The doomed voyage of Pepsi’s Soviet navy

In 1989, PepsiCo Inc., the maker of Pepsi, acquired 17 submarines, a cruiser, a frigate, and a destroyer from the Soviet Union. In recent years, an internet legend has grown up around this deal, which holds that Pepsi briefly possessed the sixth-largest fleet in the world. In one way, that isn't far off. According to an analysis of Jane's Fighting Ships 1989-90, a country operating a squadron of 17 submarines would have tied with India for possessing the seventh-largest fleet of attack submarines.

Yet in any real sense the story is false. What PepsiCo acquired were small, old, obsolete, unseaworthy vessels. The Pepsi navy no more conferred military power than a rusting Model T could have been a Formula 1 contender. What's more, the ships themselves were immediately turned over to a Norwegian shipyard to be scrapped. PepsiCo was more a middleman than a maritime power.

Most interpretations of the story get its meaning wrong, too. The Pepsi navy is sometimes portrayed as an embarrassment for the USSR. Far from it. The multinational firm and the country founded by Vladimir Lenin were business partners, and in 1989 Pepsi executives were bullish on Soviet prospects. PepsiCo acquired the rusting fleet as part of a multibillion-dollar bet on the long-term stability of the Soviet Union, an enormous market that had little to trade immediately besides raw material and the promise of future profits.

The Pepsi navy isn't a story from the era of Soviet collapse. It's from the brief moment right before, when the Soviet Union looked likely to survive even though the Cold War had ended. The rusting submarines were one way in which Soviet leaders and Western corporations could establish world peace and a new, post-communist prosperity led by business.

American leaders hoped that exposure to Western business could transform the Soviet Union into a country just like theirs. Pepsi executives influenced US policymakers to gain a major advantage in its rivalry with Coca-Cola. Soviet officials saw the deal as part of a larger strategy of external trade that could help revitalise their creaking economy. In the end, almost nobody got what they wanted.

The Pepsi navy begins with one man's driving ambition to sell soda to Soviets. Bluff, hearty, and ambitious, Donald Kendall started as a worker in a Pepsi-Cola bottling plant, but he swiftly climbed the corporate ladder, becoming head of the company's international division by 1957 when he was only in his mid-30s.

As a corporate executive engaged in international business, Kendall filled a role sometimes slighted by scholars. Theorists can make international relations seem far removed from everyday experience: nuclear strategy, treaty negotiations, human rights principles.

Yet formal interactions between governments are only a small part of international relations. Most of what happens among countries concerns something far simpler and more direct: business. International business executives and their attendant lawyers, accountants, and fixers handle the complexities of cross-border trade and investment, but such complex deals still chase a simple goal: making money.

There's no mystique in that ambition, which may explain why it's written about far less often than the deals of politicians and diplomats. Yet it is the Donald Kendalls, not the Henry Kissingers, who steer much of international relations. The constant pressure business executives exert as they dig for profit can wear away at even the supposedly rock-solid foundations of national policy. If the quest for profit proves compatible with official objectives, so much the better; if not, then executives will try to manufacture opportunities to pursue their narrow interests.

These pressures manifest in unexpected ways. In the late 1950s, as Kendall assumed his executive role, US President Dwight D Eisenhower tried to use propaganda to counter the early advantages of the Soviet Union in the Cold War. Soviet leaders could point to the country's sizzling postwar economic growth rates, which outpaced US growth so substantially that even leading American economic textbooks assumed that the USSR would soon overtake the United States. Soviet triumphs in space, including the launch of the first artificial satellite, Sputnik, exemplified the communist world as the wave of the future - and American racial apartheid in the South made the United States seem like the champion of an imperialist past.

Paul Musgrave / Assistant Professor, University of Massachusetts Amherst. Photo: TBS

One part of Eisenhower's counteroffensive involved organising the 1959 American National Exhibition in Moscow. Eisenhower bet that showing the ordinary bounties of American living as showcased by the wares of such leading brands as Kodak, General Electric, and Pepsi-Cola would convince the Soviet people that peace was desirable - and, more important, that they would be better off under capitalism.

The most notable part of the exhibition came with the visit of Eisenhower's vice president, the anti-communist zealot Richard Nixon, who escorted Soviet leader Nikita Khrushchev on a tour of the pavilion. The two sparred over the relative merits of their systems in front of a media entourage, who broadcast their exchanges.

Eisenhower's vision of holding an exhibition that would shake the foundations of communism was a bust. But three other men got what they wanted from the display. Khrushchev demonstrated to his domestic audience that the Soviet Union could excel in peaceful competition. Nixon received a huge poll boost and media plaudits for defending the American system.

Kendall was the third. In 1999, he recounted that he had told Nixon the night before the visit that some at Pepsi-Cola headquarters viewed participating in the exhibition as a waste of money. The next day, Nixon deftly guided the Soviet premier to the Pepsi booth. Pepsi photographers recorded Nixon and Khrushchev drinking the soda together.

Even though Khrushchev's verdict on the soda was ambivalent (Time magazine recorded his reaction as "skeptical"), the publicity coup accelerated Kendall's career. In 1963, Kendall became the company's president and chief executive officer.

Kendall was now positioned to repay Nixon for the favour. Nixon needed it. He was then best known as a loser, both in the 1960 race for president to John F. Kennedy and then, humiliatingly, the 1962 California governor's race.

Kendall handed Nixon a lifeline: a promise that whatever law firm took the politician on as a partner would also receive Pepsi-Cola's legal accounts. The prominent New York law firm Mudge, Stern, Baldwin, & Todd leapt at the sweetener. The deal enriched Nixon and gave him excuses to travel around the country and globe as a Pepsi representative. Thanks to Kendall, Nixon was rich and laying the groundwork for a political comeback.

Kendall's role as a political sugar daddy paid off when Nixon won the presidency in 1968. The most visible return on Kendall's investment came when the businessman used his relationship to broker one of the first deals between the Soviet Union and an American firm in the Cold War period. In the 1920s, U.S. companies like Ford Motor Co. had been prominent in the Soviet Union, which idolised American management practices, but they exited the market before World War II.

In 1972, Kendall and Soviet officials announced a deal that would exchange equivalent values of Pepsi for Soviet vodkas made by Stolichnaya and Sovetskaya. Not only would Pepsi become the first American soft drink available in the USSR, but the deal also locked Coca-Cola out of the Soviet market.

Nixon's friendship paved the way for the deal. In 1971, U.S. National Security Advisor Henry Kissinger's deputy Alexander Haig lobbied Soviet Ambassador Anatoly Dobrynin to have the Soviets accept a trade delegation Kendall would head. In one of his regular phone calls with Nixon and his aides, Kendall asked Kissinger (whom he greeted with "Hello, handsome") to press Kremlin leaders to finalise the deal. The Soviets got the message: This deal mattered to Nixon, personally.

In a 1975 meeting in Geneva, Soviet Foreign Minister Andrei Gromyko wondered why the Soviets had Pepsi but not Coca-Cola. Dobrynin diplomatically observed that it was because "their chairman is more energetic." Kissinger, more bluntly, said it was because Kendall "was a friend."

Kissinger was not always so generous. In a 1973 meeting with the AFL-CIO's foreign-policy adviser, Kissinger thanked organised labour for their support of the president's foreign policy and exclaimed, "The businessmen in this country are a disgrace. Look at Kendall of Pepsi-Cola, he would sell the country for a contract."

The Pepsi-for-vodka swap may have been consistent with Nixon's policy of detente between the Soviet Union and the United States, but it was also a triumph for Kendall. The 1972 PepsiCo annual report featured a two-page photo spread of Kendall standing in front of the iconic St. Basil's Cathedral in Moscow's Red Square, with a quote that made him sound more like a statesman than an executive: "I have long believed that trade between nations could help to build bridges of greater understanding between different cultures and economic systems." Kendall was asserting that private enterprise could succeed in ways that the Kissingers of the world could not—that he could have both the profits of a salesman and the mystique of a statesman.

The deal faced obstacles. The cumbersome Stolichnaya-for-soda swap resulted from the difficulties of trading with a communist country outside the normal trading rules of the capitalist world. Because Soviet currency, the ruble, could not be traded on international markets, and the Soviet Union hoarded its reserves of hard international currencies, every deal involved complicated, time-consuming, and risky exchanges of material goods, not the simple ease of currency.

Other obstacles were political. Jewish groups in the Soviet Union boycotted Pepsi, charging that the deal placed profits before the rights of Soviet citizens of Jewish descent locked inside the country. (Soviet policy required Jewish emigres to pay exorbitant fees.) Activists in Congress linked U.S.-Soviet trade and human rights to block a planned 75 percent reduction of U.S. tariffs on imports, including those of Stolichnaya.

Political and economic challenges could also combine, especially as detente crumbled later in the 1970s. PepsiCo aggressively marketed Stolichnaya as an authentically Soviet vodka. That left the brand open to boycotts when Cold War tensions ran high, as when the Soviet Union invaded Afghanistan or a Soviet fighter jet shot down a Korean Air Lines passenger aircraft in 1983.

Still, Pepsi's Soviet market grew, and by 1985, when Mikhail Gorbachev took power in the USSR, Pepsi had built 16 bottling plants there.

What were the Soviets getting out of all this? For Soviet leaders after Joseph Stalin, trade with the West offered many advantages, something they repeatedly made clear. Khrushchev stressed Soviet openness to trade when he met a delegation of U.S. state governors weeks before the American exhibition opened in Moscow.

Trade in such raw materials as gold and oil offered the Soviet Union the ability to earn hard currency, which it could use to purchase advanced equipment (or, when the harvest failed, food) on world markets. Yet Soviet leaders, conscious of their disadvantages relative to the leading technologically sophisticated capitalist countries, also found commercial dealings to be a promising way to import more sophisticated technology. In 1966, for example, the Italian automaker Fiat signed an accord to build a major automobile factory in a partnership with Soviet industry, an investment whose impact in real terms far exceeded that of the Pepsi deal.

In the early 1970s, Soviet leaders hoped that the Pepsi agreement would be only the first in a series of more such deals with the United States, Western Europe, and Japan. Reform-minded technocrats calculated that the occasionally pragmatic Nixon administration offered a window to accelerate Soviet growth. When the U.S. Congress tied human rights to the trade deal, it weakened those reformers and detente—which were dealt another blow by the ascent of the hard-line anti-communist U.S. President Ronald Reagan.

Gorbachev's ascent meant a return to the broad Soviet policy of international relaxation, economic cooperation, and domestic reform. Yet circumstances had changed. Western businesses were now warier of the political risks associated with trade with the Soviet Union. They had also learned, at great cost, about the less dramatic but real headaches involved with doing business in the Soviet Union: customs hassles, contract violations, truculent workers, a primitive financial system, and creaking logistics.

Despite those hardships, American brands including McDonald's, Pizza Hut (also owned by PepsiCo at the time), and even Baskin-Robbins cautiously entered the liberalising Soviet market. Even Coca-Cola entered the market (in a limited way, with its flagship Coke at first only available in hard-currency stores open to tourists) when Pepsi's exclusive deal expired.

There were some secondary benefits from entering the Soviet market: Pepsi ran television ads in the United States implying that its sodas had caused glasnost. The more important bet was on the long term. Executives like Kendall still thought that such hassles would be worth building a business that could be profitable as the reforming Soviet economy took off. Corporations got the best of all worlds: the ability to out-compete bumbling Soviet firms while using clout to exclude foreign rivals.

1989 turned out to be an axial year. Tanks rolled into Tiananmen Square in June. The Berlin Wall fell in November. Less remembered, but almost as important to observers at the time, was that the Soviet Union held meaningful elections for its new legislative body, the Congress of People's Deputies, another step that seemed to confirm the power of Gorbachev and reformers.

That was the environment in which PepsiCo concluded the deal that delivered the Pepsi navy. The ruble was still worthless internationally, and Stolichnaya's growth prospects were more limited than in 1972, so enlarging Pepsi's sales in the USSR meant turning to new sources of revenue.

These were the circumstances in which PepsiCo struck the deal for the submarines and other vessels. The novelty of the submarine trade grabbed headlines even at the time, but PepsiCo never even took possession of the watercraft. As the Associated Press reported in July 1989, PepsiCo was just the middleman for the vessels bound for the scrap heap, which went to a Norwegian ship-breaker instead.

Indeed, there was little notable about the sale of the submarines except that it involved Pepsi. The Soviet navy had begun selling its obsolete and unseaworthy vessels for scrap in the late 1980s, one component of a flood of scrap exported from the Soviet Union and Eastern Europe. The Economist reported in 1990 that the Eastern bloc glut had contributed to scrap prices' slide from 70 British pounds (over $100 at the time) per ton to less than 40 pounds per ton in only a few months. By then, a Soviet Whiskey-class submarine could be had for $50,000 or a destroyer for $400,000. Even at those prices they were hardly worth the cost of ship-breaking, not least because Soviet ships could contain loads of asbestos. Hard-liners in the West warned that such deals could simply help fund Soviet naval modernisation, making the Soviet navy of the 1990s a far more formidable foe.

The sale of the Pepsi vessels for scrap may have been worth a few million dollars, which brought the Soviet navy much-needed hard currency. Yet it was a sideshow. The real soda-for-ships deal involved ships that would work. Initially, PepsiCo arranged for its vodka countertrade arrangement to include two 28,000-ton Soviet oil tankers, which PepsiCo bought in a joint arrangement with a Norwegian shipping firm run by a friend of Kendall's. In April 1989, according to the Financial Times, PepsiCo joined a similar, bigger deal with a Soviet trade organisation and two Norwegian firms valued at nearly $2.6 billion to deliver as many as 85 Soviet-built ships over a decade. (The reported value of the deal varies by source, possibly because American firms that were engaged in bartering could understate their true value to avoid tariffs and taxes.)

Pepsi announced the deal would double its sales of soda inside the Soviet Union over a decade and enable it to open Pizza Huts in the country. The Norwegian partners would handle the marketing of the Soviet ships (and bear the risks of selling the vessels). And the Soviet Union would receive not only a market for its ships but also investment by the Norwegian partners to overhaul shipyards where the vessels would be built.

With a reformist government moving forward, executives such as Kendall assured themselves that the future looked bright for their investments in the Soviet Union. But one consequence of liberalisation was a new wave of public criticism. Anatoly Sobchak, the democratic mayor of Leningrad (now St. Petersburg), attacked the expanded Pepsi deal as an exercise in "gigantomania" that would destabilise the market. Kendall ruefully observed in early 1991 that it had been easy to do business with the centralised economy before Gorbachev, but "Dealing in a democracy in the Soviet Union today is much more difficult."

Yet the fact that those objections could be voiced seemed only to confirm that reform was real and that progress was possible. On July 30, 1991, U.S. President George H.W. Bush announced major steps toward full trade normalisation. "My country stands ready to assist in this new Soviet revolution," Bush said. But, Bush cautioned, "Western governments—with their own strapped resources—are limited in what they can do. So, we must bring together the businessmen from Europe and America, and their partners from all across the Soviet Union." Finally, Kendall's vision would be realised: Western capitalism would end the Cold War and get rich in the process.

Less than three weeks later, hard-line forces launched a coup against Gorbachev. Within months, leaders of key Soviet republics dissolved the union. On Dec. 25, 1991, Gorbachev resigned as president of the USSR, which vanished with the stroke of his pen.

To be sure, Pepsi's interests in Russia didn't disappear. In 2020, PepsiCo reported revenue of $3 billion in Russia, its third-largest market behind Mexico and the United States. In 2004, Kendall received the Order of Friendship for his contributions to Russian commerce from Russian President Vladimir Putin. Yet there was no longer any mystique. Russia was now just one developing and newly competitive market among many.

The Pepsi navy has been remade as part of a narrative in which Soviet collapse was inevitable, a can-you-believe-this story about an American victory lap over a terminally ill enemy. It fits the era of economic chaos that followed, when the Russian economy crumbled, oligarchs plundered industries and resources, and military stockpiles—with functioning weapons, not rusted submarines—really were traded on the black market.

But the thesis that foreign economic trade and investment could transform a moribund communist economy was tried in the People's Republic of China at about the same time. Chinese technocrats wagered that international firms would bring new techniques and experience. And just as the Soviets gave Pepsi a monopoly in exchange for these benefits, China granted Coca-Cola exclusive rights to its market in 1978.

Perhaps the Soviet Union could not have managed what China accomplished. Yet the idea that only one communist juggernaut could succeed was far from obvious at the time. Had events unfolded the way Kendall hoped and Gorbachev planned, the 1990s might have been a decade of democratisation and economic growth for a strengthening Soviet Union. And the story of how Pepsi scrapped 17 Soviet submarines to cement its hold on the Soviet market would have been just one among thousands about how American investments helped a former foe become an economic competitor.

Paul Musgrave is an assistant professor of political science at the University of Massachusetts Amherst.

Disclaimer: This article first appeared on Foreign Policy, and is published by special syndication arrangement.