FACTBOX-Key political risks to watch in Cuba

HAVANA Jan 4 (Reuters) - Cuba has opened more of its retail services to the private sector and liberalized land lease terms so farmers can rent more state land and keep it in the family as reforms aimed at fortifying the socialist system for the future continue.

The Caribbean island's self-employed sector has continued to grow and Cuba's long-delayed hope of exploring for oil offshore is close to becoming a reality as a Chinese-built drilling rig is expected to reach Cuban waters this month.

If oil is found, it will take at least three to five years to produce, but eventually should reduce or eliminate reliance on oil imports from Venezuela, whose President Hugo Chavez, the island's top ally and economic partner, had surgery for cancer last year.

ECONOMIC REFORM

The government said it would allow Cubans to operate various service businesses such as appliance and watch repair, locksmith and carpentry shops, just as it has done the past year with 1,500 state barbershops and beauty salons. [ID:nN1E7BPOOL]

They will pay a monthly fee for the government-owned space, buy supplies, pay taxes and charge what the market will bear in another step away from the doctrinaire communism imposed after the 1959 revolution.

Government officials said there are now more than 357,000 people working in the self-employed sector, the growth of which is being encouraged because the cash-strapped government wants to slash a million jobs from its payrolls and encourage more private initiative. It has temporarily lowered taxes and begun providing credits to the new entrepreneurs.

No figures have been released but government insiders said in October that just under 150,000 people had lost their jobs as the government pushes toward its goal of having up to 40 percent of the island workforce of 5.2 million in non-state jobs by 2015.

Economy Minister Adel Yzquierdo Rodriguez told the National Assembly in late December that 170,000 state jobs would be cut in 2012 and as many as 240,000 new non-state jobs added.

The Cuban state owns 70 percent of the land on the island and, according to figures given at the National Assembly, has leased almost 3.5 million acres (1.4 million hectares) to 150,000 private farmers since 2008 with the goal of increasing agricultural production so it can reduce budget-draining food imports. About 70 percent of the leased land was said to be under cultivation.

Food output was up in 2011, but still below 2005 levels, so starting this month, in response to farmer suggestions, the amount of land they can rent has been quintupled to 165 acres (67 hectares) and leases extended from 10 years up to 25.

The leases can be renewed and passed on to family members and farmers can build homes on the land. [ID:nN1E7BH02Q]

President Raul Castro told the National Assembly that Cuba still expected to spend $1.7 billion on food imports in 2012.

He also emphasized the importance of an ongoing crackdown on corruption, which already has shuttered three foreign firms and brought the arrest of top executives at Tecnotex, a company run by the Cuban military.

Cubans had hoped Castro would announce reforms making it easier for them to travel abroad, but he said only that changes would be made gradually.

The Cuban Communist Party and the government passed a series of reform plans this year that would move all business administration out of the ministries and grant newly formed holding companies more authority to make day-to-day decisions and control a percentage of their profits.

Cubans are now allowed, for the first time in decades, to buy and sell homes and used cars. As of the end of November, 6,009 cars had changed hands and 301 homes had been sold, officials said.

What to watch:

- The pace of reforms and their consequences.

- The development of small businesses.

- The shedding of business management by the ministries.

FINANCIAL HEALTH

Castro said the economy grew 2.7 percent in 2011 and was expected to reach 3.4 percent in 2012.

Cuba said it would end 2011 with a record 2.7 million tourists for the year and a 9 percent increase in tourism revenues over the $2.1 billion in 2010. Tourism is a top hard currency earner for the island.

Reserves at the Bank for International Settlements stood at $5.649 billion in June, double what they were three years ago.

Cuba is heavily indebted and still recovering from a liquidity crisis that led to a default on payments and freezing of foreign business bank accounts in 2009. [ID:nN24211495]

Castro told the National Assembly that accounts for foreign suppliers to Cuba had been unfrozen and steps taken to prevent the problem from happening again.

Hopes that reforms would bring more foreign investment have yet to materialize with no significant new ventures this year.

Long-awaited golf course developments, aimed at attracting wealthier tourists, remain on hold. [ID:nN04118234]

What to watch:

- Resolution of outstanding short-term debt

- Signs of increased interest in foreign investment.

OIL PLANS

A Chinese-built drilling rig, the Scarabeo 9, was in Trinidad and Tobago in early January and expected to reach Cuba later in the month. It will be used in the first major exploration of Cuba's part of the Gulf of Mexico. [ID:nN1E77P03U] Spain's Repsol YPF and its partners will get the rig first, followed by Malaysia's Petronas and its partner, Russia's Gazprom Neft.

The project has drawn opposition in the U.S. Congress [ID:nS1E78R1P9], but, to allay safety concerns, Repsol will let the United States inspect the rig. [ID:nN1E79H1XN] [ID:nN1E7BJ077] U.S. companies are forbidden from operating in Cuba by the U.S. trade embargo.

Cuba depends on imports from its oil-rich ally Venezuela, but says it may have 20 billion barrels of oil offshore. The U.S. Geological Survey has estimated 5 billion barrels.

What to watch:

- U.S. inspection of drilling rig.

- Results of Repsol's exploratory well.

- U.S. pressure to stop the drilling.

FOREIGN RELATIONS

A planned Papal visit in March [ID:nL6E7NC3I6] and improved ties with Brazil are bright spots even as it faces a more hostile Spanish government elected in November.

A major concern for Cuba is the health of Chavez, whose government provides 114,000 barrels of oil a day and investment to Cuba. He underwent chemotherapy in Cuba and has declared himself cancer free [ID:nN1E79J13X], but experts say it is too soon to tell. If he were unable to continue in office, it would be a big blow to Cuba.

U.S.-Cuba relations, which thawed briefly under President Barack Obama, have been frozen by the imprisonment of U.S. aid contractor Alan Gross. [ID:nN1E7AT2CK] He is serving a 15-year sentence for providing Internet gear to Cuban groups under a U.S. program promoting Cuban political change.

Cuba is angry that five Cuban agents have been jailed in the United States since 1998, and has given no indications that Gross will be released early. [ID:nN1E7BR0BZ] (Additional reporting by Marc Frank; Editing by Kieran Murray)