Want to Invest in Cuba? Meet Your Partner, Castro's Son-In-Law

Want to Invest in Cuba? Meet Your Partner, Castro's Son-In-Law
Michael SmithSep 30, 2015 12:01 am ET

(Bloomberg) -- 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.

It's a decidedly capitalist element deeply embedded within
authoritarian, socialist Cuba.

Rodriguez doesn't just count Castro as a longtime boss. He's family.
More than 20 years ago, Rodriguez, a stocky, square-jawed son of a
general, married Deborah Castro, Raúl's daughter. In the past five
years, Castro has vastly increased the size of Rodriguez's business
empire, making him one of the most powerful men in Cuba. Rodriguez's
life is veiled in secrecy. He's rarely been photographed or quoted in
the media, and his age isn't publicly known. (He's thought to be 55.)
Rodriguez and the other Cuban government officials in this story
declined multiple requests for comment.

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.

"Luis Alberto was not very sophisticated."

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."

Foreign businesspeople are not immune.

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 startedher 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 ofBloomberg Markets. With
assistance from Blake Schmidt.

Source: Business: Washington Post Business Page, Business News -
http://washpost.bloomberg.com/Story?docId=1376-NVH1TT6S972H01-27M6VRPB95VGJL219LH8RS45GF