In the never-ending battle for market share, Pepsi has consistently taken second place against its rival, Coca-Cola. Fortunately, the rivalry between the companies has been limited to commerce. Had it broken out into an actual shooting war, there’s no question Pepsi would have emerged as the industry’s lone superpower. Its victory would be assured simply because — for a while, anyway — Pepsi owned the sixth largest navy in the world.
It was 1959 when Vice President Richard Nixon and Soviet Premier Nikita Khrushchev faced off at the American National Exhibition in Moscow. In what would come to be known as the “Kitchen Debate,” the two men exchanged verbal barbs about which country had the better household appliances.
While Khrushchev maintained that the Soviets had the advantage in the kitchen, there was one aspect of American society that he grudgingly embraced. Donald Kendall, head of Pepsi’s international operations, arranged for his company’s product to be on display at the exhibition. He offered the Soviet leader a cup of his company’s soda. Khrushchev sniffed the beverage suspiciously before declaring that it smelled like shoe wax. Despite his misgivings, he took a sip. Then he took another. He ended up drinking several cups of the beverage before the event was over. Khrushchev was hooked.
Although he was still convinced that the Soviet Union would bury western capitalism, Khrushchev worked out a deal with Kendall to allow Pepsi to be imported, produced and sold in the USSR.
The deal was a career-maker for Kendall, who became CEO of Pepsi six years later.
One of the details Kendall had to work out was how the Soviets would pay for Pepsi. The USSR had a closed economy, without official international monetary transactions. Its currency, the ruble, was worthless outside of the country. The only way the Pepsi deal could work would be if Kendall could work out a trade.
The answer came in the form of vodka. The agreement called for Pepsi’s products to go into the USSR, in exchange for Stolichnaya Vodka. Pepsi received the vodka in the USA and sold it at a profit.
The people of the Soviet Union fell in love with Pepsi. As the 1980s drew to a close, Russians were drinking more than 1 billion servings of the soda every year. It was at this time that Pepsi’s contract with the USSR was coming up for renewal. The country’s demand for the product was increasing, but its ability to pay for it was in decline. If they could not agree on something quickly, the nation might have to quit their Pepsi addiction cold turkey.
In desperation, the nation decided to pay with warships. As part of the contract renewal terms, Pepsi received a fleet of 17 submarines, a cruiser, a frigate, and a destroyer in exchange for ongoing Pepsi product rights. Pepsi, in turn, sold the naval vessels to a Swedish company for scrap recycling. Pepsi also purchased some Soviet oil tankers and leased or sold them in partnership with a Norwegian company.
Between the time it acquired the naval vessels and when it relinquished them, Pepsi could boast that it had the sixth-largest navy on the planet.
Kendall joked with Brent Scowcroft, National Security Advisor to President George H.W. Bush, saying, “We’re disarming the Soviet Union faster than you are.”
Despite Pepsi’s boast, its fleet wasn’t exactly the sort that could take on the rest of the world. The submarines were in a terrible state of repair. Many listed to one side and nearly all were covered in rust. Of the surface ships, there was only one that could really be classified as seaworthy, and there was another that required nonstop pumping of seawater just to keep it from sinking.
The same could not be said of its product, however. Despite losing out in Russian market share to Coca-Cola in the 1990s, Russia and the countries of the former Soviet Union remain as Pepsi’s second biggest market outside of the United States.