In Pepsi/Coke war for consumers behind the Iron Curtain, Pepsi owned world’s sixth largest navy

 
 

The Pepsi/Coke War took a whole new turn when the chairman of Pepsi Co Inc., Donald M. Kendall, found an innovative way to distribute his soft drink behind the Iron Curtain.

The origin of this arrangement dates back to 1959, when the U.S. government struck a deal with the Soviets to organize an exhibition presenting American culture to their ever-wary Russian rivals.

Richard Nixon, then vice-president, visited Moscow as the top representative of his government. He was met by Nikita Khrushchev, Stalin’s heir, who showed the will to loosen up tensions between the two superpowers.

The American National Exhibition included a selection of American-produced technology and consumer goods. Among these products was the famous Pepsi Cola soft drink, represented by the head of its International department, Donald Kendall.

Old logo of Pepsi-Cola

During a heated discussion between Nixon and Khrushchev concerning the opposing political and economic systems they represented, Khrushchev reportedly became increasingly sweaty, as the weather was hot that day, and the feisty discussion certainly added some temperature.

Kendall, who was part of the American delegation, noticed this and hurried to the rescue. He gave Khrushchev a paper cup filled with Pepsi to relieve him of thirst.

A snapshot by a clever photographer who found himself on the spot documented what is considered by many a historic moment. In the photograph, the president of the Soviet Union is drinking an American beverage in front of Nixon.

Vintage Pepsi Cola bottle. Author:Gail Frederick CC BY2.0

Pepsi Co’s slogan at the time was “Be sociable. Have a Pepsi,” which, in this situation, certainly served as a brilliant punch line, as the two statesmen agreed to disagree and continued their conversation in a more relaxed manner.

This image exceeded any dreams of a marketing campaign, and it served as an incredible advertisement for Pepsi Co. Kendall was probably enjoying his moment of triumph, already thinking of how to bring about an import deal with the Soviets.

Vintage-style Pepsi advertisement on Long Island City, in New York. Author:Fraser Mummery CC BY2.0

But it took more than a decade for that to happen. Kendall became CEO of Pepsi Co Inc. in 1963, which enabled him to focus his thoughts on breaking through the Iron Curtain and becoming the first Western businessman to manage to distribute his product on Soviet soil.

The main problem with importing anything to the Soviet Union during the Cold War was the issue of currency. At the time it was strictly forbidden to exchange the Russian ruble for an American dollar. The Soviet government was also prohibited from owning a reserve of the American monetary unit.

So the CEO of Pepsi needed to find a serious loophole in order to achieve his goal.

Soviet Premier Nikita Khrushchev and U.S. Vice-President Richard Nixon debate the merits of communism versus capitalism in a model American kitchen at the American National Exhibition in Moscow (July 1959) – photo by Thomas J. O’Halloran, Library of Congress collection

Meanwhile, Kendall wasn’t the only one who got promoted. His long time friend, Richard Nixon, became the 37th president of the United States when he won the election in 1968. The CEO of Pepsi started pulling strings, hoping to reach an agreement with the U.S. government first.

Even though there was little the USSR could offer the U.S. in terms of consumer products, there was one thing that the Americans loved and lacked, while the Russians were drowning in it―vodka. Not just any vodka, for that matter, but Stolichnaya. This prestigious brand had been patented by the famous Russian chemist Dmitri Mendeleev, the man behind the Periodic Table of Elements, the basis of modern chemistry. He was sort of a Walter White of his time. One fun fact is that Mendeleev was nominated for the Nobel Prize several times, but was never officially awarded due to various disputes regarding his temper.

Russian vodka Author:Yuri Samoilov CC BY 2.0

Anyway, back to our story. The deal was finally struck in 1972―Pepsi Co Inc. gained the exclusive right to sell and produce its beverage in the USSR, and it also became the distributor of Stolichnaya Vodka in the U.S. Pepsi was finally winning the war against its fierce rival, the Coca Cola Company.

During the 1980 Moscow Olympics, Coca Cola was ready to push back. The commercial equivalent of the Cold War was in full swing. The company obtained special rights to supply the Olympics with its brand of soft drink, right in the face of Pepsi, which was expanding its factories all over the USSR, literally owning this huge isolated market.

1980 Summer Olympics Author:Yuriy Somov / Юрий Сомов CC BY-SA 3.0

But Coke’s plans backfired when the Soviet-Afghan conflict escalated into a full-blown war that would later become known as the Soviet Vietnam. Coca Cola pulled back its sponsorship in an act of protest against the invasion. Pepsi was king once again.

This venture did not go unnoticed by the press, who often called out Pepsi for boosting the Soviet economy during which time the USSR was still considered a growing nuclear threat. Some, like the conservative author and commentator William Buckley, went on to accuse Pepsi of deliberately working against the United States.

Pepsi.Author samantha celera CC by 2.0

But the company took little notice of such accusations. In 1989, the contract between Pepsi and the Soviet government was coming to an end. Both parties were highly concerned about the renewal of the contract, as the level of cooperation had outgrown all expectations. The USSR was still banned from participating in the global market, so a simple money transaction was out of the question.

Once again, a bargain needed to be made. As the Soviet world was steadily collapsing,  a sudden military strike from the U.S. became less and less likely. The USSR was at the time one of the two most armed countries in the world, second only to the United States of America.

So they decided to get rid of some hardware. Ships for drinks, you might say. The USSR once again outdid itself in terms of conducting business. They traded in 17 diesel-powered submarines, a cruiser ship, a frigate, and a destroyer, in order to obtain the new Pepsi contract. The submarines, which were worth millions, were given for a mere $150,000 apiece.

They also added some oil tankers to sweeten the deal. The military ships were then sold to a Swedish company that specializes in recycling metal, to be dismantled and sold for scrap.

Pepsi  Author:Sally Mahoney CC BY2.0

Donald Kendall, who was then 68 years old, was, for a short while, the owner of the sixth largest navy in the world at that time. Talk about corporate security, right?

The New York Times summarized the history of this deal with a quote given by Kendall to President Bush’s national security adviser, Brent Scowcroft: ”We’re disarming the Soviet Union faster than you are.”

This was Pepsi’s contribution to world peace. But on the other hand, the fall of the Soviet Union led to trouble for their business plan.

Just when the Coca Cola Company was ready to throw in the towel on the Soviet market, something unusual happened. The fall of the Berlin Wall, which marked the end of the Soviet empire, opened up the borders, and Western goods flooded the local supermarkets.

Coca-Cola

Pepsi had been available since 1972, and it was considered a domestic beverage. It therefore completely lacked the exotic charm of a Western product that Coke now had to offer.

Read another story from us: During the 1940’s, a Soviet Union Marshal asked Coca-Cola to produce a white, less American Coke

The sales of Pepsi went down, while the sales of Coca Cola skyrocketed. The Pepsi generation of the Eastern Block considered Kendall’s soda a thing of the past, and it was collectively abandoned, boycotted even, as a reminder of the previous regime.