This story begins with a threat and ends with scrap metal—and between the two lie three decades in which soda was the currency of diplomacy.
In November 1956, addressing Western diplomats, Nikita Khrushchev uttered the phrase that would set the temperature of the Cold War for decades: “Whether you like it or not, history is on our side. We will bury you.” The words were taken literally—as a promise of nuclear annihilation—though Khrushchev apparently meant the historical inevitability of communism’s triumph. The context did not help: the Suez Crisis, the Hungarian uprising, a world split into two camps. At that moment, no CIA analyst could have imagined that sixteen years later the Soviet government would sign a contract with an American corporation to supply sweet soda. But the seed of that contract was planted just three years later—and, characteristically, with the personal involvement of that same Khrushchev.
In July 1959, the American National Exhibition opened in Moscow—a showcase of consumer capitalism in the middle of Sokolniki. Food processors, cars, televisions. And a Pepsi-Cola stand. US Vice President Richard Nixon and Khrushchev had already argued over the merits of their two systems right beside a model American kitchen—the famous “Kitchen Debate.” After the clash, Donald Kendall, head of Pepsi-Cola’s international division, handed the Soviet leader a cup of the drink. The photograph of Khrushchev with a paper cup of Pepsi made the rounds in the world press. Kendall later said that he had practically nudged Nixon into bringing Khrushchev over to the stand—a career calculation that paid off brilliantly. In 1963, Kendall became the company’s CEO, and the Soviet market remained his personal project for decades to come.
Thirteen years of negotiations, changes of leadership, and geopolitical turns passed between that cup in Sokolniki and an actual contract. Khrushchev was ousted in 1964, but Kendall kept building connections—now with the Brezhnev leadership. The talks unfolded alongside détente: Nixon, now president, knew Kendall personally, and that thread stretched all the way back to the Moscow exhibition.
In 1972, the agreement was finally announced. Pepsi supplied concentrate and bottling technology to the Soviet Union and, in return, received exclusive rights to distribute Stolichnaya vodka in the United States. The first Soviet Pepsi plant began operating in Novorossiysk in 1974—the first time a Western consumer brand started production on Soviet soil. Coca-Cola did not reach Soviet shelves until the late eighties, and only opened its own plant after the collapse of the Union.
Why vodka? Here, it is worth pausing for a second and recalling how the Soviet economy functioned externally. The ruble was a nonconvertible currency—it could not be freely exchanged for dollars on the international market. The state monopoly on foreign trade meant that no Soviet factory could independently transfer money to an American corporation. PepsiCo needed payment in dollars. The Soviet Union had nothing with which to pay in dollars except exports. Countertrade, in effect, turned vodka exports into a converter: bottles of Stolichnaya sold in American stores generated the dollar revenue that paid for the next shipment of concentrate. Barter—a word that sounds archaic, but for a country with a nonconvertible currency, it was the only mechanism that worked.
A closed loop: dollar revenue from Stolichnaya in American retail paid for the next shipment of concentrate.
By the end of the decade, 24 plants were bottling Pepsi in the USSR, and the network stretched from Novorossiysk on the Black Sea to Moscow, Leningrad, and Tallinn. Pepsi became perhaps the most recognizable Western brand in the Soviet Union—in a place where store shelves were not exactly known for variety and imported goods held an almost mythical status.
But by then, the scheme was already beginning to sputter. The problem was not demand—Soviet citizens gladly drank Pepsi, and Americans gladly drank Stolichnaya. The problem was scale. PepsiCo wanted to expand, while vodka revenues were no longer enough to cover growing supplies. The Soviet economy, already breathing hard, could not increase vodka exports indefinitely—especially after Mikhail Gorbachev launched an anti-alcohol campaign in 1985, hitting both liquor production and exports. A new commodity was needed for exchange. And here the story takes the turn for which, really, it gets retold on every other business podcast.
In the spring of 1989, PepsiCo and Soviet trade organizations concluded a new large-scale agreement, then reinforced it in April 1990 with a record-breaking contract—some $3 billion over the next decade, the largest deal between an American company and the USSR. But there was no longer enough vodka for sums like that, so the calculations included something the Soviet Union had in abundance: military scrap metal.
The agreement involved 17 decommissioned submarines, one cruiser, one frigate, and one destroyer. The ships were transferred to a Norwegian shipbreaking yard for disposal—plainly put, to be melted down. At the same time, PepsiCo took part in deals with Norwegian shipping firms, including the acquisition of oil tankers—new, commercial vessels with nothing whatsoever to do with the navy. The tankers could be sold or leased for actual dollars. Roughly speaking, the arrangement worked like this: the Soviet side transferred decommissioned ships and tankers → they were sold through Norwegian intermediaries → the dollars raised went toward paying for Pepsi concentrate and bottling equipment.
It was this episode that spawned one of the most enduring legends of business folklore: that PepsiCo briefly became the owner of the “sixth-largest navy in the world.” It is a beautiful line. It has been attributed to various participants in the talks, sometimes to Kendall himself, supposedly joking in a conversation with National Security Advisor Brent Scowcroft: “We’re disarming the Soviet Union faster than you are.” The quote is hard to verify, but it has stuck to the story for good.
Now for a cold shower. PepsiCo did not receive a combat-ready fleet. The company had no plans to patrol the Atlantic, and could not have done so even if it had wanted to. The submarines were decommissioned—meaning withdrawn from service, demilitarized, stripped of their weapons systems. Their value was measured in tons of steel that could be recovered by breaking them up at a Norwegian yard. The cruiser, frigate, and destroyer were the same story.
The “sixth-largest navy in the world” ranking is pure arithmetic play. If you count the number of units—two dozen hulls—and compare them to the fleets of small countries, the figure does indeed look impressive. But a fleet is crews, bases, supplies, combat readiness. A rusting submarine under tow toward a Norwegian fjord is not a fleet; it is a line item on a disposal company’s balance sheet. I like this detail precisely because it shows how easily a striking number turns into a myth: all you have to do is remove the context.
And yet the compensation scheme itself was perfectly rational. By the end of the eighties, the Soviet Union had an enormous navy, much of it obsolete and costly to maintain. Decommissioned ships were a burden on the budget. Handing them over for disposal and receiving a Pepsi bottling line in return—by the standards of Soviet bureaucracy, that was an entirely sensible exchange. PepsiCo, for its part, received the dollar equivalent of their metal mass through Norwegian intermediaries. Every participant in the chain was acting according to their own logic, and none of them was engaged in naval construction.
This entire story—from the cup in Sokolniki to submarines under tow—works as an X-ray image of the Soviet economic system. An image in which every fracture is visible.
The first fracture was the ruble’s nonconvertibility. In a world where currency can be freely exchanged, the Pepsi deal would have looked banal: the Soviet side pays dollars for concentrate, PepsiCo pays rubles to lease factories, and a bank transfer covers the difference. But the ruble was not traded on international exchanges; its rate was set by directive and reflected no real purchasing power. For PepsiCo, rubles were useless scraps of paper beyond Soviet borders. Which is why every bottle of Pepsi drunk in Moscow or Novorossiysk had to be “paid for” by a bottle of vodka sold in New York or Chicago.
The second fracture was the state monopoly on foreign trade. No Soviet factory, collective farm, or trust could independently enter the international market. All export-import operations went through a system of foreign-trade associations subordinate to the Ministry of Foreign Trade. Which meant that even the simplest commercial transaction required a decision at the government level. Pepsi in the USSR is a story of interstate negotiations involving diplomats, trade representatives, and, most likely, the intelligence services of both sides—though I have no documentary proof of the latter, only the common sense of the era.
The third fracture was scarcity. Pepsi in the Soviet Union was a marker of status and access. It was not sold everywhere, or to everyone. In a country where bananas were a holiday and jeans an object of black-market dealing, a bottle of Pepsi carried symbolic weight wildly disproportionate to its contents. An ordinary sweet carbonated drink became a window into another world—and that window was carefully rationed by the state.
The 1990 agreement was designed to last a decade. But that decade turned out to be nothing like what its signatories had planned for. In 1991, the Soviet Union ceased to exist. The state monopoly on foreign trade collapsed. The ruble, after passing through hyperinflation, became—painfully, but nonetheless—a convertible currency. Countertrade lost its meaning: Russian companies could now pay dollars directly.
Coca-Cola, which had remained on the margins throughout the Soviet era, stormed into post-Soviet Russia with aggressive marketing and by the mid-nineties began to squeeze Pepsi out. The monopoly PepsiCo had spent three decades building through Kendall’s personal connections, barter arrangements, and patient negotiations with Soviet bureaucracy melted away within a few years of the open market. The irony is hard not to smile at: while the market was closed, Pepsi reigned unchallenged; once it opened, its advantage evaporated.
Donald Kendall stepped down as PepsiCo CEO in 1986, but remained chairman of the board until 1991. The decommissioned submarines were broken up at Norwegian shipyards. Stolichnaya continued to be sold in the United States, but in a different legal landscape—rights to the brand became the subject of years of litigation between Russian and Luxembourg companies.
And by then Khrushchev’s line about “we will bury you” had long since become a museum piece. The Soviet system was not buried by Pepsi or Coca-Cola—it was buried by its own inability to convert the ruble, feed its citizens, and keep the economy from resorting to bartering submarines. Soda merely turned out to be the litmus paper by which the process can be traced with precision down to the year and the ton of decommissioned steel.