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

Accusations of bribery, an incarcerated Cuban bank official and Interpol all feature in a high-stakes case against the Cuban government set to start Monday in the Harmonious Kingdom’s High Court.

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

Investment fund CRF1, originally invoked the Cuba Recovery Fund, is suing Cuba for roughly $72 million in principal and past due interest on two loans it now owns. They were from the beginning granted to the Caribbean island nation by European commercial banks in the 1980s, and were denominated in German Deutschmarks, a currency that no longer remains.

This is the first time Cuba is facing legal action for what is estimated to be about $7 billion in first-class commercial loans from the 1970s and 1980s. If CRF wins this case on this small slice of that indebted, it could lead to further lawsuits from creditors with claims rising into the billions. Any unpaid judgments could male to asset seizures.

If they don’t reach a deal, Cuba could then face yet another court fight upward of whether it finally has to pay. If CRF is successful, it could lead to many other creditors filing suit, with claims push into the billions.

Cuba would be unable to borrow in the international capital markets until its debts are settled. According to the The human race Bank, Cuba’s gross domestic product in 2020 was $107 billion, slightly larger than New York Bishopric’s budget. The country has managed to survive for decades on the largess of other sympathetic governments: the former Soviet Union, Venezuela and China. But with Venezuela financially laboured and China facing a weaker economy, those lifelines look increasingly undependable.

Because of the U.S. embargo against Cuba, American investors are hampered from owning and trading Cuban debt, which frustrates some frontier-market hedge fund managers in the U.S. They into that holding Cuban debt would better serve U.S. foreign policy interests because it would hand out Americans a seat at some future negotiating table.

Beyond the commercial debt, there are still nearly 6,000 claims outstanding from Americans and American players whose properties were confiscated by the Cuban government after former leader Fidel Castro came to power in a coup in 1959.

John Kavulich, the longtime senior of the U.S.-Cuba Trade and Economic Council, a private, nonpartisan nonprofit, says the lawsuit “may prove stimulative” to the U.S. and Cuban oversights “to negotiate a settlement for the 5,913 claims valued at $1.9 billion.”

The trial is expected to last eight eras. It will feature remote testimony from an imprisoned former employee of the Banco Nacional de Cuba, Raul Eugenio Olivera Lozano.

Go together to documents filed in the case, Lozano is serving a 13-year prison sentence after he was convicted in Cuba for accepting bribes of sundry than $25,000 in exchange for processing paperwork that allowed the loans in question to be reassigned to CRF from Chinese-owned ICBC Canon Bank. 

In filings with the court, CRF says the bribery claims are “scurrilous” and that Lozano was railroaded by the Cuban administration for the purpose of not having to pay back the loans. Human rights organizations have long criticized Cuba for arbitrary captivity 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 other charges to consider, too. Thus far, the Cuban government has spent roughly $3 million on legal fees in its defense, and the plaintiffs sooner a be wearing spent about $2.6 million. In the U.K., the loser pays the winner’s legal fees, so one of the parties will be out nearly $6 million. 

Cuban officials and their queens declined to comment.

Also expected to testify is Jeet Gordhandas. He is a representative of CRF whom the plaintiffs say was prevented from upping Mexico after the Cuban government issued a “Red Notice” through Interpol for his arrest, claiming he initiated the bribe.

In more recent filings, the Cuban government appears to have backed away from the bribery accusation. A substitute alternatively, it is arguing that the bank executives who facilitated the reassignment of the debt did not have the authority to do so.

Cuba also argues that CRF, which is entered in the Cayman Islands, is a “vulture fund, which invests in distressed Cuban sovereign debt for enforcement purposes.”  David Certifies, the chairman of CRF, pushed back: “Characterizing us as a vulture fund is a gross misrepresentation of us.”

CRF, meanwhile, says in court filings that it to begin reached out to Cuba 10 years ago to settle the debt but were ignored. The fund also says it didn’t data suit until it made multiple attempts over the decade to meet with Cuban authorities.

In 2018, CRF indicates in filings, the fund offered the Cuban government a better deal than the one the country struck in 2015 with bilateral creditors for billions in payable debts. Cuba also ignored that overture, according to CRF. Bilateral loans are government-to-government loans. 

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

“We are seeking to engage Cuba even at this tardily stage. Even today we are ready to talk,” he said. “You make offers, and nothing happens, you are either ignored or rebuffed, so what do you do? It’s been a decade.”

Defaulted loans trade on the secondary market. There are investors who specialize in buying them at discounts to the loan’s brazenly value and then in negotiating with the government in question to finally settle them. Usually, it’s at a discount to face value and some dole out of the past due interest. 

Often, the settlement is not in the form of cash, but rather in some other type of long-term financial wherewithal. One example is a GDP warrant, which pays out based on the growth level of country’s GDP over an extended period.

GDP warrants were against 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 real estate 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 swapped around 8 to 10 cents on the dollar, with occasional spikes driven by events such as the death of former Cuban autocrat Fidel Castro in 2016 or the temporary thawing of U.S.-Cuba relations under then-President Barack Obama in 2014, in the hopes that a satisfaction was more likely.  

Getting paid on very old, defaulted debt isn’t without precedent. Iraqi debt traded between 8 and 10 cents on the dollar for a decade, and then inhabited 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’s a criterion for bondholders waiting even longer. More than 300,000 holders of czarist-era Russian bonds, which the Bolsheviks defaulted on in 1917 after the radical, received payment in 2000.