Exploring the Legal Battle Surrounding Cuba's Debt Obligations

The high-stakes case against the Cuban government is set to begin on Monday in the United Kingdom’s High Court. The case revolves around accusations of bribery, and an imprisoned Cuban bank official who is working with Interpol.

‍
The legal battle is over a portion of Cuba's unpaid commercial debt dating back to the 1980s. If Cuba loses, it could ultimately cost the island nation billions in long overdue payments. In a worst-case scenario, this could lead to the seizure of government-owned assets such as oil tankers and in-bound wire transfers.

‍
Investment fund CRF1 is suing Cuba for roughly $72 million in principal and past due interest on two loans it now owns. The loans were originally granted to the Caribbean island nation by European commercial banks in the 1980s, and were denominated in German Deutschmarks, a currency that no longer exists.
This is the first time Cuba is facing legal action for what is estimated to be about $7 billion in outstanding commercial loans from the 1970s and 1980s. If CRF wins this case, it could pave the way for further lawsuits from creditors with claims totaling in the billions. Any unpaid judgments could lead to asset seizures.

‍
If Cuba and CRF don't reach a deal, Cuba could face another court battle over whether it would have to pay CRF. If CRF is successful, it could pave the way for other creditors to file suit, with claims potentially reaching into the billions.

‍
Cuba will not be able to take out loans from international capital markets until its debts are paid off. According to the World Bank, Cuba’s gross domestic product in 2020 was $107 billion, slightly larger than New York City’s budget. The country has managed to survive for decades with the help of other sympathetic governments: the former Soviet Union, Venezuela and China. But with Venezuela facing financial strain and China’s economy weakening, those lifelines are looking increasingly unreliable.
Some frontier-market hedge fund managers in the United States argue that holding Cuban debt would better serve U.S. foreign policy interests than the current embargo. They argue that owning Cuban debt would give Americans a seat at some future negotiating table.

‍
There are nearly 6,000 outstanding claims from Americans and American companies whose properties were confiscated by the Cuban government after Fidel Castro came to power in a coup in 1959. These claims go beyond the commercial debt and represent a significant loss for those affected.

‍
John Kavulich, who has been heading the U.S.-Cuba Trade and Economic Council for a long time, said that the lawsuit might have a stimulating effect on the U.S. and Cuban administrations so that they could negotiate a settlement for the 5,913 claims that are valued at $1.9 billion.
The trial is expected to last eight days and will feature remote testimony from Raul Eugenio Olivera Lozano, a former employee of the Banco Nacional de Cuba who is currently imprisoned.

‍
Lozano is currently serving a 13-year prison sentence after being convicted in Cuba for accepting bribes totaling more than $25,000 in exchange for processing paperwork that allowed loans to be reassigned from Chinese-owned ICBC Standard Bank to CRF.

‍
CRF has disputed the bribery claims made against Lozano, saying they are baseless and that he was unjustly detained by the Cuban government in order to avoid having to repay loans. Human rights organizations have long criticized Cuba for its arbitrary detention practices and lack of rule of law, with both Amnesty International and Human Rights Watch describing it as one of the most repressive regimes in the world.

‍
There are other costs to consider as well. The Cuban government has spent approximately $3 million on legal fees in its defense, while the plaintiffs have spent about $2.6 million. In the United Kingdom, the loser pays the winner's legal fees, so one of the parties will be out nearly $6 million. Cuban officials and their lawyers have not commented on the situation.

‍
Jeet Gordhandas is also expected to testify. He is a representative of CRF. The plaintiffs say that the Cuban government issued a "Red Notice" through Interpol for his arrest, claiming that he initiated the bribe, which prevented him from entering Mexico.

‍
In more recent filings, the Cuban government appears to have backed away from the bribery accusation. Instead, it is arguing that the bank executives who facilitated the reassignment of the debt did not have the authority to do so. This is a change in position from the Cuban government's previous stance, and it remains to be seen how this will affect the case going forward.

‍
Cuba has accused CRF, which is registered in the Cayman Islands, of being a "vulture fund" that invests in distressed Cuban sovereign debt for enforcement purposes. However, David Charters, the chairman of CRF, has denied these claims, stating that they are a gross misrepresentation of the company.
CRF says that it first attempted to settle its debt with Cuba 10 years ago, but that the Cuban authorities ignored its attempts. The fund also says that it made multiple attempts to meet with Cuban authorities over the past decade before finally filing suit.

‍
In 2018, the CRF offered the Cuban government a better deal than the one the country had struck with bilateral creditors for billions in unpaid debts. However, Cuba ignored this overture, according to CRF. Bilateral loans are government-to-government loans. Charters said in an interview that CRF would rather not go to court, just days before the trial. "We are still trying to engage Cuba, even though it may be too late," he said. "We are ready to talk, but we keep getting ignored or rebuffed. It's been a decade and we don't know what else to do."

‍
Loans that have defaulted trade on the secondary market. There are investors who specialize in buying them at a discount to the loan's face value and then negotiating with the government to settle them. Usually, the settlement is at a discount to face value and includes some portion of the past due interest.
Settlements are often not in the form of cash, but rather in some other type of long-term financial instrument. One example is a GDP warrant, which pays out based on the growth level of a country’s GDP over an extended period.

‍
GDP warrants were used in the Greek debt restructuring in 2012. Sometimes debts are settled via a debt-for-equity swap, in which the creditor receives a concession or ownership of a government-owned property such as an airport or a port, and the creditors receive a share of the revenues generated by the assets.
For decades, Cuban debt has traded at a discount, with occasional spikes driven by events such as the death of former Cuban dictator Fidel Castro in 2016 or the temporary thawing of U.S.-Cuba relations under then-President Barack Obama in 2014. Investors have held onto the debt in the hopes that a settlement was more likely.
There is precedent for getting paid on very old, defaulted debt. Iraqi debt traded between 8 and 10 cents on the dollar for a decade, and then settled for roughly 32 cents on the dollar after the U.S. invasion in 2003.

‍
Even though Cuba's defaulted debt is nearly 40 years old, there are precedents for bondholders waiting even longer. More than 300,000 holders of czarist-era Russian bonds, which the Bolsheviks defaulted on in 1917 after the revolution, received payment in 2000. This shows that it is possible for bondholders to receive payment even after many years have passed.