A Cuban pilgrim participates in the San Lazaro procession at the El Rincón church in Havana on December 16, 2022.
Yamil Lage | AFP | Getty Images
Bribery allegations, a jailed Cuban bank employee and Interpol are all featured in a high-profile case against the Cuban government due to begin on Monday in the United Kingdom’s High Court.
A legal battle has been fought over part of Cuba’s unpaid commercial debt since the 1980s. If Cuba loses, it could end up costing the island nation billions of dollars in long-overdue payments, and in the worst case, seize government assets like oil tankers and incoming wire transfers.
The investment fund CRF1, originally called the Cuba Recovery Fund, is suing Cuba for approximately $72 million. principal and arrears on two loans she now owns. They were originally lent to the Caribbean island nation by European commercial banks in the 1980s and were denominated in Deutsche Marks, a currency that no longer exists.
This is the first time that Cuba is facing legal action over outstanding commercial loans from the 1970s and 1980s, which are valued at around $7 billion. If CRF wins this case on this small portion of this debt, it could lead to further claims from creditors with claims running into the billions. Any unpaid judgments may result in forfeiture of assets.
If they don’t reach an agreement, Cuba could face yet another litigation over whether it should finally pay. If the CRF is successful, it could lead to many other lenders filing lawsuits, with claims rising into the billions.
Cuba will not be able to borrow on the international capital markets until its debts are repaid. According to the World Bank, Cuba’s 2020 gross domestic product was $107 billion, slightly more than New York City’s budget. The country has managed to survive for decades thanks to the generosity of sympathetic governments: the former Soviet Union, Venezuela and China. But as Venezuela struggles financially and China’s economy weakens, those lifelines are looking increasingly unreliable.
Due to the US embargo against Cuba, US investors are prohibited from owning and trading Cuban debt, which is frustrating for some hedge fund managers in US frontier markets. seat at the future negotiating table.
An old American car drives past the Floridita bar in Havana on December 27, 2022.
Adalberto Roque | AFP | Getty Images
In addition to commercial debt, there are about 6,000 outstanding claims from Americans and American companies whose property was confiscated by the Cuban government after former leader Fidel Castro came to power in a 1959 coup.
John Kavulich, longtime head of the US-Cuban Economic and Trade Council, a private, impartial non-profit organization, says the lawsuit “could be stimulating” for the US and Cuban administrations “to negotiate settlements of 5,913 claims worth $1.9 billion.” “
The trial is expected to last eight days. It will include remote testimony from imprisoned former Banco Nacional de Cuba employee Raul Eugenio Oliver Lozano.
According to documents filed in the case, Lozano is serving a 13-year prison sentence after he was convicted in Cuba for accepting more than $25,000 in bribes in exchange for paperwork that allowed pending CRF loans from Chinese companies to be rescheduled. ICBC Standard Bank.
In documents filed with the court, CRF claims that the bribery claims are “obscene” and that the Cuban government punished Lozano with a railroad to not repay loans. Human rights organizations have long criticized Cuba for its arbitrary detentions and lack of the rule of law. Both Amnesty International and Human Rights Watch describe it as one of the most repressive regimes in the world.
There are other costs to consider as well. To date, the Cuban government has spent about $3 million in legal fees in its defense, while the plaintiffs have spent about $2.6 million. In the UK, the loser pays the winner’s legal costs, so one side will lose nearly $6 million.
Cuban officials and their lawyers declined to comment.
Jeet Gordhandas is also expected to testify. He is a representative of the CRF, who, according to the plaintiffs, was not allowed to enter Mexico after the Cuban government issued a “red notice” through Interpol for his arrest, alleging that he initiated a bribe.
Cuban boxers prepare to fight in the first official women’s boxing program in Cuba at the Giraldo Córdoba boxing school in Havana on December 17, 2022.
Yamil Lage | AFP | Getty Images
Judging by the latest documents, the Cuban government dropped the accusation of bribery. Instead, he argues that the bank’s executives, who facilitated the assignment of the debt, did not have the authority to do so.
Cuba also claims that CRF, registered in the Cayman Islands, is “a vulture fund that invests in Cuba’s distressed sovereign debt for enforcement purposes.” David Charters, chairman of CRF, countered: “Calling us a vulture fund is a gross misrepresentation of our information.”
Meanwhile, CRF says in court documents that it first approached Cuba 10 years ago to pay off a debt, but was ignored. The foundation also says it did not file a lawsuit until it made several attempts to meet with Cuban authorities over the decade.
In 2018, the CRF documents say, the fund offered the Cuban government a better deal than the one the country made in 2015 with bilateral creditors for billions of outstanding debts. Cuba also ignored this initiative, according to CRF. Bilateral loans are interstate loans.
CRF would rather not go to court, Charters said in an interview days before the trial.
“We are committed to engaging with Cuba even at this late stage. Even today we are ready for negotiations,” he said. “You make offers and nothing happens, you are either ignored or rejected, so what do you do? It’s been a decade.”
Overdue loans are traded on the secondary market. There are investors who specialize in buying them at discounts to the face value of the loan and then negotiating with the relevant government to finally settle them. Usually this is a discount to the nominal value and some part of the overdue interest.
Often the settlement is not cash, but some other type of long-term financial instrument. One example is the GDP warrant, which is paid based on a country’s GDP growth rate over an extended period.
GDP warrants were used in the Greek debt restructuring in 2012. Sometimes debts are settled through a debt-for-equity swap in which the creditor receives a concession or ownership of public property such as an airport or port, and the creditors receive a share of the proceeds from the assets.
For decades, Cuban debt has traded at between 8 and 10 cents on the dollar, with occasional spikes triggered by events such as the death of former Cuban dictator Fidel Castro in 2016. or a temporary thaw in US-Cuban relations under then-President Barack Obama in 2014 in the hope that a settlement would be more likely.
Getting paid on very old, past due debt is not unprecedented. Iraqi debt traded at between 8 and 10 cents on the dollar for a decade, then stalled at about 32 cents on the dollar after the US invasion in 2003.
Even though Cuban debt is almost 40 years old, there is a precedent for bondholders waiting even longer. Over 300,000 holders Tsarist-era Russian bonds that the Bolsheviks defaulted on in 1917 after the revolution were paid off in 2000.
Michelle Caruso-Cabrera is a CNBC correspondent with 30 years of experience in finance, economic development and communications.