Pepsi Briefly Became the Sixth Largest Navy in the World

For some time, Pepsi became the sixth-largest Navy in the world. It turns out that it was some very clever bartering, some very clever kind of quid pro quo between the Russian government and the Pepsi Corporation.

The Cold War in the 1950s was between two hegemonic superpowers, the US and the USSR. Both want to be the big dog on the planet, and they both wanted to avoid confrontation. So they waged proxy wars, unethical diplomacy, propaganda. Different countries that were full of innocent bystanders were used as battlegrounds.

And the crux of it is that both countries are nuclearly armed. Nobody wants an escalation because of mutually assured destruction. The theory is that if one state launches a nuclear weapon, then it'll become increasingly easier for other states to rationalize launching them. So no one wants to tip the applecart too far.

At different times, the US and the USSR would escalate things, and then they would try to ease things down. This story sort of begins when the USSR in the US was in a period of easing tensions. They started this thing they called cultural exchanges. In the summer of 1959, the Soviet Union held a Mini World Fair.

American culture was coming to Russia in the form of the American national exhibition in Sokolniki Park in Moscow. They had all of these massive brands that included Pepsi.

The Soviet Union held a similar exhibition in New York City and they did the same thing with Russian displays. At the American national exhibition there in Sokolniki Park, the Soviet Premier Khrushchev visits this exposition. And then he meets Richard Nixon, who at this time was just vice president. He had been sent to stand in for Dwight Eisenhower, the US president at the time because the US president wasn’t going to travel there.

The night before Nixon and Khrushchev meet, one of the executives for Pepsi named Donald M. Kendall visits Nixon at the US Embassy in Moscow. He's known Nixon for a long time outside of business relationships. Kendall wants to grow PepsiCo overseas and the rest of the Pepsi executive board is against it but he goes against them. He sponsors a booth at this exhibition. In that exhibition, the only thing they give you is Pepsi Cola and he gets a little bit of help from Nixon. They try something that stands out to everyone. The booth gives you two batches of Pepsi, you can get one that's made with water from the US and one made with water from Russia. That was the whole point was to get a Pepsi in Khrushchev’s hand.

It was set up for Khrushchev to lose his cool and conclude the Russian version was better because to Khrushchev of Russia is going to be superior in every single way. He gets the Pepsi in his hand. I imagine there’s some branding on it and they snap a picture.

A photographer catches Khrushchev taking that initial sip with Kendall on the other side pouring another cup instantly. People went crazy for this.

At the time, Coke and Pepsi were head to head for a while. They both wanted to get a foot in the door and have this big cultural moment. Both have their markets carved out even now, but they wanted to be the first soda that people in the country have ever seen because you set the standard.

The optics of that photo op set the world on fire because it was sort of like, everything’s cool, Khrushchev and Nixon are kicking it, sharing an ice-cold Pepsi, what could be more American than that, right? Kendall, by the way, is riding high. He is a hero in Pepsi culture, of course. But he is also becoming iconic in his own right in the United States. Only six years after this American national exhibition, he becomes CEO and decides to continue this growth.

Fast forward to 1972, Dick Nixon is president of the United States and his old pal Kendall is serving as CEO of Pepsi Cola. And their plans overlap.

Nixon wants to expand commerce with the USSR and Kendall is now CEO, and he is in sort of a Highlander situation with Coca Cola. And he thinks the USSR is going to be this huge market. And he gets with Nixon, who, you know, again, is now president. And he uses that nepotism that influences to negotiate a deal with Brezhnev, who is the Soviet Premier at the time.

But the catch here is that Pepsi would then get exclusive rights within the USSR. They shipped all that raw Pepsi syrup to 20 different bottling plants in Russia. That's where they carbonate it - that's where they put local water in it. And as the New York Times put it, this meant that Pepsi was the first capitalistic product legally available in the USSR.

The Russian currency wasn’t really good for the exchange rate. So it was not particularly feasible for the country to pay with their currency.

Not only was the Russian currency worthless outside of the USSR, but they didn’t have a big secret vault of American cash that they could use to pay Pepsi. Pepsi was going to barter their products to the Russians, and in exchange, instead of US dollars, they were going to get government-produced vodka.

The Soviet government begins creating Pepsi. And Pepsi began selling this vodka in the US. And in time, it becomes the second-largest vodka brand in the country in the United States.

By the late 1980s, Russians are drinking about a billion servings of Pepsi per year.

By 1988, they’d reached a peak and Pepsi started running commercials. The demand for Pepsi was high and the bartering situation was fine because Russian Vodka was doing well in the US but here’s the problem; the demand for the product Pepsi on the Russian side was higher than they had vodka to barter with.

Added to that, there was a US boycott of Russian Vodka as a response to the Soviet-Afghan war and Pepsi needed something else because people weren’t buying vodka. The vodka agreement at this point is set to expire in 1989. Just to recap there, Pepsi had exclusivity until 1985. They had vodka until 1989.

They go back to the drawing board or bartering table. The Soviet government is going to have to come up with something else to pay Pepsi with, something other than vodka that can sell on the international market. And it can't be money because their money doesn't work in the rest of the world and it can't be vodka because of the boycott.

In the spring of 1989, they agree. Pepsi becomes the proud owner of 17 Soviet submarines, three warships including a decommissioned frigate, a cruiser, and a destroyer. And the idea here was that Pepsi had this big Navy. They were not intending to take over the world with their Navy. They just needed something that they could liquidate but they didn’t meet their bottom line because the money they made for scrapping this flotilla and the money they made from leasing or selling these oil tankers let them more than double the Pepsi bottling plants in the Soviet Union.

So the Soviet Union collapses in 1991 and with that, the Pepsi deal collapses. They’ve gone from having this decades-long balancing act that was very profitable for them into this mad dash to try to get all of their stuff back before it is taken away by the different governments that are popping up.

Pepsi did have this pretty sweetheart exclusive agreement with Russia. Like all good things, they must come to an end, and eventually, their biggest competition, Coca Cola came rushing in and wanted to get a piece of that action.

Pepsi tries a bunch of different marketing campaigns. They’ve always been pretty original with their marketing campaigns, sometimes for better or for worse but Coca-Cola is very good at marketing too. If you go to Russia, it’ll be easy to find Pepsi, because Russia is still Pepsi’s second-biggest market outside of the US. However, Coca-Cola is the most popular soda in Russia. In 2013, the famous Pepsi billboards over Pushkin square were torn down leading the author of the fantastic Atlas Obscura article to conclude that maybe Pepsi should have held on to that destroyer after all.

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