Pepsi's Misadventures in the USSR: How Not to Navigate Authoritarian Markets

Moscow, 1959. The Cold War is in full swing, and the U.S. government has organized an exhibition to showcase American prosperity. Their goal: prove to ordinary Soviets that capitalism delivers a better life than communism. But while President Eisenhower dreams of ideological victory, a 30-something Pepsi executive named Donald Kendall sees something more concrete: an untapped market of hundreds of millions of potential soda drinkers.

What happens next reads like a Cold War farce. Kendall arranges for Soviet Premier Khrushchev to be photographed drinking Pepsi alongside then-Vice President Nixon.

The Soviet leader's verdict is underwhelming ("Refreshing," he allows), but the photo op launches Kendall's career into the stratosphere.

By 1963, he's Pepsi's CEO.

The Nixon Connection

Kendall repays Nixon's favor during the latter's wilderness years by arranging for any law firm that hires Nixon to receive Pepsi's legal business. This sweetheart deal helps fund Nixon's political comeback. When Nixon reaches the White House in 1968, Kendall's investment pays off spectacularly.

By 1972, Kendall has leveraged his Nixon connection into a groundbreaking deal: Pepsi will become the first American consumer product sold in the USSR. But there's a catch - several catches, actually:

1. Soviet rubles are worthless outside the USSR
2. The Soviets are chronically short on hard currency
3. Standard international trade mechanisms don't work with communist economies

The Creative Solution

Kendall's answer is baroque but clever: Pepsi will get paid in vodka. Specifically, they get exclusive rights to distribute Stolichnaya in the U.S. market. This creates a three-way trade where:

• Soviets manufacture Pepsi locally and sell it to their citizens
• Soviets ship vodka to the U.S.
• Pepsi sells Stolichnaya to Americans and keeps the profits

For a while, this works brilliantly. Pepsi builds 16 bottling plants in the USSR and, crucially, locks Coca-Cola out of the market entirely. But there's a deeper problem they're not facing: they're building infrastructure in an authoritarian state based on political connections rather than market fundamentals.

The Famous Submarine Deal: Not What You Think

Let's address the internet's favorite Cold War business factoid: "Pepsi briefly had the world's sixth-largest navy." This is technically sort-of-true but fundamentally misleading.

In 1989, Pepsi did agree to accept 17 submarines, a cruiser, a frigate, and a destroyer as payment. But:

1. These were obsolete vessels headed straight for scrap
2. Pepsi immediately transferred them to a Norwegian company for dismantling
3. The real value was in the scrap metal, not military capability

The Real Deal

The submarines were actually a sideshow to the main event: a $2.6 billion arrangement to take delivery of up to 85 new Soviet-built merchant ships over a decade. The plan was for Pepsi to sell these ships (through Norwegian partners) on the international market.

This deal structure reveals something important: by 1989, even the original vodka-for-soda swap wasn't working well enough to support Pepsi's Soviet ambitions. They were forced to accept payment in increasingly exotic forms of barter.

Competing Visions of Reform

The timing here is crucial. In 1989, many Western executives believed they were witnessing the dawn of a new era. Gorbachev's reforms seemed to be working. The Cold War was ending. Surely, they thought, the USSR would follow a path similar to China's: maintaining political control while opening to market forces.

Pepsi wasn't alone in betting big on Soviet stability and reform. But they were among the most exposed when everything fell apart.

Within three years:

1. Hard-liners attempted a coup against Gorbachev
2. The USSR dissolved into separate states
3. The Russian economy collapsed
4. Most carefully negotiated deals became worthless

The China Contrast

The China comparison is particularly instructive. Around the same time Pepsi was dealing with the Soviets, Coca-Cola was making similar bets on Chinese market liberalization. They also got exclusive market access in exchange for being an early mover.

The difference in outcomes wasn't because Chinese communists were inherently better at reform than Soviet communists. It's that China's leadership maintained political control while liberalizing the economy, while the USSR attempted political and economic reform simultaneously and lost control of both.

The Authoritarian Market Trap

The Pepsi story tells us several enduring truths about doing business with authoritarian regimes:

1. The Access Paradox: What looks like privileged access can become a vulnerability when politics shift. Pepsi's deep connection to the Soviet system, originally its greatest advantage, became worthless overnight.
2. The Infrastructure Problem: Building physical infrastructure in authoritarian states creates hostages to fortune. Those 16 bottling plants represented sunk costs that Pepsi couldn't easily abandon.
3. The Reform Dilemma: Betting on authoritarian reform is dangerous because:
   • If reform fails, you lose your investment
   • If reform succeeds too well (regime change), you might still lose your investment
   • The sweet spot of "just enough reform" is hard to predict and harder to maintain

Modern Parallels

This pattern keeps repeating. Companies enter authoritarian markets through special deals with the regime, build infrastructure assuming political stability, then act surprised when politics intervenes. Recent events in Russia suggest we haven't learned this lesson.

Consider:

• Western companies rushing into China despite growing political risks
• Companies that built extensive operations in Russia pre-2022
• Tech companies making deals with authoritarian governments

The Long View

There's a deep irony that Pepsi - the company that once bet big on Soviet reform - still operates in Putin's Russia today, reporting $3 billion in revenue there in 2020. But now it's just another market, stripped of the grand ideological ambitions of the Cold War era.

The submarines have long since been scrapped, along with the dream of using commerce to transform former enemies into friends. But the fundamental tensions Pepsi navigated remain:

• How do you do business with states that don't play by market rules?
• Can commerce really drive political reform?
• When do the risks of authoritarian markets outweigh the rewards?

There are no easy answers - only trade-offs and risks that need to be clearly understood. Sometimes a Pepsi is just a Pepsi. But sometimes a submarine deal isn't really about submarines at all - it's about the danger of mistaking political opportunity for market opportunity.

The next time you hear about a tech company collaborating with authoritarians, remember Pepsi's submarines.

They might be headed for the same scrapyard.