“Students on school vacation sell Russian-bottled Pepsi
to thirsty motorists in downtown Moscow in 1992”
When the Soviet Union Paid Pepsi in Warships
by Anne Ewbank / January 12, 2018
“On April 9, 1990, American newspapers reported on an unusual deal. Pepsi had come to a three billion dollar agreement with the Soviet Union. The Soviet Union had long traded Stolichnaya vodka in return for Pepsi concentrate. But this time, Pepsi got 10 Soviet ships. This wasn’t the first time that Pepsi sold soft drinks in return for a flotilla. The previous year, the company even received warships. This situation—a soft drink conglomerate briefly owning a fairly large navy—was the unusual result of an unusual situation: a communist government buying a product of capitalism from the country it considered its greatest rival. It began with a rare exchange of culture. In the summer of 1959, the U.S.S.R. held an exhibition in New York, and the United States reciprocated. The American National Exhibition in Sokolniki Park, Moscow, featured American products: cars, art, fashion, and an entire model American house. A number of still-familiar brands sponsored exhibits and booths, including Disney, Dixie Cup Inc, IBM, and Pepsi.
“Richard Nixon and Nikita Khrushchev at the Kitchen Debate”
That month, many Russians got their first taste of Pepsi. One of them was Soviet leader Nikita Khrushchev. On July 24, then-Vice President Richard Nixon showed Khrushchev the exhibition. It became the scene of the infamous Kitchen Debate. While standing in a mock-up of an American kitchen, Nixon and Khrushchev traded barbs about communism and a recent American resolution on “captive states” under Soviet power. Nixon also led Khrushchev towards a display booth that dispensed nothing other than Pepsi-Cola. Symbolically, the booth offered two batches: one mixed with American water, the other with Russian. It was a set up. The night before, a Pepsi executive, Donald M. Kendall, had approached Nixon at the American embassy. As the head of Pepsi’s international division, he’d defied the company’s leaders in deciding to sponsor a booth and attend the exhibition. To prove that the trip was worthwhile, he told Nixon, he “had to get a Pepsi in Khrushchev’s hand.”
“Kendall is at the front, pouring”
Nixon delivered. A photographer caught Nixon and Khrushchev together as the Soviet leader gingerly sipped his cup of Pepsi. Kendall stands to the side, pouring another cup. Khrushchev’s son later recalled that many Russian’s first take on Pepsi was that it smelled like shoe wax. But, he added, everyone remembered it, even after the exhibition was over. For Kendall, the photo was a triumph. He had big plans for the brand’s expansion, and the Khrushchev photo op catapulted him up the ranks at Pepsi. Six years after the American National Exhibition, Kendall became CEO. The U.S.S.R. was Kendall’s land of opportunity, and his goal was to open it to Pepsi. In 1972, he succeeded, negotiating a cola monopoly and locking out Coca-Cola until 1985. Cola syrup began flowing through the Soviet Union, where it was bottled locally. It was a coup: As the New York Times put it, the soda was “the first capitalistic product” available in the U.S.S.R. Pepsi had become a pioneer. But there was one issue: money. Soviet rubles were worthless internationally, with their value determined by the Kremlin. Soviet law also prohibited taking the currency abroad. So the U.S.S.R. and Pepsi resorted to barter. In return for cola, Pepsi received Stolichnaya vodka to distribute in the United States.
“A woman inspects Pepsi bottles at a plant near Bucharest, 1989”
By the late 1980s, Russians were drinking approximately a billion servings of Pepsi a year. In 1988, Pepsi broadcast the first paid commercials on local TV, starring none other than Michael Jackson. The bartering worked well—Stolichnaya was popular in the United States. An American boycott in response to the Soviet-Afghan war, however, meant that Pepsi wanted something else to trade. So, in the spring of 1989, Pepsi and the Soviet Union signed a remarkable deal. Pepsi became the middleman for 17 old submarines and three warships, including a frigate, a cruiser, and a destroyer, which the company sold for scrap. Pepsi also bought new Soviet oil tankers and leased them out or sold them in partnership with a Norwegian company. In return, the company could more than double the number of Pepsi plants in the Soviet Union. (It also ignited jokes that Pepsi was taking the Cola Wars to the high seas.) “We’re disarming the Soviet Union faster than you are,” Kendall quipped to Brent Scowcroft, President George H.W. Bush’s national security adviser.
“A statue of Pushkin watching over the Pepsi signs”
But that was nothing compared to 1990’s three billion dollar deal. (A figure based on Pepsi’s estimate of how much sales of cola in the Soviet Union and vodka in America would net them over the next decade.) It was the largest deal ever brokered between an American company and the Soviet Union, and Pepsi hoped it would spur more expansion. Pepsi even launched another American institution in the country: Pizza Hut. The future looked bright. Instead, the Soviet Union fell in 1991, taking with it Pepsi’s deal of the century. Suddenly, their long balancing act turned into a scramble to protect its assets in a free-for-all made more complex by redrawn borders, inflation, and privatization. The LA Times described how the new Pizza Huts were hobbled—their mozzarella was sourced from Lithuania. The company had hoped to pivot from heavy glass bottles to cheaper plastic, but the plastic company was located in Belarus. Similarly, Pepsi’s partially-built ships were stranded in newly-independent Ukraine, which wanted a cut of the sales. Kendall, who had since retired, lamented that the Soviet Union had essentially gone out of business.
Over several months, Pepsi pieced parts of the deal back together. But instead of dealing with a single state, they had to broker with 15 countries. Worse, Coca-Cola aggressively entered the former Soviet Union, and Pepsi struggled to keep its advantage. Among other marketing strategies, it launched a giant, replica Pepsi can up to the Mir space station for a commercial, and erected two iconic billboards over bustling Pushkin Square in Moscow. Russia is still Pepsi’s second biggest market outside of the United States. But their pioneering luster has faded. It didn’t help that Pepsi had been around for so long that other sodas seemed novel by comparison. After only a few years, Coke beat out Pepsi as Russia’s most popular cola. And in 2013, even the billboards over Pushkin Square came down. Maybe Pepsi should have held on to that destroyer.”
SOFT (DRINK) POWER
How did Pepsi become the first American brand to take root in the Soviet Union?
by Ksenia Zubacheva / Feb 12 2018
“We had a very beautiful uniform, like that of doctors: white robes, hats, clothes made personally for each worker. We were all proud of our work, and it was very prestigious to work here,” recalled Valentina Merezhko, a resident of the southern city of Novorossiysk (link in Russian). She was one of the lucky ones who worked in the USSR’s first Pepsi plant, which opened its doors in 1974, making up to 160,000 bottles of Pepsi per shift.
The head of the company at that time, Donald M. Kendall, named it “the best and most modern PepsiCo plant in the world.” He must have been surprised that the plant was completed in just 11 months – something never achieved before with any other Pepsi plant. Kendall had been dreaming of it for years, but it was in the summer of 1959 that good fortune came his way at the U.S. National Exhibition in Moscow’s Sokolniki Park. At that time, he was in charge of Pepsi’s international operations, and asked Richard Nixon, then U.S. Vice President, to help him “get a Pepsi in [Nikita] Khrushchev’s hand.”
“Apart from Kendall and his board of directors,Soviet leader
Leonid Brezhnev also came to see the first Pepsi plant”
Nixon agreed, and the rest is history. The company was eager to enter the Russian market, especially since Pepsi’s key competitor, Coca-Cola, was not active there. In between talks with the Soviet leader on their countries’ rivalry in the production of consumer goods, Nixon fulfilled his promise to Kendall and the above picture was taken. This was the best advertisement that a company could possibly want in the Soviet Union at that time!
Nixon actually tricked Khrushchev, asking to taste two types of Pepsi: one made in the U.S., and one made in Moscow (our guess is that the Americans brought concentrate to Moscow and added local water). Of course, the Soviet leader preferred the latter and then promoted it to everyone at the exhibition. The press went crazy and published photos of Khrushchev holding a Pepsi with the caption, “Khrushchev wants to be sociable,” which was a reference to Pepsi’s slogan in the U.S. at that time: “Be sociable, have a Pepsi.”
“Teenagers celebrate the end of school, Moscow, 1981”
Barter for Vodka
It wasn’t until 1972, however, when Pepsi became the first capitalistic brand produced in the Soviet Union. According to the agreement, PepsiCo started to supply concentrate and equipment for 10 future production plants where concentrate was to be diluted, bottled and distributed across the country. One issue to solve, however, was payment. Soviet rubles could not be internationally exchanged because of Kremlin currency controls, which made it illegal not only to trade them internationally but also to take the currency abroad. Therefore, a barter deal was made whereby Pepsi concentrate was swapped for Stolichnaya vodka and the right for its distribution in the U.S. – liter per liter.
Originally, it was expected that the first plant would appear in Sochi, but due to the lack of fresh water sources nearby it was decided to build it in Novorossiysk. When the plant opened, Soviet people often would visit Novorossiysk with two goals: a holiday on the Black Sea, and to try Pepsi. By the end of 1982 seven more plants appeared: in Moscow, Leningrad, Kyiv, Tashkent, Tallinn, Alma-Ata and Sukhumi. In 1973-1981, as many as 1.9 million decaliters of Stolichnaya vodka worth $25 million was shipped to the U.S., and 32.3 million decaliters of Pepsi was produced, earning the Kremlin 303.3 million rubles. The barter deal with the USSR only allowed the company to profit from vodka sales in the U.S. – it didn’t benefit from Pepsi sales in the Soviet Union. The price for a bottle of the American soft drink was twice the cost of Soviet drinks (lemonad was 10 kopecks), and one could buy a 0.33 liter bottle for 45 kopecks, and then return the glass bottle to get 10 kopecks back.
“Pepsi was the first American consumer product manufactured and sold in the Soviet Union. In 1991, Russians could buy the soda for 20 kopeks, about 10 cents”
Following the American reaction to Soviet intervention in Afghanistan in 1979, the sales of vodka plummeted and PepsiCo started to look for something else to barter. The company founded a peculiar way to continue its business – Soviet warships. In May 1989, Pepsi bought 17 submarines (for $150,000 each), a cruiser, a frigate and a destroyer, which all were later resold for scrap. Plus, the company bought new Soviet oil tankers and later leased them or sold them in partnership with a Norwegian company. It was then that Kendall famously remarked, addressing U.S. national security adviser Brent Scowcroft, “We’re disarming the Soviet Union faster than you are.” A year later, the company signed a historical $3 billion deal with the Kremlin to swap 10 Soviet tankers and freighters worth more than $300 million for Pepsi concentrate.
“In 1988, Pepsi was the first Western brand to place a paid commercial on Soviet TV. The ad featured none other than Michael Jackson.”
Despite Kendall’s hopes that this would foster PepsiCo’s further expansion in the country, the collapse of the Soviet Union ruined his plans and the company never claimed the ships. They were located in a newly independent Ukraine that wanted to bargain something for itself. Suddenly, PepsiCo had to deal with 15 states instead of one. The worst part – its key competitor, Coca-Cola, now entered the market, and PepsiCo struggled to hold on to its market share in Russia.
“1990 Pepsi commercial in the USSR: “New generation choses Pepsi.”
Today, Pepsi enjoys a strong position on the Russian market producing a wide range of items. Yet, from time to time, Russians nostalgically recall the unique taste of Pepsi in a glass bottle saying that it tasted better than today because plastic ruins the taste. Here’s something that shows the extent of this nostalgia: One lucky owner of an original Soviet-era Pepsi bottle offered to sell it for 6,400 rubles ($110) – an already expired product, of course, but still a nice find for lovers of vintage items.”
Ethical capitalism rarely comes with easy answers or universal values, which is why the shareholder-returns model seems underrated lately, writes @AllisonSchrager https://t.co/CTDCXcb9t0
— Bloomberg Opinion (@opinion) March 24, 2022