FACTBOX-Key political risks to watch in Cuba

HAVANA, Jan 4 (Reuters) - Cuba is moving ahead with reforms

to its Soviet-style economy, but it faces a new period of

uncertainty over the fate of cancer-stricken Venezuelan

President Hugo Chavez.

Cuba's top ally and benefactor, Chavez is struggling to

recover from his latest operation in Havana for an undisclosed

type of cancer, leaving open the possibility that he will not be

able to continue in office.

REFORMS AND THE ECONOMY

A report by Economy Minister Adel Yzquierdo showed

surprising progress in the government's efforts to slash its

workforce of about 5 million people and move those laid off into

"non-state," or private, employment.

Yzquierdo told the National Assembly the number of non-state

workers rose 23 percent to 1.1 million in 2012, double the

number of two years ago and significantly higher than previously

announced totals.

At the same time, he said state employment dropped 5.7

percent with the slashing of 228,000 public jobs in 2012, on top

of the previously announced 137,000 in 2011, as the government

moved toward its goal of cutting 20 percent of workers, or

nearly a million, from its payrolls by 2016.

A majority of the non-state workers, or about 610,000, were

farmers, whose numbers have swelled under President Raul

Castro's plan to boost agricultural output through reforms that

include the leasing of state lands to individuals.

The rest were mostly in small retail businesses or

self-employed, such as carpenters, seamstresses, photographers

and taxi drivers.

Castro is trying to rationalize the debt-ridden state's

finances by cutting spending and to spur economic growth by

encouraging more private initiative.

With that in mind, the state has been offering thousands of

its small retail outlets to employees interested in running them

as their own businesses and announced in December that it would

turn 200 medium-sized businesses into the first private,

non-agricultural cooperatives. Cuba has had private farming

cooperatives since the 1970s.

The new ventures will be in sectors ranging from

transportation, food services and fishing to personal services

and construction.

They were described as an experiment that would be expanded

if successful. Castro has said the government

wants to free the state from running secondary businesses so it

can concentrate on managing the economy and large, state-owned

companies.

To raise revenue for the cash-strapped state, a new tax code

took effect on Jan. 1 that imposes property and income taxes,

though not right away for most Cubans.

Under the island's paternalistic system, few have paid taxes

for half a century while all have received a variety of social

benefits including free healthcare, education and monthly food

rations. The tax code includes incentives for small businesses

and farmers.

WHAT TO WATCH:

- Pace of reforms and the strength of the private sector.

- The continued reduction of the state workforce.

- Success of the new business cooperatives.

FOREIGN RELATIONS

Chavez, 58, has suffered a series of complications after a

six-hour operation on Dec. 11 in Havana, including what the

Venezuelan government says is a "severe" respiratory infection.

The cancer is in the pelvic region, but little

else has been disclosed since it was discovered by Cuban doctors

in June 2011.

Chavez is due to be sworn in for his third term as president

on Jan. 10, but if he were to die or step down Venezuela would

have to hold an election for his replacement within 30 days.

Before the surgery, he named Vice President Nicolas Maduro as

his preferred successor.

Cuba has staked its economic well-being on the success and

generosity of Chavez, much as it did with another former

benefactor, the Soviet Union.

He sends 115,000 barrels of oil daily to Cuba in return for

the services of 44,000 Cuban medical and technical personnel,

and the two countries have formed more than 30 joint ventures

over the years, most of them based in Venezuela. In 2011,

Venezuela accounted for $8.3 billion of Cuba's $20 billion in

foreign trade.

Venezuelan banks provide soft credits for dozens of

development projects across the island.

Many Cubans expect that if Chavez dies or leaves office,

Maduro would win the election, thereby ensuring the continuity

of Venezuela's support.

If the more conservative opposition were to take power, it

has signaled that Venezuela's oil shipments to Cuba on highly

favorable terms would be halted.

Cuba, which gets about two-thirds of its oil from Venezuela,

was disappointed when three deepwater wells drilled off its

northwestern coast in 2012 came up dry. It has said it may have

20 billion barrels of oil offshore and pinned its hopes for

energy independence on the failed wells.

Russian state-owned oil company Zarubezhneft has begun

drilling for oil in much shallower waters near the Cuban coast

200 miles (320 km) east of Havana.

Cuba believes its top oil prospects lie in deeper waters,

but for now, the Russian company's exploration work is Cuba's

best hope for tapping into offshore fields.

What to watch:

- Chavez's health.

- Results of election if he cannot continue in office.

- Results of Zarubezhneft oil exploration.

U.S. RELATIONS

Even though Cubans applauded President Barack Obama's

re-election victory over Republican candidate Mitt Romney,

U.S.-Cuba relations remain strained.

They have been at a standstill since the December 2009

imprisonment of U.S. contractor Alan Gross for illegally

installing Internet networks in Cuba under a U.S.-funded program

that Cuba considers subversive.

Cuba wants to trade Gross for five Cuban agents arrested in

1998 for infiltrating Miami-based exile organizations and local

military bases. Four of the agents are in prison while the fifth

has been released but ordered to remain in the United States.

So far, the U.S. government has publicly

rejected such a deal.

What to watch:

- Status of Alan Gross.

(Reporting By Jeff Franks; Editing by Kieran Murray and Eric

Beech)

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