURED: April 25, 2000 - Miami, Florida, U.S. - Protestors demonstrate against the U.S. government's raid on the Gonzalez home in Little Havana that resulted in the return of Elian Gonzalez to his father. Thousands of people waved flags and honked horns to express their anger with Washington's actions. (Credit Image: © Charles Trainor Jr/Miami Herald/TNS/ZUMA24.com)

In the last of a four-part series focused on frontier markets closed off by sanctions, Gavin Serkin talks with one of the few owners of Cuba’s defaulted debt, Julian Adams of Adelante Asset Management. The following is an edited transcript of his interview this week on the Emerging Opportunities show on Share Radio.

 

Gavin:

Given communist Cuba is under a U.S led embargo and has been since at least the 60’s, when and how did this debt originate and how did you get hold of it?

Julian:

The debt originated in the 1970s and was restructured in the 1980s when Latin America had its debt crisis, but since the mid-1980s there hasn’t been any money in Cuba. They had a ‘special period’ as they called it, when Russia cut off their sugar-for-oil deal that kept the country afloat in 1990. So basically there’s been no money paid on this debt since the 1980s, so it trades a little bit like a penny share.

So to start with we’ve been buying debt in the 8 to 10 cents-on-the-dollar-range, and things all changed just over a year ago on 17th December – 17D as they know it now in Cuba – with this opening up.

- Advertisement -

As you said, after 50 years of embargo – obviously it hasn’t worked. The Castro’s have outlasted 11 U.S presidents or whatever it is, so a change of policy is called for, and the U.S public now in polls support what Mr Obama is doing, and the easing of the embargo against Cuba.

Gavin:

So where are we now with sanctions? Which sanctions actually remain in place and which ones have been lifted?

Julian:

The US embargo itself is still in place – that takes an act of Congress to lift, so Mr Obama has changed the things he can do by executive order – so he’s taken Cuba off the list of states sponsoring terrorism, which makes it a lot easier to do banking operations, for example, with the country. He’s opened diplomatic relationships again with Cuba, with the US and Cuban embassies opened. The US are cutting a deal with US airlines to have direct flights. There are direct flights – charter flights, in fact there are about 10 a day apparently, just from Miami – but there are no scheduled flights yet, and also this will open up the opportunity for Cuban airlines to fly direct to the U.S.

Gavin:

So the economy is gradually opening up, and where does that leave the debt? What stage are you at as a debt holder with the government?

Julian:

The Cubans are gradually tidying up their balance sheet. They’ve got lots of old debts, which they need to resolve, and they can get good haircuts on that debt. For example, last month they did a deal with Paris Club, which is this set of sovereign nations that lend to emerging countries, and they got a 76% debt reduction. So, generally what happens is, after the Paris Club have tidied things up, then the Cubans will look to the private creditors, which was the old bank debt, which is us –known as a the London Club. What that means for the market price is that it goes up, in that scenario. For example, Cuban debt was trading a month ago at 25 cents, so up from 10 a year-and- bit ago, and as the Cubans decide to renegotiate their debt then the market continues to go up, as we’ve seen with Vietnam and other countries that had similar debt restructuring experiences.

Gavin:

What does the market look like? How much debt is there out there for individuals like yourself?

Julian:

There’s $1.2 billion of face value of this London Club debt, which is not a huge amount at all. The market itself is a little bit dysfunctional at the moment because it’s very hard to find a bank that will hold it for investors, so actually, the only way you can access the market is through a fund like ourselves, or the one or two other funds that are around, and there’s not a huge amount of transactions as a result of that.

Gavin:

What do you expect to be the timeline from here? When do you sit down for your chat with Raul and Fidel?

Julian:

Well, the next debt that the Cubans need to sort out is the US claims. These are basically all the assets that were seized by the Cubans after the revolution. There’s a list of these things in the US Treasury with about $1.9 billion of face value, and any sort of interest that happens to have accrued on those over the last 40 to 50 years. The American government can negotiate all these claims on behalf of the people, so they’ve had the first meeting around that. Interestingly, and not surprisingly perhaps, the Cubans claimed a higher amount in compensation for the embargo than was on the US claims, but still there does seem to be some sort of good will between the two sides and certainly motivation on both parts to cut a deal, because the Cuban embargo cannot be lifted until these claims are sorted out.

Gavin:

But does this depend on the U.S election? How big a role is the next President going to play in this and what’s the outlook there from the different candidates?

Julian:

For sure. Obama will go as far as he can before his term finishes, but that finishes in January next year, with the elections in November this year, so we are watching the elections with a huge amount of interest. As things stand, the candidate that we’d rather not see win, or even have the nomination, is Marco Rubio, who is a Cuban American from Florida, so he slightly panders to the Florida constituency.

Gavin:

So we have a Donald Trump supporter?

Julian:

Trump is fine. He loves casinos, he loves golf courses – all the potential is there in Cuba. And he’s already declared himself as enthusiastic behind what the Obama administration is doing towards Cuba.

Gavin:

Just take a step back from the debt market. As somebody who’s got a ringside seat of what’s going on through the debt market. How do you see Cuba evolving in terms of its economy? What will Cuba look like in five or 10 years?

Julian:

The thing with the revolution and the reforms that they’re undergoing is that the political idealism in Latin America certainly seems to slightly cloud the economic zeal.

The Vietnamese model is what the Cubans have said they’re trying to follow – but the Asians go a bit crackers when it comes to the economics, they let the free market just get on with it, but they manage to maintain a communist party in power like they did in Vietnam.

So for the Cubans, the ideal of staying in power as a party is very attractive, but what they have real trouble with is allowing the market to set prices and just to get on with it. So the actual reforms we’ve seen have been quite piecemeal – although as things evolve, it can accelerate.

Actually, what’s interesting is in the last couple of years, we’ve noticed a real local market evolving in Cuba, so Cubans themselves have money now. The entrepreneurs in Cuba have money, and there’s a real local market developing.

 

 

To listen to Emerging Opportunities show on Share Radio, click here

Frontera’s stories on sanctioned frontier markets:

Frontera Deep Dive: Itching to Invest in Iran?

Iran Abuzz With Secret Deals as Investors Prepare for Sanctions Lift-Off

Burmese Day: Signs Are Aung San Suu Kyi Won’t Disappoint Myanmar

The Last Frontier: What I Un-Learned In North Korea

- Advertisement -