In 1989, Russia made one of the most surprising deals in its history. Billions of dollars worth of Pepsi in return for 17 submarines, a cruiser, a frigate and a destroyer. The transfer of these naval vessels meant that Pepsi briefly possessed the world’s sixth largest military, with larger forces than both Spain and Australia, and that Pepsi became the first American product to be produced and distributed in the Soviet Union.
What makes this obscure deal even more intriguing is that it took place against the backdrop of the Cold War, a period of intense rivalry between the USA and the USSR. Starting in the aftermath of World War II and only ending with the collapse of the Soviet Union in 1991, the Cold War saw the two superpowers fighting against each other in proxy wars such as the First Indochina War (1946-1954) and competing against each other in the race to develop ever more powerful nuclear weapons and space technologies.
To understand Pepsi’s journey to Russia, we have to step back to the summer of 1959 when the US and the Soviet Union decided to hold a series of exhibitions in New York and Moscow. The idea behind the exchange was to allow Americans an insight into a typical Soviet citizen’s life and vice versa. Visitors to the exhibitions would be able to walk around and experience art, fashion, homewares, technologies, brands and even a mock-up of a typical home from each country. The American exhibition had over 450 US brands represented, such as Disney, Dixie Cup Inc, IBM and, crucially, Pepsi.
Vice President Nixon had arrived in the USSR ready to meet with Khrushchev and host him around the exhibition. The night before, Nixon was at the American embassy, and so was Donald Kendall. Kendall was in charge of international sales for Pepsi and, against the odds, he believed that the USSR offered a wealth of opportunity for the company. So much so that he had decided to defy the orders of his superiors and sponsor a booth at the exhibition. That evening he was feeling the pressure of his decision, so when he spotted Nixon he pleaded with him to get Khrushchev to try a Pepsi.
The following day, July 24th, Nixon and Khrushchev met and began their tour of the American exhibition. The two found themselves inside the model American kitchen, designed to showcase consumer goods and labour-saving products. The tension between the two men quickly began to boil over when they started to argue about Soviet control over the captive nations of Eastern Europe.
Khrushchev then attacked new US technology, stating that some products were useless and that the Soviets would have all the others in a few years. The fierce debates between the two men earned the nickname “The Kitchen Debates” for their unusual setting.
Despite the friction between the two men, Nixon remembered the promise he had made to Kendall the previous evening. He led Khrushchev over to the Pepsi-Cola booth in the kitchen, which offered two distinct options: cola made with US water and cola made with Soviet water. The ploy worked. Khrushchev took the offered glass, marking the first public sampling of an American product by a Soviet leader, and he absolutely loved it. The iconic moment was caught on camera, making the press, and the Russians who crowded into the exhibition over the coming weeks all tried and loved Pepsi too. Kendall’s big risk had paid off.
Except there was one key problem. How could a communist country, with a currency that was almost worthless outside the Soviet Union, go about doing business with an American company? Khrushchev wanted Pepsi in Russia, but making it happen would be difficult, particularly given that export of the Ruble was officially forbidden and its value was controlled by the Kremlin. It took 13 long years to overcome this, but finally, in 1972, the USSR and Pepsi resorted to a barter agreement. In exchange for Pepsi, the New York company accepted payment in vodka. For a while this exchange worked remarkably well. Pepsi had a monopoly in the USSR and, boosted by many Pepsi TV commercials, the amount of Pepsi being consumed was increasing significantly, so that by the end of the 1980s, Russians were drinking over a billion servings of Pepsi a year. Stolichnaya vodka also proved a hit in the US, so both parties were happy.
Unfortunately for Pepsi, the honeymoon period came to an end with the outbreak of the Soviet-Afghan War in 1979. The Soviet Union fought alongside the Afghan military to defeat the Afghan Mujahideen, who were rebelling. America and Britain supported the Mujahideen and, accordingly, the Cold War between the USSR and the USA escalated, prompting the US to declare a boycott of all Soviet goods. The vodka deal was no more, and an alternative needed to be found if Russia’s love affair with Pepsi was to continue.
This time the solution was even more bizarre: warships. Pepsi would receive payment for their cola in naval vessels. The Soviet Union handed over 21 naval vessels in return for the fizzy drink. While willing to accept the deal, Pepsi had little use for its newly acquired navy. Accordingly, they decided to loan some of these ships to Norway and sell the rest to Sweden as scrap, therefore conveniently bypassing the rule that no Soviet products could enter the US and allowing Pepsi to keep flowing in the Soviet Union. And so that is how Pepsi briefly owned the world’s sixth largest military.
Pepsi’s growth within Russia seemed unstoppable. In 1990, they signed an even bigger deal with the Soviet Union, this time doubling the production of Pepsi and opening Pizza Hut restaurants in return for a fleet of oil tankers. However, change was on the horizon. On December 26th 1991, the Soviet Union was officially dissolved, leading to the independence of its 15 republics. This caused chaos for Pepsi, who now had to manage operations across 15 countries instead of one, and over the next two decades Coca-Cola increased their market share as Pepsi’s declined.
While Russia’s fascination with Pepsi didn’t last forever, the story of how it arrived there provides a fascinating insight into the relationship between the US and the USSR throughout the Cold War years.
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https://www.thefactsite.com/how-pepsi-became-sixth-largest-military/
https://nickyoder.com/5-minute-history-pepsi
https://yourstory.com/2024/05/pepsi-6th-largest-military-world