Castro Faces Deeper Economic Crisis Diplomatic Clash, Cash Terms of Trade with East European Allies Foreshadow Tougher Times

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FIDEL CASTRO faces one of the most serious crises in his 31-year rule as the Soviet Union and new East European governments impose tougher trade terms on Cuba, Western observers say.

Even as its economy weakens, Cuba's growing political isolation is underscored this month by a dispute over asylum seekers that heightened differences with former ally Czechoslovakia and created a damaging schism with Spain, the island nation's chief Western trading partner.

Castro's determination to survive all challenges, however, was clear last week as Cuba celebrated the 37th anniverssary of the battle that launched his revolution.

In a speech before several hundred thousand supporters crowded into the Plaza of Revolution, Castro vowed that Cuba would not abandon communism.

"Our a reaction is to struggle and struggle, to resist and resist," Castro told the cheering throng. "Socialism is not an option. It is a historic need. Socialism is ... a result of our history."

Yet Castro also acknowledged what most Cubans already know. As the Soviets and East Europeans force Cuba toward trade based on market prices and hard currency, the country's economy will be strained to its limits - and an already bleak standard of living is almost certain to decline.

About 71 percent of Cuba's trade is with the Soviet Union, and some 14 percent with former East Bloc nations. Since July 2, East Germany has demanded US dollars in exchange for its goods, drawing down Cuba's estimated $l70 million foreign currency reserve. The Soviet Union has indicated that it, too, will seek cash.

As a result, Cubans are tightening their belts. Several times this year Castro has referred to the possible need for a "special period" when the economy would move to a warlike footing in order to reduce consumption. This spring, longshoremen practiced unloading ships by hand and road crews used picks and shovels instead of machinery to practice special-period conditions.

"We lack resources and we have worked with less imports. We have economic difficulties, like all third-world countries," says Jose Viera, vice minister in the Ministry of Foreign Affairs.

Phil Brenner, a Cuba specialist at American University in Washington, says new trade arrangements mean central planners will have little margin for error.

"They were used to dealing with government agencies, and now they have to go to the international market," Mr. Brenner says. "They're not quite prepared for that."

Castro has tried to boost hard- currency earnings by expanding tourism and increasing production of primary exports, including sugar, coffee and shellfish.

Cuban coffee, for example, is almost imossible to buy on the island because nearly the entire crop is exported. Cheaper foreign coffee is imported for domestic consumption. Lobster, shrimp and crab also are earmarked for export.

"They're the fourth largest shellfish producer, and you can't get it in Cuba," Brenner says. Meat, eggs, milk are hard to find.

Even among Castro's supporters, economic inefficiency has generated cynicism, says a middle-aged engineer. …