When Pepsi Had a Navy

In 1989, just before the collapse of the USSR, the Pepsi Company cut a deal with Soviet Premiere Mikhail Gorbachev that left it with a fleet of Russian military ships, making PepsiCo temporarily the sixth-largest Navy in the world.

 

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Russian diesel attack submarine                       photo from WikiCommons

In the 1950s, the Cold War between the US and USSR was raging. To try and ease tensions both countries agreed to a program of “cultural exchanges”. In the summer of 1959, as part of this effort, the Soviet Union held an exhibition in New York City, a sort of mini-world fair that featured Russian cultural displays. In return, the United States held a display of its own in Moscow’s Sokolniki Park, called the American National Exhibition. The Exhibition featured booths sponsored by various American companies like IBM, Disney and Pepsi. One exhibit featured a full-size American suburban house.

On July 24, Soviet Premiere Nikita Krushchev visited the Exhibition, and was met there by American Vice President Richard Nixon. As they toured the American model home, the two began trading pointed political barbs at each other, in an exchange that became known as “The Kitchen Debate”.

Unknown to Krushchev, though, he was seeing another part of American capitalism in action—good old-fashioned hucksterism. The night before, one of Pepsi’s executives, Donald M. Kendall, had visited Nixon at the US Embassy in Moscow. Kendall was not only a longtime friend and supporter of Nixon, but was also in charge of Pepsi’s marketing division, and he now enlisted the Vice President’s help. Against his company’s objections, Kendall, who had ambitious plans to expand Pepsi’s overseas markets, had agreed to sponsor a booth at the Exhibition, where he provided Pepsi-Cola that had been bottled both with American water and with local Russian. Recognizing the potential publicity coup, Kendall begged his friend Nixon to help him get a soda into Krushchev’s hands.

It went like clockwork. It was a hot July day in Moscow, and as the two toured the Exhibition, Nixon steered Krushchev towards Pepsi’s booth, where Kendall was waiting to offer him a nice cold Pepsi. As photographers flashed, the Soviet Premiere tried both the American and the Russian versions, and promptly announced that the Pepsi made with Moscow water was better. The photos of the communist Krushchev drinking capitalist Pepsi went around the world. It was an advertising coup.

By 1972, Nixon was President of the United States, and Kendall was CEO of the Pepsi-Cola Company, and once again their plans overlapped. As part of his détente policy to ease Cold War tensions, Nixon was seeking to expand commercial relations with the USSR, and Kendall, as part of his plans to take on the Coca-Cola Company, viewed the Soviet Union as a vast new market. Capitalizing on his earlier publicity with Krushchev and his friendship with Nixon, Kendall now negotiated a deal with Soviet Premiere Leonid Brezhnev which gave PepsiCo exclusive rights within the USSR. Pepsi would ship raw Pepsi syrup to 20 bottling plants in Russia where it would be carbonated and bottled using local water.

One of the problems that had to be dealt with, though, was the issue of “money”. The Russian ruble was not convertible into foreign currency and was worthless outside of the USSR, and the Soviet Union had no supply of American dollars that it could pay with. So an elaborate process was worked out: the Americans would in effect barter their Pepsi products to the Russians in exchange for an equal value of Stolnichnaya Vodka (which was produced by the Soviet Government), and in turn the Pepsi Company would then have the exclusive right to sell Stoli in the USA.

The first bottling plant went into operation at Novorossiysk in 1974, and Pepsi became the first capitalist consumer product to be manufactured and sold within the Soviet Union. Most important to Pepsi, its rival Coca-Cola was locked out of the Russian market completely. Meanwhile, Stolichnaya, imported by Pepsi and sold through distributors, became the second-largest brand of vodka in the United States.

By the time the agreement was set to expire in 1989, though, the Soviet Union had changed drastically. Mikhail Gorbachev was now the Soviet Premiere, and he introduced sweeping domestic reforms, called glasnost (“openness”) and perestroika (“restructuring”), and a series of arms-control agreements with the US to try to save the tottering superpower. He was also anxious to provide new consumer goods to improve the Soviet economy and its standard of living.

Pepsi, in the meantime, was selling some 300 million rubles a year worth of soda in the USSR, and was looking to expand its Soviet operations, adding another 26 bottling plants and expecting sales worth over $3 billion. (And it also wanted to open new businesses within the USSR for some of the other brands that it owned, such as Pizza Hut.)

But once again, an obstacle appeared. The Soviet ruble was still worthless on the international market, and the sales of bartered Stolichnaya were not enough to cover the amounts of Pepsi that the company was planning on selling. To make the deal work, the Russians would have to provide something else that PepsiCo would be able to sell on the international market.

The solution that was reached was, to say the least, unique. With its faltering economy, the USSR did not have many consumer products that it could successfully sell to the West. But one thing it did have, thanks to its bloated Cold War military budget, was a lot of surplus equipment for its armed forces. And so, in what must be one of the oddest commercial agreements ever signed, Gorbachev agreed to turn over to Pepsi a fleet of 17 obsolete Soviet Navy diesel attack submarines along with a decommissioned cruiser, destroyer and frigate, as well as a number of new civilian oil tankers. At a stroke, PepsiCo had become the sixth most powerful navy in the world. The oil tankers would in turn be sold to Norway, and the decommissioned military ships and submarines would be sold for scrap to a shipyard in Sweden.

At one point, Kendall, now on Pepsi’s Board of Directors, jokingly remarked to Brent Scowcroft, the Bush Administration’s National Security Advisor, that “We are disarming the Soviet Union faster than you are.”

The war that Pepsi really cared about, of course, was the Cola War with Coke. The new agreement once again gave Pepsi exclusive access to the Soviet market. Two Pizza Hut restaurants, owned by Pepsi, opened in Moscow, and more were planned. Things seemed good for Pepsi.

Then it all ended. In 1991, the Soviet Union collapsed, and so did PepsiCo’s exclusive deal. Identified, perhaps unfairly, with the former Soviet regimes, Pepsi’s popularity within the former USSR fell, and Coca-Cola quickly moved in to dominate the new market.