Pepsi’s Cold War Trade With the USSR: Cola for…Submarines?

What happens when Cold War politics collide with cutthroat cola-brand rivalries? In the 1980s, it produced one of the strangest deals in business history.

In 1989, PepsiCo inked a deal with the Soviet Union to trade its cola syrup for Russian vodka—and a decommissioned fleet of rusting warships, including 17 attack submarines. According to Foreign Policy magazine, the undersea arsenal briefly acquired by the soft drink conglomerate would have equaled India’s submersible fleet—at the time, the seventh largest in the world.

It’s a wild tale, one that began decades earlier—with the leader of the Soviet Union taking part in a high-stakes forerunner of the “Pepsi Challenge.”

A decade after the Iron Curtain sealed off Eastern Europe from the democratic West, the head of Pepsi-Cola’s international division saw a vast, untapped market: the Soviet Union. Donald Kendall had risen fast—from bottling plant rookie to executive. But inside Pepsi, many called his idea of chasing business in a communist state a waste of time and money. Some called it un-American.

While Coca-Cola declined an invitation, Pepsi joined corporate giants such as Disney and Cadillac in sponsoring a booth at the 1959 American National Exhibition in Moscow, a Cold War showcase of American consumer goods. On the eve of the fair’s unveiling, Kendall devised a plan to silence his doubters back home: a taste test.

Knowing Soviet Premier Nikita Khrushchev would tour the exhibition’s opening with U.S. Vice President Richard Nixon, Kendall pitched the V.P. a bold idea: get a soda into the Soviet leader’s hands. “I told him I wanted Khruschev to sample Pepsi made in New York and Pepsi made in Moscow,” Kendall recalled.

On July 24, 1959, while touring the exhibition, Nixon and Khrushchev traded jabs over the merits of communism and capitalism. As their now-famous “kitchen debate” exchange got heated, Nixon steered Khrushchev to the Pepsi-Cola booth, where Kendall handed the Soviet leader two paper cups—one bubbling with Pepsi bottled in Manhattan, the other in Moscow.

“I’d like you to try them both, Premier Khrushchev, and tell me which one tastes better,” Kendall said. After a few cautious sips, Khrushchev naturally proclaimed the Soviet version superior, declaring it “very refreshing!” (His son, however, recalled that the drink “smelled like shoe wax.”) Newspapers around the world printed photos of the Soviet leader enjoying a Pepsi, an unexpected publicity coup for the cola company.

After becoming Pepsi’s president and CEO in 1963, Kendall kept pursuing opportunities inside the Soviet Union, believing the benefits went beyond the bottom line. “I have always believed that the stiff wind of free enterprise can help knock down even the strongest totalitarian wall,” he said.

Although U.S.-Soviet tensions deepened after the 1962 Cuban Missile Crisis, Nixon’s 1968 election to the presidency opened the door to a new era of détente diplomacy—making a deal more feasible. Kendall, who stayed close to Nixon after his 1960 defeat, had steered Pepsi’s legal business to Nixon’s law firm. Once in the White House, Nixon returned the favor by lobbying the Soviets to accept a trade delegation headed by Kendall himself.

Doing business in the Soviet Union, however, came with a major complication: currency. “The Soviet ruble was not convertible,” says Kristy Ironside, associate professor of history at McGill University. “So, if the Soviet Union wanted to do any kind of business with the outside world, they had to either barter or use hard currency.”

With the ruble untradeable on international markets—and the Soviets hoarding their limited foreign currency reserves for essentials, not fizzy drinks—Pepsi struck a creative barter deal. In 1972, it became the first American soft drink to enter the Soviet market, trading its concentrated syrup (to be bottled locally) for exclusive U.S. distribution rights to Stolichnaya vodka and Soviet and Eastern Bloc wines. The agreement not only opened a new market for Pepsi—it blocked Coca-Cola from the Soviet Union until 1985.

Soviet consumers quickly developed a taste for Pepsi. By 1980, Muscovites quenched their thirst at 73 Pepsi kiosks across the city, each selling an average of 4,000 bottles a day. Television commercials featuring Michael Jackson beamed into Soviet households later in that decade gave rise to a “Pepski generation.”

“The Soviets make more money off of selling Pepsi domestically than they do the vodka because people love it,” Ironside says. “It’s a very lucrative deal and ends up being a win-win for both sides.” By the late 1980s, Soviets were drinking a billion servings of Pepsi each year. The brand even launched advertisements hinting that it had played a role in the wave of economic reforms introduced by Soviet leader Mikhail Gorbachev after 1985.

Stolichnaya, however, was a tougher sell stateside. Though it cornered 70 percent of the U.S. imported vodka market by 1977, sales cratered when the 1979 Soviet invasion of Afghanistan triggered a consumer boycott of Russian products. “America’s détente love affair with Russian vodka has gone off the rocks and down the drain,” the Miami Herald quipped in 1980.

As Pepsi sales surged past those of Stolichnaya, the Soviets added an unlikely sweetener to expand its deal with the cola giant.

Under Gorbachev, the Soviet Union was eager to attract Western investment—but had few consumer products to offer in return. What it did have, in abundance, was outdated military sea craft.

In the spring of 1989, PepsiCo tapped one of Kendall’s connections to form a joint venture with a Norwegian company—securing 17 submarines (at a price of $150,000 each) and three warships: a cruiser, frigate and destroyer. The venture also acquired new Soviet oil tankers to be leased or sold in return for more than doubling Pepsi bottling plants in the Soviet Union. As The New York Times subsequently reported, Kendall later joked to National Security Adviser Brent Scowcroft, “We’re disarming the Soviet Union faster than you are.”

The following year, PepsiCo signed the largest-ever transaction between an American company and the Soviet Union. Valued at more than $3 billion over the next decade, the agreement called for the Soviet trade agency to build at least 10 commercial tankers and freighters. The joint venture between Pepsi and its Norwegian partner would sell or lease the ships to fund new bottling plants—and launch Pizza Hut, then a Pepsi subsidiary—in Moscow.

But when the Soviet Union collapsed in 1991, so did the Pepsi deal. “We had a multibillion-dollar contract with a nonexisting entity,” Kendall said. “One of our biggest partners, the Soviet Union in this case, had just gone out of business.” As Pepsi scrambled to rebuild its fractured supply chain, Coca-Cola seized the moment, entering Russia and quickly overtaking its rival. The “cola wars” had found a new battleground.

While the Soviet Union faded into history, online legends about PepsiCo’s briefly owning one of the world’s largest navies only grew.

In reality, the company never commanded a fleet. While Pepsi did temporarily acquire a batch of decommissioned Soviet submarines and warships, it acted purely as an middleman—transferring the aging vessels almost immediately to a Norwegian shipping firm for scrap. “Pepsi didn’t all of a sudden form a navy, as some people have argued,” Ironside says. “They certainly weren't like the Merchant Marines, but they were the third party in the deal.”

And the so-called “Pepsi navy”? The Soviet Union’s creaky cast-offs weren’t exactly seaworthy. “In any real sense, the story is false,” wrote Paul Musgrave in Foreign Policy. “The Pepsi navy no more conferred military power than a rusting Model T could have been a Formula 1 contender.”