Here’s what you need to know about a blockbuster lawsuit over Cuba’s debt

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A Cuban pilgrim participates in the San Lazaro procession at Havana’s El Rincon Church, on December 16, 2022.

Yamil Lage | UKTN | Getty Images

Bribery charges, an imprisoned Cuban bank official and Interpol are all part of a case against the Cuban government set to begin in the UK’s Supreme Court on Monday.

The legal battle is over part of Cuba’s unpaid trade debt from the 1980s. If Cuba loses, it could end up costing the island nation billions in long-overdue payments — and, in the worst case scenario, lead to the seizure of state assets like oil tankers and incoming remittances.

Investment fund CRF1, originally called Cuba Recovery Fund, is suing Cuba for about $72 million in principal and interest in arrears on two loans it now owns. They were originally granted to the Caribbean island by European commercial banks in the 1980s and denominated in Deutsche Deutschmarks, a currency that no longer exists.

This is the first time that Cuba is facing legal action for an estimated $7 billion in outstanding commercial loans from the 1970s and 1980s. If CRF wins this case for this small portion of that debt, it could lead to further litigation from creditors with claims running into the billions. Unpaid judgments can lead to asset seizures.

If they don’t reach an agreement, Cuba could face another lawsuit over whether it eventually has to pay. If CRF is successful, it could lead many other creditors to sue, with claims running into the billions.

Cuba would not be able to borrow on international capital markets until its debts are paid off. According to the World Bank, Cuba’s gross domestic product was $107 billion in 2020, slightly more than New York City’s budget. The country has managed to survive for decades on the help of other sympathetic governments: the former Soviet Union, Venezuela and China. But with Venezuela under financial strain and China facing a weakening economy, those lifelines seem increasingly unreliable.

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Due to the US embargo against Cuba, US investors are prohibited from owning and trading Cuban debt, which frustrates some hedge fund managers in the US frontier market. take a seat at a future negotiating table.

On December 27, 2022, an old American car passes the Floridita bar in Havana.

Adalberto Roque | UKTN | Getty Images

Commercial debts aside, there are still nearly 6,000 outstanding claims from Americans and American companies whose property was seized by the Cuban government after former leader Fidel Castro seized power in a 1959 coup.

John Kavulich, the longtime head of the US-Cuba Trade and Economic Council, a private, non-partisan nonprofit, says the lawsuit “could provide an incentive” for the US and Cuban governments “to negotiate a settlement for the 5,913 claims worth $1.9 billion.”

Details of the case

The process is expected to take eight days. It features remote testimony from an imprisoned former Banco Nacional de Cuba employee, Raul Eugenio Olivera Lozano.

According to documents filed in the case, Lozano is serving a 13-year prison sentence after being convicted in Cuba of taking a bribe of more than $25,000 in exchange for processing paperwork that allowed the loans in question to be reallocated to CRF of Chinese owned ICBC Standard Bank.

In documents filed with the court, CRF says the bribery claims are “gross” and that Lozano was defrauded by the Cuban government to avoid repaying the loans. Human rights organizations have long criticized Cuba for arbitrary detention and lax rule of law. Both Amnesty International and Human Rights Watch describe it as one of the most repressive regimes in the world.

There are also other costs to consider. So far, the Cuban government has spent about $3 million on legal fees in defense, and the plaintiffs have spent about $2.6 million. In the UK, the loser pays the winner’s legal fees, so one of the parties will lose nearly $6 million.

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Cuban officials and their lawyers declined to comment.

Jeet Gordhandas is also expected to testify. He is a CRF representative who, according to prosecutors, was denied entry Mexico after the Cuban government issued a “red notice” through Interpol for his arrest, claiming he initiated the bribe.

Cuban boxers prepare for their fights in Cuba’s first official women’s boxing program at Giraldo Cordova boxing school in Havana, on Dec. 17, 2022.

Yamil Lage | UKTN | Getty Images

In more recent files, the Cuban government appears to have backed away from the bribery charge. Instead, it is alleged that the bank executives who facilitated the debt rescheduling did not have the authority to do so.

Cuba also states that CRF, which is registered in the Cayman Islands, is a “vulture fund that invests in distressed Cuban sovereign debt for enforcement purposes.” CRF chairman David Charters pushed back: “To characterize us as a vulture fund is a gross misrepresentation of us.”

Meanwhile, in court filings, CRF says it first contacted Cuba to clear the debt 10 years ago, but was ignored. The fund also says it has not filed a lawsuit until it has made several attempts to meet with Cuban authorities over the past decade.

In 2018, CRF says in filings, the fund offered the Cuban government a better deal than the country struck in 2015 with bilateral creditors for billions in unpaid debt. Cuba also ignored that rapprochement, according to CRF. Bilateral loans are loans from government to government.

CRF prefers not to go to court, Charters said in an interview days before the trial.

“We are trying to involve Cuba even at this late stage. Even today we are ready to talk,” he said. “You make offers and nothing happens, you get ignored or rejected, so what do you do? It’s been 10 years.”

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What happens to bad old debts

Defaulted loans are traded on the secondary market. There are investors who specialize in buying them at a discount to the face value of the loan and then negotiating with the appropriate government to eventually settle them. Usually it is at a discount to face value and a portion of interest in arrears.

Often the settlement is not in the form of cash, but rather in another type of long-term financial instrument. An example is a GDP warrant, which pays out based on the growth rate of a country’s GDP over a longer period of time.

GDP warrants were used in the Greek debt restructuring in 2012. Sometimes debts are settled through a debt-for-equity swap, where the creditor receives a concession or property of government property, such as an airport or a port, and the creditors receive a portion of the income generated by the assets.

For decades, Cuban debt has traded around 8 to 10 cents against the dollar, with occasional spikes due to events such as the death of former Cuban dictator Fidel Castro in 2016 or the temporary thawing of US-Cuba relations under then-President Barack Obama in 2014, hoping a settlement was more likely.

Getting paid on very old, defaulting debts is not without precedent. Iraqi debt traded between 8 and 10 cents per dollar for a decade and settled at about 32 cents per dollar after the US invasion in 2003.

While Cuba’s defaulted debt is nearly 40 years old, there is a precedent for bondholders waiting even longer. More than 300,000 holders of Tsarist-era Russian bonds, which the Bolsheviks defaulted on in 1917 after the revolution, received payment in 2000.

Michelle Caruso-Cabrera, a UKTN contributor, has 30 years of experience at the intersection of finance, economic development and communications.

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