Want to Do Business in Cuba? Prepare to Partner With the General
Omar Everleny Pérez is eager to show me how far Raúl Castro’s overhaul of Cuba’s socialist economy has advanced, and so, on a muggy evening in August, the 54-year-old economist invites me into his home in Havana’s Marianao neighborhood. Above his cramped desk, shelves sag under the weight of economics books and monographs, including more than a dozen that Pérez wrote.
“Just look at this,” he says, pointing to the screen of his wheezy black desktop PC. He clicks on a file, and scenes of Havana’s colonial-era port appear. A female narrator with a soothing voice describes a 14-part government plan to replace the gritty piers with cruise ship terminals, restaurants, and hotels, all to be bankrolled by foreign investors. Run-down warehouses fade digitally into luxury apartments, shops and offices, and marinas crowded with yachts. Little virtual people jog and bike along greenways where an oil refinery now sits, and a ferry glides into a modern glass-and-steel terminal.
“It’s really visionary, what they want to do, if you think about it,” says Pérez, a professor at the University of Havana and a researcher at the influential Center for the Study of the Cuban Economy.
Later, a few steps from the port in Old Havana, I see the city’s redevelopment in progress. Near El Floridita, where Ernest Hemingway once knocked back daiquiris, the hulking Manzana de Gómez building is being transformed into a five-star hotel. Stylish boutiques sell perfume and stereos. Inside an old warehouse is a microbrewery teeming with people drinking lager made in huge steel tanks imported from Austria.
What isn’t immediately apparent to a person taking a walk on a warm Caribbean night is that all of this—and anything else that stands to make money in Old Havana, and much of the rest of the country—is run by a man who is little known outside the opaque circles of Cuba’s authoritarian regime. A quiet general in the Revolutionary Armed Forces, Cuba’s multibranch military, he has spent his life around the communist elite that served Fidel Castro’s revolution. Yet he is chairman of the largest business empire in Cuba, a conglomerate that comprises at least 57 companies owned by the Revolutionary Armed Forces and operated under a rigid set of financial benchmarks developed over decades. It’s a decidedly capitalist element deeply embedded within socialist Cuba.
This is Luis Alberto Rodriguez. For the better part of three decades, Rodriguez has worked directly for Raúl Castro. He’s the gatekeeper for most foreign investors, requiring them to do business with his organization if they wish to set up shop on the island. If and when the U.S. finally removes its half-century embargo on Cuba, it will be this man who decides which investors get the best deals.
In a country where capitalism was treated as a subversive enemy force for a half-century, Raúl Castro has been cautiously opening the island to private enterprise since he effectively succeeded Fidel as president of the country in 2006. Daily life has changed for many people. There are now 201 permitted types of private businesses (restaurants and bed-and-breakfasts are the biggest categories), employing a million people, or a fifth of the Cuban workforce, according to Pérez and other economists.
Raúl Castro has legalized the sale of homes and cars, scrapped travel restrictions, and allowed private farming and cooperative businesses. It’s now legal for Cubans to stay in hotels, and 2.6 million people own cell phones, up from close to zero a decade ago.
But Castro has kept the big-money industries in the hands of the state, and much of it is managed by his son-in-law. (Or former son-in-law; there are rumors, difficult to confirm, that Rodriguez and Deborah Castro have divorced.) Rodriguez’s Grupo de Administración Empresarial runs companies that account for about half the business revenue produced in Cuba, says Peréz. Other economists say it may be closer to 80 percent.
GAESA, as it’s called (it’s pronounced guy-A-suh), owns almost all of the retail chains in Cuba and 57 of the mainly foreign-run hotels from Havana to the country’s finest Caribbean beaches. GAESA has restaurant and gasoline station chains, rental car fleets, and companies that import everything from cooking oil to telephone equipment. Rodriguez is also in charge of Cuba’s most important base for global trade and foreign investment: a new container ship terminal and 465-square-kilometer (180-square-mile) foreign trade zone in Mariel.
Cubans talk constantly about the changes they’ve seen. But for a majority of people, Castro’s reforms haven’t delivered that most basic thing: a living wage. Salaries average just 584 pesos, or about $24, a month, government figures show. That’s what it costs to buy 2 kilos (4.4 pounds) of chicken breasts, a couple bags of rice and beans, and four rolls of toilet paper in one of GAESA’s Panamericana supermarkets. Costs are sky-high for most people because they earn Cuban pesos but everything they have to buy is priced in a parallel, dollar-linked currency called Cuban convertible pesos, or CUCs.
On a breezy Saturday morning, I head to the neighborhood of La Timba, down a warren of streets lined with tin-roofed shanties and piles of rotting garbage. It’s all within sight of the hulking, Soviet-inspired monuments of Plaza de la Revolución, where Fidel Castro used to speak for hours on end and Raúl Castro has his offices.
Dayanis Cabrera, 38, calls me into her home, three rooms built from cracked cinder blocks and rotting planks. The intense morning sun pierces the darkness through gaps in the corrugated-metal roof. Her elderly father, who’s suffering from cancer, lies on a bare mattress in the small bedroom to the left. Cabrera leafs through her little, 22-page food-rationing booklet, which lists the staples every Cuban can get for next to nothing at government food depots.
“No one can live off this,” she says, sitting in her kitchen, where a tattered curtain serves as a door. Her family’s rations: a quarter-kilo of chicken, 10 eggs, one pack of spaghetti, a half-kilo of black beans, and a quarter-liter of cooking oil per person per month. Shortages of food are rare, but the price of most things is simply prohibitive. “I’m just hopeful that all this change will bring a living wage,” Cabrera says, shaking her head.
As we speak, she’s loading a metal tray with peanuts she’s roasted over her gas stove. She’ll take them around her neighborhood and try to sell them on the street.
Most Cubans have to scrape and hustle to put together a decent living. Nearly everyone I meet in Havana has a story of moonlighting in odd jobs or even stealing to make up for dismal pay. One friend’s father sells Cohiba cigars pilfered from the factory where he works. A young engineer drives tourists around in his mother’s Lada to supplement his $19.59 monthly salary as a university professor.
Since Dec. 17, when Castro and President Barack Obama announced plans to normalize U.S.-Cuban relations, the country has been abuzz with talk of money to be made. You hear Cubans everywhere speaking giddily about the imminent end to the U.S. embargo that’s hobbled the country for half a century.
On Aug. 14, I walk to the U.S. embassy on the Malecon seaside promenade to watch U.S. Secretary of State John Kerry order a Marine honor guard to run up the U.S. flag, for the first time in 54 years. I am among thousands of cheering Cubans. Some weep, holding homemade American flags. Digmari Reyes, a 27-year-old worker at a finance company owned by GAESA, stands there afterward, smiling broadly. She’d waited three hours in the searing heat to watch the flag go up. “This has to bring something good, some prosperity for the vast majority of us who don’t earn enough to live a dignified life,” Reyes says, as people surge past her to take selfies with the embassy’s flag in the background.
I meet Alcibiades Hidalgo, an eloquent man of 70 who spent decades working in Cuban state media and government posts, at an Italian restaurant in Doral, a prosperous Latino neighborhood in Miami. He’s part of a network of Cuban defectors and self-described exiles engaged in a cottage industry of sorts, that of forecasting Raúl Castro’s next move. Hidalgo wants to offer his perspective on how Castro plotted the changes Cuba is now experiencing.
In April 1981, Castro called Hidalgo, then a young diplomat, into his sprawling office on the fourth floor of the headquarters of the Revolutionary Armed Forces. He directed Hidalgo to join a handful of powerful advisers who, among other things, were going to overhaul the economy. Unlike his impulsive, autocratic brother, Castro was always a conciliatory, methodical commander who preferred change when it was gradual, well planned, and, above all, efficient. He ordered his advisers to scour the world for interesting economic policies that might be adapted to Cuba. “Raúl always wanted to study economic experiments and apply them to the economic model,” says Hidalgo.
One of the most powerful advisers of them all was general Julio Casas, a bank accountant–turned–guerrilla commander who fought under Castro’s command during the revolution. In meetings, Castro praised Casas for his stingy nature, which was applied to controlling costs and improving efficiency in whatever mission he was given. Castro put Casas to work building what would become GAESA. Casas’s top aide was Rodriguez, who would sit quietly near Casas in meetings with Castro, talking only when addressed, Hidalgo recalls.
Casas built GAESA around wringing revenue from the military’s properties and assets. Soldiers planted crops on fallow swaths of bases. Work brigades built tourist hotels. Military planes were refitted for domestic passenger flights for GAESA’s ad hoc civilian airline, Aerogaviota. Casas, assisted by Rodriguez, also helped develop a benchmarking process for state companies called the Business Improvement System. “Under Raúl, the military had its own, parallel economy,” Hidalgo recalls.
As Casas started new businesses, he put Rodriguez in as manager. “Luis Alberto was not very sophisticated,” says Hidalgo, who rose to become Castro’s chief of staff. (In 2002, Hidalgo fled Cuba at night in a speedboat, bound for Miami, after being sidelined and then blacklisted for almost a decade, in one of the regime’s political purges.) “But he was an efficient manager who was cold and calculated in his pursuit of power.”
With the collapse of the Soviet Union in 1991, Cuba lost its economic patron, and the country was plunged into a crushing four-year contraction known as the Special Period. Cubans endured shortages of food and medicine. Jobs disappeared. The sugar industry, which had long supplied the Soviets at inflated prices, fell apart. In 1993, Cuba’s gross domestic product shrank 14.9 percent, according to the World Bank.
Fidel Castro responded with schemes to lure foreign money into Cuba. He legalized the possession of hard currency. He allowed people to start dozens of kinds of private businesses, including family restaurants.
Big change came to GAESA as well. Its tourism arm, Grupo de Turismo Gaviota, cut deals with international chains, most notably Spain’s Meliá Hotels International and Iberostar Hotels & Resorts, to build and run hotels and resorts in Varadero, a 20-kilometer stretch of white, sandy beach two hours east of Havana by car.
By the late 1990s, the Castros had found their savior in Hugo Chávez, the charismatic ex-paratrooper who was elected president of Venezuela on promises to emulate Cuban-style socialism. He quickly flooded Cuba with free oil—up to 115,000 barrels a day. Cuba also cut creative and lucrative deals with other leftist leaders, including Brazil’s Luiz Inácio Lula da Silva, to send tens of thousands of medical doctors to work abroad. Under the terms of those deals, many of which are still in place, the Cuban government kept up to 90 percent of the doctors’ wages.
After Chávez died of cancer in March 2013, Venezuela slid into an economic crisis. The country slashed oil shipments to Cuba—some estimates say by a third or more. Cuba once again needed cash.
“Raúl Castro has to open Cuba up to the world, to the capitalist, free-market world. He has no choice,” says Emilio Morales, a former marketing executive at Cimex, a big conglomerate later folded into GAESA. Morales, too, now lives in Miami, where he runs the Havana Consulting Group. He has developed an unmatched database of thousands of new, private businesses in Cuba.
Morales opens his laptop to take me through his analysis of the new Cuban economy. According to his research, people made 650,000 trips to Cuba from America last year, taking advantage of Obama’s and Castro’s relaxed travel restrictions. “Look at this,” he says, pointing to a 2013 survey of travelers to Cuba. “They brought $3.5 billion of goods with them in their suitcases.” And Cuban-Americans sent $3.1 billion to relatives in Cuba. “It’s a huge impact.”
So much has changed in Cuba, but so much hasn’t. In August alone, the month the flag was raised over the U.S. embassy, security forces made 913 politically motivated arrests, according to the Cuban Human Rights Observatory. Castro’s government represses dissent, routinely harasses independent journalists and activists, and restricts access to the Internet for the vast majority of Cubans, Human Rights Watch says.
Foreign businesspeople are not immune. Sarkis Yacoubian, a 55-year-old Canadian, made his home in Cuba for two decades, building a company called Tri-Star Caribbean. He sold cars, trucks, and industrial equipment, mainly to GAESA-owned companies. On July 13, 2011, armed internal security troops—Cuba’s secret police—swarmed Yacoubian’s office. He was held for more than two years as police interrogators leveled allegations of tax evasion, corruption, and, ultimately, espionage.
Investigators seemed to believe, Yacoubian says, that the BMWs a GAESA executive expressed interest in buying contained technology that would allow Cuba’s enemies to track Raúl Castro. Yacoubian denied all the allegations; he says he wasn't given the time or resources to prepare a proper defense. Government officials and documents concluded that Tri-Star and Yacoubian didn't owe any taxes in Cuba, court records show. Nevertheless, after a two-day trial in May 2013, a Havana court sentenced Yacoubian to nine years in prison and fined him $7.5 million on charges of bribery, tax evasion, and causing economic harm to Cuba.
Then, in February 2014, Yacoubian was suddenly released without explanation and put on a plane to Canada. The Cuban justice ministry seized Tri-Star Caribbean’s assets, valued at $20 million. Most of them were absorbed by GAESA’s Almacenes Universales and other companies Yacoubian did business with. “They took everything from me,” says Yacoubian, who is now a consultant on Cuban business issues. “I was completely innocent.”
Cuba is a place both frozen in time and moving swiftly toward a future in which private enterprise will be a bigger part of life. Vast areas of Havana are little changed from 1959, when Fidel Castro’s bearded guerrilla fighters marched into town. The streetscapes are largely free of billboards and ads. Vintage American cars are, as promised, everywhere. As for the fast-arriving future, there are Afro-Cuban jazz clubs, swank private restaurants, and boutique hotels. More tellingly, on street corners within the few, closely controlled, government-sponsored Wi-Fi zones, Cubans by the hundreds sit and stand all day in the tropical sun, clutching phones, tablets, and laptops, eager to take advantage of the first chance many have ever been given to connect.
What’s amazing about all this is how Raúl Castro has managed to convince the most die-hard followers of Cuba’s socialist revolution to embrace his capitalist changes. After succeeding his brother as head of state, Castro placed a series of reform proposals before a powerful body he leads, the Council of State.
Miguel Barnet, a famous Cuban anthropologist, author, poet, and translator who sits on the council, says he’s no economist but he was convinced that Cuba had to embrace Castro’s vision. “We need to develop, and these changes will help us do it without sacrificing the revolution,” says Barnet, 75, who in conversation toggles between Spanish and near-perfect American English, which he polished in New York, where he spent several months after winning a Guggenheim Fellowship in 1983.
The members of the council debated and shaped Castro’s proposals endlessly. In April 2011, the Cuban Communist Party’s Sixth Congress approved 313 Economic and Social Policy Guidelines of the Party and the Revolution.
In early 2013, Marino Murillo, who’s known as Castro’s economic reform czar, called 20 of Cuba’s top economic minds to his office on Plaza de la Revolución. They were leaders of university departments, think tanks, and foundations, including Pérez. Murillo, a general known for his straight talk and blunt style, didn’t mince words. He told them to use their knowledge to turn the guidelines into policies that would reshape the Cuban economy.
Murillo ordered one group, which included Pérez, to come up with proposals to overhaul Cuba’s 1995 foreign-investment law. They had to sum it up in fewer than 32 pages, following a strict PowerPoint-like format used in the Cuban military. Pérez and six other economists studied foreign-investment laws from around the developing world. Six months later, they gave their pitch to a panel of military commanders, government officials, and economists. The changes they proposed included allowing foreign companies to own 100 percent of their ventures in Cuba, up from 49 percent, and giving them an eight-year respite from paying taxes. “They asked a lot of hard questions. There was a lot of reflection, trying to square it with their ideology,” Pérez says. The National Assembly of People’s Power, Cuba’s legislative arm, approved the new law in March 2014. “In the end, they accepted 80 percent of what we proposed,” Pérez says.
By then, Castro had already moved Cuba’s most profitable state companies under GAESA and Luis Alberto Rodriguez. The biggest addition to GAESA was Cimex, which had been run for three decades by military commanders chosen by Fidel Castro. Adding the Cimex companies more than doubled the size of GAESA. More recently, Rodriguez was given the green light to take over Habaguanex, the state company that owns the best commercial real estate in Old Havana, including 37 restaurants and 21 hotels.
Rodriguez rarely deals with clients, apparently preferring to delegate to the managers who run GAESA’s collection of companies. Early one morning, Mohamed Fazwi, who runs operations in Cuba for Blue Diamond Resorts, a Barbados-based hotel chain, meets me for coffee at Memories Miramar Havana, set amid a cluster of grand art deco and neoclassical mansions. Fazwi has been busy since 2011, when Blue Diamond won its first hotel contract in Cuba.
The company now manages 14 hotels across Cuba, with 8,600-plus rooms, second to the Meliá group. Many of Blue Diamond’s contracts are with GAESA’s Hoteles Gaviota, the biggest state lodging company. “The executives we deal with are very, very knowledgeable and active. They know what they want and are really good negotiators,” says Fazwi, 43, a man of Spanish-Palestinian descent who moved to Cuba in 2008. “They are savvy.”
Rodriguez seemed to be more hands-on in Mariel, where he was entrusted with building the $1 billion megaport and surrounding free-trade zone. As the vast ship terminal rose atop an abandoned U.S. air base by the old Mariel port, where Fidel Castro allowed 125,000 people to flee to the U.S. in 1980, Rodriguez regularly assembled his engineers for progress reports. Rodriguez liked to listen more than talk, according to people who dealt with him in these meetings. But when he spoke, Rodriguez was concise, specific, and crystal clear. The government saw the port and the surrounding special development zone as a gateway for a new economy for Cuba, Rodriguez explained. It would anchor a wave of international trade, factories, and economic growth.
On Jan. 27, 2014, the port was ready, and dignitaries took their seats under a brilliant sun for the formal opening. On the stage was Castro, Venezuelan leader Nicolás Maduro, and Brazilian President Dilma Rousseff. The port, a collection of more than a dozen big cranes, a 700-meter-long pier designed to handle the world’s biggest container ships, a highway, and a rail line to Havana, had been built by Brazil’s mightiest construction company, Odebrecht SA. It was financed at subsidized rates by Brazil’s state development bank in a deal negotiated directly between Castro and Lula, the former Brazilian president.
Rousseff, smiling, walked up to the podium and started her speech with the customary naming of dignitaries in the crowd. She thanked Castro and unnamed Cuban ministers, foreign executives, and leaders. And just before she leaned into her short address, she thanked one more person by name: GAESA Chairman Luis Alberto Rodriguez.
This story appears in the November 2015 issue of Bloomberg Markets. With assistance from Blake Schmidt and Javiera Quiroga.