Pepsi Had the 6th Largest Navy in the World?

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Here's the History Guy. Drinks are hard business. The total worldwide beverage market value in 2018 was estimated at $2.2 trillion. The Coca Cola company's net operating revenues in 2016 were over $40 billion. The industry is so lucrative that it represents one of the longest lasting wars in modern history. The Cola Wars. While beverage industry giants Pepsi and Coke have been competing since their creation in the 19th century, the Cola Wars refer to particularly aggressive advertising against each other since the 1980s. That war took an odd turn in 1990, when PepsiCo purchased a fleet of warships. Yes, actual warships that gave them at the time, the sixth largest submarine navy in the world. That odd event had to do with the peculiarities of the world's second oldest national currency, the most significant world conflict of the post World War Two era, and a visionary businessman.

It is a story that deserves to be remembered. The ruble offered a unique challenge for the Bolsheviks following the Russian Revolution. In Marxist theory, money should not be necessary and only encouraged the sort of personal desire that was contrary to the idea of a classless society. As Leon Trotsky explained, in a communist society, the state of money will disappear. But the Marxist revolutionaries realized that abolishing money would not be easy as Trotsky continued. Money cannot be arbitrarily abolished, nor the state and the old family liquidated.

They have to exhaust their historic mission, evaporate and fall away. But while the Soviets kept the ruble, an important aspect of the new Soviet ruble, as opposed to most national currency, is that the ruble was not convertible. That is, Russians were not allowed to use their rubles to buy foreign currencies.

There's a reason for this. In capitalist countries, currency is a market. In fact, its purpose is to support market mechanisms. But in the Soviet Union, currency was a tool of centralized planning. With nonconvertible currency, Russians could only use the money that they were paid to buy from government stores that only sold products sanctioned by the government with prices set by the government. This difference in economic philosophy would be a primary driver of the defining conflict of the period following the Second World War, the Cold War. And it would become the topic of a well-known debate that will eventually result in a novel challenge to the convertibility of the ruble.

And that famous debate would occur in a kitchen. During a period of rising tensions, the Eisenhower administration and Soviet Premier Nikita Khrushchev decided to have a cultural exchange to promote understanding between the two nations. Each nation would host an exhibition in the other's country, showcasing the daily life of their citizens. The Soviet exhibition was held in New York in June of 1959, and the American exhibition was held in Moscow in July. For their exhibition, the Americans built a model home meant to represent a typical American home. The model home was based on an actual house, 398 Town Line Road in Comac, Long Island.

For the exhibition, the model was split down a central hallway to allow the public to view the inside, and thus earn the nickname Split Nick. And it included a model kitchen full of modern appliances. And it was there that Soviet Premier Khrushchev and US Vice President Richard Nixon got into an impromptu debate about the relative value of the competing economic systems that became known as the kitchen debate. The kitchen debate is interesting for a number of reasons, but it was notable that in the middle of a tense Cold War, it was not a debate about armies and rockets, but of homes and tractors and kitchens and how each system provided for its citizens. It was certainly pointed but cordial and became a propaganda point for both sides. Not many minds were changed as Khrushchev summarized, I am a lawyer for communism. You are a lawyer for capitalism.

Let's kiss. But during that debate, a particular capitalist was watching closely. Donald M. Kendall was the vice president of marketing for Pepsi Cola, which had a booth at the American National Exhibition just around the corner from the famous kitchen. While soda was popular in America, it was virtually unknown in the Soviet Union. Kendall saw opportunity in that market and had been desperate to get Khrushchev to take a drink of Pepsi. As the debate grew heated, both literally and figuratively, Khrushchev began to sweat and Kendall dropped in with a cold cup of Pepsi. The photo op was a marketing coup.

But it would be nearly a decade before Don Kendall could take advantage of that opportunity. By 1968, he was the CEO of PepsiCo and his friend Richard Nixon had been elected president of the United States. Leveraging his White House connection, Kendall was able to negotiate an exclusive contract to produce and sell Pepsi Cola behind the Iron Curtain.

But there was a problem. The Soviet ruble. Since the ruble was non convertible, the Soviets had very little foreign currency to pay for that Pepsi Cola and rubles had no value outside the Soviet Union.

The answer came in the form of a trade. In exchange for selling soft drinks in the Soviet Union, Pepsi got the rights to sell hard liquor to the West. Pepsi was paid in vodka. Specifically Stolichnaya a premium brand produced in Russia that had won a gold medal in an international competition. In 1953, Pepsi was given exclusive right to sell Stolichnaya outside the Soviet Union. Pepsi became the first Western consumer item to be manufactured and sold in the Soviet Union. And Stolichnaya became the first premium vodka to be imported for sale in the United States. The deal was struck in 1972.

But production did not start until 1974. And that started the 15 year exclusive contract that shut rival Coca Cola out. But when it came time to renew the contract in 1989, the situation in the Soviet Union had changed. Mikhail Gorbachev had become the premier in 1985 and had instituted significant reforms called glasnost and perestroika, or openness and restructuring. The Soviet economy was facing challenges as a result and Gorbachev was supporting more connection between markets.

Pepsi was only too happy to expand looking to increase from 26 factories in the Soviet Union to 50. But the ruble was still not convertible and would not be for many years. And the $3 billion deal was simply too big to be paid in vodka. So the Soviets sold them something of which they had an excess warships, specifically a cruiser, a destroyer, a frigate and 16 submarines. At the time PepsiCo had the sixth largest submarine Navy on earth. Don Kendall, then chairman of the PepsiCo executive board quipped to US national security advisor Brent Scowcroft, that we are disarming the Soviets faster than you. The kitchen debates and the national expositions actually represented a relative thaw in US Soviet relations. But in 1960, a US U-2 spy plane was shot down over the Soviet Union and relations sank to a new low.

The Cold War will continue for another three decades. Donald M. Kimball became the CEO of Pepsi Cola in 1963 and didn't retire from that position until 1985 and then continued as chairman of the executive board till 1991. In addition to his deal to sell Pepsi behind the Iron Curtain, he shepherded the company through the merger with Frito-Lay that created PepsiCo Inc. The 96 year old is now retired and lives in Washington state.

The modest ranch house at 398 town line road in Comac, Long Island that was the model for the 1959 American national exposition is still there, although the famous kitchen has been remodeled. Making the ruble convertible was not an easy feat. The Soviet ruble was replaced by the Russian ruble in 1992, but significant marketing and banking reforms were required to make the currency convertible.

It was not made fully convertible in 2006. As the ruble is tied to Russia's energy trade, its value has been volatile but many argue that it is set to become a larger player in currency markets that are becoming less dependent on the US dollar. No, Pepsi did not use its submarines to sink cargo ships carrying Coca-Cola. They were actually sold for scrap, just another barter. But it is ironic that at the very center of the Cold War, the lawyer for communism would take a sip out of a cup bearing one of the world's most recognized symbols of capitalism. And as a result, Pepsi would play a notable role more than three decades later in the end of that Cold War, right down to breaking up the weapons of war and selling them for scrap.

The day that Pepsi got a navy deserves to be remembered. And special thanks to the history guy. History deserves to be remembered.

And you can find all of his work at YouTube and we treasure our partnership. And again, that is the history guy. And if you've got some history stories like this, family stories, town stories, state stories, send them to us.

The Cold War, the Cola Wars, the story of Pepsi and the ruble, all of it here on Our American Stories. Do you have more than $50,000 saved for retirement you can't afford to lose? Nothing is being done to stop inflation or more rate hikes. And if you have $50,000 or more saved for retirement, now's the time to protect your savings while you still can. Call 855-512-GOLD to get your free wealth protection kit and see how you could protect your savings before it's too late. Call 855-512-GOLD.

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