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Cuba is a beautiful Caribbean island 90 mi off the coast of Florida, less than an hour by plane from the world's largest consumer economy. And yet, roughly 90% of its population lives in poverty. That gap is what 60 years of economic isolation does to a country. And right now, that isolation is showing up in a very visible way. The country is running on fumes, relying on lowquality domestic oil and hoping for more oil tankers from Russia. Meanwhile, rolling blackouts stretch up to 20 hours a day across the island. State industries have largely stopped functioning and agricultural output has fallen. The economy is on track to shrink by around 15% relative to pre-crisis levels. And
between 2020 and 2024, Cuba's population shrank by roughly 1 in 8 people, driven largely by a historic wave of immigration. What had been a slow, managed decline has tipped into something that looks less like an economic crisis and more like a humanitarian one. The immediate trigger was the collapse of a deal with Venezuela, Cuba's main energy supplier. For years, Venezuela had been providing the bulk of Cuba's oil in exchange for food, medical workers, and political support. It wasn't exactly a great foundation. If your economic stability depends on Venezuela, things are already not going particularly well. But even a house of cards can remain standing, right up until someone pulls the table
from underneath it. And that happened just a few months ago when the Trump administration decided to deal with the Venezuela question somewhat more directly. US forces arrested Maduro and Caracus. And under direct US pressure, the Venezuelan oil shipments to Cuba stopped almost immediately. Mexico's state oil company stepped in to cover the gap, but it pulled back after Trump introduced punitive tariffs for suppliers, effectively blocking Cuba from receiving oil imports from anyone. Cuba's isolation has left it so exposed that when Washington decides to cut the tap, the whole system buckles. Now, if that wasn't enough, Trump has been openly floating military intervention, calling a Cuba operation as viable as
the Maduro capture. Cuba's response has been to announce 176 free market reforms it's calling the most sweeping since the revolution itself. Whether that's enough to change anything remains to be seen. So, as always, we've got some important questions to answer. How did Cuba end up so cut off from the global economy that its energy supply depends on a deal with Venezuela? What is actually happening on the ground right now? And is there any realistic path out of this? I started Economics Explained because I wanted to create something that did not exist. In the process of that creation came so many other tasks besides the ones I originally signed up for. Sales, client relationships, and a whole host of other
things. That's why I use ODO. ODU is an all-in-one business management platform that brings all your workflow under one roof. ODO really helped me manage my sales pipeline. We all hate sales, especially juggling how many different platforms and communication apps it can involve. With ODO's new sales app, it can help any small business create professional quotes that make the entire sales process faster and easier to follow, giving me time back to work on the creative things I like doing. But not only does ODU manage and help me write my quotes, it also can store all of the information from past quotes in one place, allowing me to search and follow up with sales, so I never lose
track of loose ends. With plans starting under $25 a month, ODU pays for itself in quote creation and sales organization alone. If you're ready to simplify your sales process and get back to focusing on what you like, click the link below to get your 15 days trial started today or book a meeting with an ODU expert. It's free. To understand how Cuba ended up where it is today, you have to go back to 1960 when the US decided to stop doing meaningful business with Cuba. That year, Castro nationalized American oil refineries and US President Eisenhower banned trade in response. Kennedy formalized the ban 2 years later during a particularly intense period of distrust and hostility following the Bay
of Pigs and of course the Cuban missile crisis. The ban has since become the most enduring trade embargo in modern history. Now, a trade embargo from the world's largest economy and one you have a natural advantage in trading with due to proximity is a pretty serious blow. Cuba suddenly had to source imports through more expensive and less efficient trade routes while its industries struggled to find new export markets and foreign investment. This suppressed growth with Cuba's own government estimating the cumulative economic cost at around $135 billion. But what cushioned the blow, at least for a while, was the Soviet Union. For most of the Cold War, the USSR propped Cuba up with huge subsidies, accounting
on average for roughly a fifth of the entire Cuban economy. When the Soviet Union dissolved in 1991, that support vanished almost overnight, and Cuba's GDP fell by more than a third in just 3 years. This wouldn't be the last time that Cuba's structural dependence on America's adversaries would come back to bite it. The government called this rough patch the special period in a time of peace. A fairly euphemistic name for a period that included mass food rationing, widespread blackouts, and importing more than a million bicycles from China because there was no fuel left for cars. Now, what makes Cuba's situation genuinely unusual is that even after all of this, the embargo survived.
The Soviet Union had collapsed. The Cold War was over. And most of the countries that had been on the wrong side of American foreign policy, eventually got folded back into the global trading system. Vietnam, which had fought a brutal and deeply personal war against the United States, rebuilt its relationship with Washington and is now Southeast Asia's fastest growing major economy. China opened up and became the factory of the world. Even Russia was doing substantial business with the West, at least until the war in Ukraine changed that. But Cuba remained locked out, and the reason has more to do with politics than economics. Unlike many other communist states, after the USSR
collapse, Cuba's political leaders continued to prioritize the survival of the socialist system over economic and political reform. That gave the embargo's defenders exactly the justification they needed to keep it in place. It also reinforced support among many Cuban Americans who believed continued pressure was the best path forward. The Cuban diaspora in the US became a serious political force in Florida, a state that has decided more than a few presidential elections. So, the embargo became untouchable because any politician who suggested lifting it risked losing Florida, and losing Florida can mean losing the White House.
This left Cuba increasingly dependent on whatever allies it could find, and Washington was intent on limiting even those. Congress eventually locked the embargo into law and extended its reach beyond US borders, threatening penalties for any foreign company that tried to trade with Cuba. The message to the rest of the world was clear. You can do business with the largest consumer economy on Earth, or you can do business with Cuba, an increasingly isolated, impoverished state. Most countries chose the obvious option, and you can hardly blame them. That kind of sustained isolation made Cuba's economy more and more lethargic. When countries engage in global trade, competitive pressure forces efficiency. Inefficient
industries lose out and governments face real consequences for protecting them. That's what happened to most nominally communist countries. Once they started engaging with global trade, even partially, the competitive pressure created an internal logic that pushed them further and further toward free markets. Cuba never had that pressure. The command economy stayed in place. The state sector expanded and genuine reform was always deferred. The Cuban government has long pointed to the American embargo as the explanation for the country's economic problems. The reason the country is failing is not because state systems are corrupt, resources are misallocated, or the island is facing a mass brain drain.
It's because of US policy. And that's not entirely wrong, but it's not the whole story. In practice, the embargo has done two things at once. It has made Cuba's economy materially harder to run, and it has given the government a powerful external explanation for problems that are also partly homegrown. So, how did the economy survive at all? For years, two reliable sources of foreign money kept the economy moving. Tourism and remittances from the diaspora, which ironically came from the very community that was keeping the embargo in place. Somewhere between1 and3 billion flows into Cuba each year in remittances. Money sent home by Cubans living in the United States,
Spain, and across Latin America. Exactly how large a share of the economy that represents depends on two things. Which estimate of Cuba's GDP you use, and which exchange rate you use to calculate it. Cuba's official government statistics put GDP at somewhere around $100 billion, which would make remittances a modest 2 to 3% of the total. The Interamerican dialogue puts Cuba's real economic output at closer to $14 billion, though. At that scale, the same remittances work out to around 26% of GDP. What is not in dispute, though, is that in an economy with almost no access to foreign currency through normal trade, remittances are one of the primary mechanisms keeping Cuba's
general population fed. The second factor keeping the Cuban economy afloat was tourism. By 2019, Cuba was receiving around 4.2 million visitors a year, generating more than $2.5 billion in revenue. Cuba is genuinely a beautiful country. It has pristine beaches, historic architecture, and the unique appeal of a Caribbean destination that avoided the resort chains and commercial development that reshaped most of the region. Not by choice exactly, but because 60 years of isolation had made sure of it. But even at its peak, Cuban tourism was fragile. The revenue mostly flowed to stateowned hotels and enterprises rather than circulating through the local economy, and the infrastructure was aging. And then CO
hit. International arrivals collapsed and remittances dropped sharply too. GDP fell by more than 10% in 2020 alone, becoming the worst contraction since the special period. And if that wasn't enough, Cuba's government made the situation considerably worse. In January 2021, Cuba carried out a long deferred monetary reform, unifying its two currencies and devaluing the Cuban peso from a 1:1 rate with the dollar to 24:1. The idea was to force state enterprises to become more efficient by removing a major price distortion. But with the new exchange rate, basic imports suddenly became much, much more expensive. Before the reform, a $200 import went on the
books as 200 pesos. After the 2021 devaluation to 24 pesos per dollar, that same import cost 4,800 pesos overnight. Businesses and the government had to raise prices to cover their actual costs. And that price shock rippled through the entire economy almost instantly. The result was tripledigit inflation that wiped out most of the purchasing power ordinary Cubans had managed to hold on to. Through all of this, the thing keeping the lights on literally was Venezuela. Back in 2000, Venezuela's president at the time, Hugo Chavez, struck a deal with his ideological ally, Fidel Castro, that was essentially a barter. Venezuela supplied Cuba with oil at below market rates and unfavorable credit terms. And Cuba sent
back personnel. At its peak, Venezuela pumped close to 100,000 barrels of oil a day to Cuba. And in return, Cuba sent around 40,000 doctors, teachers, security advisers, and military personnel to Venezuela. though the conditions under which those workers were sent is a story in itself and one we'll be covering in more detail in this week's newsletter. In any case, Cuba needs around 100,000 barrels a day to function normally and only produces about 40,000 domestically. So, at the height of the deal, Venezuela was covering virtually all of Cuba's energy requirements. The fragility of that should have been obvious. Venezuela's oil production has been dropping for years and its population is leaving by
the millions. The volume of oil flowing to Cuba had been declining for years before 2026. from that 100,000 barrel peak in the late Chavis years down to around 15,000 barrels a day in 2025. So Cuba was already running on a fraction of what it needed well before the final cut came. When it did, the combination of Maduro's arrest, US pressure on Venezuela and the subsequent executive order cut Cuba's oil imports to near zero almost overnight. With Venezuelan oil gone, Cuba began siphoning its emergency reserves and scrambled for alternative sources. Mexico's state oil company had briefly stepped in to cover the gap, but halted shipments in late January under direct US pressure. Then
Russia sent two tankers. The first successfully delivered around 730,000 barrels after the US granted it passage. Those stores lasted just 6 weeks. The second tanker stalled for weeks before diverting, never delivering its cargo of diesel. In May, the Cuban government announced it had no oil or diesel reserves left. The result was immediate and devastating. Across the island, rolling blackouts now stretched to 20 hours a day. in some areas, even around the clock. And no electricity means essentially no production. The lack of fuel has paralyzed large sectors of the economy, including rubbish collection. Rubbish trucks don't run without diesel, so across the island, rubbish has been piling up in city streets for months.
Food and agricultural production has fallen by 60% relative to an already structurally weak baseline. For a country that relies on imports for the large majority of its food consumption, that is a serious problem. And Cuba with almost no export revenue doesn't have the foreign currency to cover the gap. Even the water supply hasn't been spared. Because 84% of Cuba's water pumping systems run on electricity, clean drinking water has become increasingly scarce. By March 2026, roughly 1 million Cubans were relying on water tanker trucks known locally as peepers for clean water, which is a problem as those trucks also run on diesel. Now, the reason the grid collapsed so completely is that it was already in serious trouble before the
oil ran out. Cuba's national electricity system was built largely in the decades after 1959 and hasn't received the investment and maintenance it requires for more than 30 years. By early 2025, before the oil ran out, only 34% of installed power plant capacity was available on any given day. That means 2/3 of the system was sitting idle offline from corrosion, mechanical failure, and a chronic shortage of spare parts. The system ran on a combination of imported oil and Cuba's own domestic crude, which is so high in sulfur that it corrods the boilers and turbines it runs through. To plug some of the gap, the government had been leasing floating power plants from Turkey. But when it
fell behind on payments, those ships left with their capacity. The result, even before the oil stopped entirely, was a daily electricity deficit averaging around 1,600 megawatt, roughly half the country's typical demand going unmet every single day. Meanwhile, Cuba had been directing roughly 32% of total national investment to tourism while putting only 12% into its energy infrastructure. That's why today provincial officials manage the electricity allocation openly each morning, announcing which neighborhoods will lose power and for how long. The healthare system has not been spared either. Essential medicines are available at only around 30% of normal supply levels, and an estimated 96,000
medically necessary surgical procedures have not been performed, including around 11,000 involving children. Blood banks and laboratories entirely dependent on reliable electricity are struggling to function. And infant mortality rates, which Cuba spent decades bringing down to levels that compared favorably with far wealthier countries, have doubled to 9.9 per 1,000 births. And if that wasn't enough, inflation is making all of it worse. While the official exchange rate sits at 24 pesos to the dollar, on the informal market, the dollar buys closer to 450 pesos. In the small private shops that now do most of the actual food selling, a carton of 30 eggs can cost more than a month's government pension. The overall
picture is accelerating collapse, where each failing system takes the next one down with it. No fuel means no electricity, which means no production. No production means no government revenue, and that means fewer imports of food and medicine. And through all of this, Cuba is going through the biggest migration wave in its history. Doctors, engineers, and young adults with options are looking at what is happening and deciding to leave. In fact, so many people are leaving that the total population is declining at an accelerating rate. And of those who have stayed, surveys suggest 78% plan to go.
What separates Cuba's situation from a simple energy crisis is that every available mechanism for relief has been closed off simultaneously. The country cannot borrow on international markets. Domestic production is far too limited to meet basic needs. And in May, Trump signed an executive order imposing secondary sanctions on Gaasar, the military-industrial conglomerate that controls most of Cuba's economy. The country cannot attract significant foreign investment because any foreign company that tries to do business there now risks losing access to the US market. That's a trade-off almost no one is willing to make. Cuba's main source of hard currency is being squeezed by US
financial restrictions and the basic reality that sending money into a country with a collapsing currency and no functioning banking system is increasingly difficult. Even the informal economy, which for years allowed Cubans to buy and sell outside the state system, is struggling now that there is simply less to buy. So, is there any realistic path out of this? As much as I would like to say there is, there isn't a clear one. At least not right now. The most obvious route would be a diplomatic resolution between Washington and Havana. Diaz Canel confirmed Cuba was in talks with Washington, the first direct contact since 2016. Cuba's position was short.
Lift the energy blockade and we'll negotiate. The American position was considerably longer. release political prisoners, allow economic liberalization, and compensate Americans for assets seized after the 1959 revolution. Both sides talked, but neither moved. And even as those talks were still technically in progress, the US administration sanctioned Diaz Canel personally along with his wife and several senior officials, which is one way to run a negotiation. Then Trump began floating the possibility of military intervention and saying an operation in Cuba was as viable as the Maduro capture. His message was increasingly clear. The goal isn't reform, it's removal. Cuba responded by announcing a sweeping package of 176
free market reforms described by Cuban economists as the most profound shift since the revolution. The government is authorizing private banks, allowing foreign investment without forming joint ventures, lifting the cap on the size of private enterprises, and permitting imports and exports without state intermediation. Diaz Canel explicitly cited the Vietnamese and Chinese models, which is worth pausing on because earlier in this video, we used Vietnam as the example of a country that chose commerce over ideology. Cuba appears to be reaching the same conclusion 60 years later. More striking was the acknowledgement from the government itself that price controls had failed and generated scarcity. For decades, the Cuban government has pointed to the
American embargo as the explanation for everything that has gone wrong. Now, for the first time, the administration is admitting that some of the damage was self-inflicted. That's not nothing. But was all of this genuine reform or a move to avoid an invasion? Diaz Canel was unambiguous when he said, "We are not doing this because of Yankee pressure." Whether you believe that is another matter. For decades, Washington's stated demand has been economic liberalization. Cuba has now announced exactly that. And Washington called it superficial smoke signals and announced fresh sanctions targeting military-controlled entities anyway, which tells you something important about what the US actually
wants. Economic reform was never quite the point. The point is the government itself. Sanctions stay until the government falls or at least until it looks like it has. That also means the reforms, however significant historically, are unlikely to unlock any relief in the short term. The 176 measures don't touch GISA, which is estimated to control between 40 and 70% of Cuba's formal economy, including hotels, retail chains, import monopolies, and foreign currency flows. These are the assets that any serious investor would want access to. If Cuba opens up private banking and foreign investment while leaving GIS's dominance intact, the people best positioned to partner with foreign investors,
negotiate deals, and absorb new capital are the ones already inside that system. So, the economy looks more open on paper, but the military elite ends up owning it through private structures rather than state ones. And that's before you get to the other problem. Most of these reforms require foreign investors to actually show up, which they won't. While doing business with Cuba means risking access to the US financial system. The scale of economic transformation Cuba needs vastly exceeds what any of these reforms are permitted to deliver while US sanctions remain in place. And the entrepreneurs, professionals, and skilled workers who might have built something new have
largely already left. Now, none of this means the picture can't change. The global order is becoming more multip-olar and China, Russia, and Iran all have their own reasons to push back against American pressure, which means that the kind of support Cuba lost when Venezuela fell away could over time be partially rebuilt. China, for its part, has already been moving. It has equipped Cuba with 49 new solar parks since early 2025, adding more than 1,000 megawatts of capacity to the grid. In the space of a year, Cuba's share of electricity generated from solar went from around 6% to more than 20. And the country plans to add another 1,200 megawatt during 2026, which would bring renewables to
somewhere between 30 and 35% of total generation by year's end. Now, there's a significant caveat. Cuba's history with ambitious targets and actual delivery is not encouraging, and the grid's broader infrastructure problems don't disappear just because you add solar panels. Solar is a daytime resource. Without substantial battery storage, which Cuba does not yet have, evening demand still has to be met with whatever fuel is available. Russia has been in the picture, too, although less consistently. Of the two tankers it sent earlier this year, one delivered and one didn't. And the problem is that even together, they barely made a dent. Iran has expressed solidarity, but its own economic position limits what it can
offer. In a world where American financial and diplomatic leverage is being contested by China, Russia, and others, the US blockade could become progressively harder to enforce. That may be true over a long enough horizon, but it's not true right now. And right now is when the crisis is acute and people are going without medicine, clean water, and food. Even in the most optimistic scenario, Cuba would still face a shattered industrial base, a healthare system that has been gutted over years of neglect, and an energy grid that needs billions of dollars and probably a decade to put back together.
What Cuba needs is not one of these things, but all of them simultaneously in conditions that make all of them simultaneously very hard. Whether any of this adds up to a genuine recovery or simply slows a decline that has already gone very far is a question nobody can answer with confidence right now, least of all economists. 2 years ago, we covered how Venezuela went from a once promising country to the brink of collapse. You should be able to click to that video on screen now. And given everything that's happened since, we're working on an update to that one. Thanks for watching, mate. Bye.
