Why The Soviet Union Exchanged Warships For Pepsi

The American soft drink giant Pepsi has a long presence in Russia dating back to the early 1970s when Russia was still a part of the Soviet Union. It was the first capitalistic product to gain entry into the communist market. At that time rivalry between the two countries was high, so how did an American soft drink company get its foot in the door to build a major market in Russia?

Bottles of Soviet Pepsi at a Moscow-based plant, 1991. Photo: Vladimir Akimov/Sputnik

The story of how Pepsi came to be sold widely in Russia began in 1959, when the then-Vice President Richard Nixon came visiting the Soviet Union for an exhibition in Sokolniki Park, Moscow, and met with Soviet leader Nikita Khrushchev. The American National Exhibition was organized to promote American art, fashion, cars, and capitalism. Among many other things, the exhibition featured an entire model American house filled with modern conveniences and recreational devices such as washing machine, vacuum cleaners and color television. It was there, standing inside the mock-up of an American kitchen, the two leaders had a heated debate on the merits and demerits of communism and capitalism.

“You plan to outstrip us, particularly in the production of consumer goods. If this competition is to do the best for both of our peoples and for people everywhere, there must be a free exchange of ideas,” Nixon told Khrushchev. Later, Nixon led Khrushchev over to a booth dispensing Pepsi and gave Khrushchev a glass of the brown, fizzy, sugary drink that the Russian had never tasted before.

Richard Nixon and Nikita Khrushchev at the infamous “Kitchen Debate.” Photo: National Archives

The Pepsi booth had two different versions of the drink—one made with American water and another made with Russian water. Khrushchev declared that the one made with Russian water was clearly superior and “quite refreshing”. As Khrushchev drank he insisted that his Russian colleagues around him partake in the sugary tonic, and photographers surrounding the small group fired off their flash bulbs.

No amount of advertising spend could have brought Pepsi this much publicity what these photographs brought when they were published all over America and Soviet Russia. It eventually catapulted Kendall from an executive at the Pepsi-Cola Corporation to the company’s CEO in 1965.

Kendall did play a larger role in the events of 1959 than the photos implied. Nixon bringing Khrushchev to the Pepsi fountain and Kendall serving the addictive drink to the Soviet leader was not an impromptu move, after all. It was Kendell’s idea, and so was Pepsi’s participation at the exhibition against the wishes of his superiors, who felt that trying to sell an American product to a Communist country was wastage of effort and money. The night before, Kendall met with Nixon, with whom he shared a long-term friendship, and told him that he “had to get a Pepsi in Khrushchev’s hand.”

Nikita Khrushchev takes a sip of Pepsi in 1959 at the U.S. National Exhibition in Moscow, while U.S. Vice President Richard Nixon watches and Donald Kendall pours another glass. Photo: Fai/Legion Media

Thirteen years later, in 1972, Kendall scored an exclusive deal with the the Soviet Union shutting out Coke from the communist market. There was, however, a snag—Soviet currency was worthless outside the USSR, because the Soviet ruble did not function like a real currency in a market economy, but more like tokens or company vouchers because the value of the currency was determined by the government and not by market forces. As a result, Kendall had to use an alternative method of payment—the good old barter system.

It was decided that in exchange for the manufacture and sale of Pepsi in the Soviet Union, Pepsi would obtain exclusive distribution rights for Stolichnaya vodka in the US. The company would profit only from vodka sales in the US. It was not to receive any benefit from Pepsi sales in the Soviet Union.

A salesman shows a bottle of Stolichnaya vodka. Photo: Getty Images

Pepsi’s market grew by leaps and bounds and by the late 1980s, the company had more than twenty bottling plants in the USSR, and the Russians were drinking one billion servings a year—far more than the Americans were drinking Stolichnaya vodka. The American vodka market being limited, Kendall began to look for other Soviet products to procure in exchange of Pepsi. What about decommissioned warships? the Soviet Union suggested.

So in 1989, Kendall signed a new agreement, according to which the Soviets would transfer to PepsiCo an entire armada consisting of 17 submarines, a cruiser, a frigate, and a destroyer. Some joked that at that point in time Pepsi owned the world’s sixth largest Navy. On the contrary, these vessels were hardly sea worthy. Pepsi quickly sold them for scrap. Each submarine fetched them $150,000.

“We’re disarming the Soviet Union faster than you are,” Kendall once quipped to Brent Scowcroft, President George H.W. Bush’s national security adviser.

Workers inspect Pepsi bottles at a bottling plant somewhere in the Soviet Union. Photo: N. Arkhangelskiy/Sputnik

The following year, PepsiCo signed an even bigger deal with the Soviet Union, amounting to USD 3 billion worth of soda. As payment, the Soviet Union would build at least 10 ships, mostly oil tankers, which would be sold or leased by PepsiCo on the international market. The deal would have doubled PepsiCo’s sale of its sugary drink in Russia to nearly a billion dollars. A year later, the Soviet Union broke up and the deal fell though.

Russia is still Pepsi’s second biggest market outside of the United States, but most Russians today prefer to drink Coca-Cola instead. Pepsi has a market share of only 18 percent (as of 2013), against their rival Coca-Cola which holds twice as much. Pepsi now sells less than many domestic beverages.

Teenagers celebrate the end of school, Moscow, 1981. Photo: Ivan Vtorov

A Pepsi stand in Moscow, 1983. Photo: Getty Images

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.