Pepsi Warships: When a Soft Drink Company Owned Soviet Submarines
In the spring of 1989, PepsiCo became the owner of 17 submarines, a cruiser, a destroyer, and a frigate.
In the spring of 1989, PepsiCo became the owner of 17 submarines, a cruiser, a destroyer, and a frigate. These Soviet warships were payment for cola syrup, and the Pepsi warships deal remains one of the strangest transactions in corporate history.
The chairman of Pepsi told the US national security adviser: “We’re disarming the Soviet Union faster than you are.”
This wasn’t empire-building. It was the logical endpoint of 30 years spent solving an impossible problem: how do you get paid when your customer’s currency is worthless?
The Photo That Changed Everything
24 July 1959. Vice President Richard Nixon was touring the American National Exhibition in Moscow with Soviet Premier Nikita Khrushchev. The two men argued about capitalism versus communism whilst standing in a model American kitchen. The discussion got heated.
Donald Kendall, the 37-year-old head of Pepsi’s international division, saw his opening. He handed Khrushchev a cup of Pepsi. A photographer captured the moment: the Soviet leader holding American soda.
That photograph spread across the Soviet Union. Kendall later admitted to The New York Times that he’d gone to Nixon the night before and asked for help. “I told him I was in a lot of trouble at home because people thought I was wasting Pepsi’s money coming to a Communist country.”
Nixon delivered. The photo launched Kendall’s career. Six years later, he became CEO of PepsiCo. And he spent the next decade turning that single photograph into a distribution deal.
The Currency Problem
In 1972, Kendall got his Soviet deal. Pepsi became the first American consumer product sold in the USSR. Coca-Cola was shut out until 1985.
But payment was impossible. The Soviet ruble couldn’t be traded internationally. The Soviet government refused to spend limited foreign currency reserves on soft drinks. Normal business was impossible.
Kendall’s solution: vodka. The Soviets paid for Pepsi concentrate with Stolichnaya vodka, which Pepsi sold in the United States. Both sides got what they wanted without touching dollars.
The arrangement worked brilliantly. Pepsi opened plants across the Soviet Union. Soviet citizens drank Pepsi. Americans drank Stolichnaya. Everyone profited.
Until the vodka market collapsed.
When Vodka Wasn’t Enough
By the late 1970s, geopolitics had shifted. The Soviet invasion of Afghanistan turned American opinion against Soviet products. US sanctions made selling Soviet vodka increasingly difficult. Pepsi still wanted to expand in the USSR. The Soviets still wanted Pepsi. But vodka could no longer balance the trade.
By 1989, Pepsi operated 21 bottling plants with plans for 26 more. Revenue from Soviet operations reached roughly $3 billion annually. Getting that money out of the country remained impossible through conventional channels.
The Soviets needed something else to trade. They looked at what they had in abundance: obsolete military equipment.
The Pepsi Warships Deal
Spring 1989. Kendall flew to Moscow to renegotiate Pepsi’s contract. He asked for $3 billion in payment over time. The Soviets had no cash.
They offered ships. The Pepsi warships deal included seventeen submarines at $150,000 each, plus three surface vessels: one cruiser, one frigate, one destroyer. Pepsi also acquired several oil tankers through joint ventures with Norwegian shipping companies.
In return, Pepsi would double its Soviet presence and open Pizza Hut restaurants in Moscow.
The Pepsi warships weren’t operational military vessels. They were decommissioned, obsolete, rusting hulks waiting to be scrapped. Pepsi had no intention of operating a navy. The company was a middleman in a scrap metal deal. The vessels went directly from Soviet control to Swedish scrapping companies. Pepsi facilitated the transaction and received payment for the scrap value.
The submarines were likely 1950s-era Foxtrot or Whiskey-class boats. The surface vessels were similarly outdated. None were combat-ready. None could have been made combat-ready without spending more than their scrap value.
But the deal worked. Pepsi got paid. The Soviets got cola and pizza. And a soft drink company briefly owned more submarines than most countries’ militaries.
Then Everything Collapsed
In 1990, Pepsi announced an even larger deal valued at $3 billion over the next decade. Kendall, approaching 70, saw it as his crowning achievement. The Pepsi warships were already being scrapped in Sweden when the Soviet Union began to dissolve.
In December 1991, the USSR split into 15 independent states. Pepsi’s deals disintegrated overnight. Ships under construction were stranded in newly independent Ukraine, which wanted its own cut. Supply chains that crossed what were once internal Soviet borders now crossed international ones. Contracts became unenforceable.
Worse for Pepsi, Coca-Cola aggressively entered the former Soviet markets. The monopoly Pepsi had enjoyed since 1972 evaporated within months.
Russia remains Pepsi’s second-largest market outside the United States. But the advantage they’d built through three decades of creative deal-making was lost in the chaos of Soviet collapse.
What Founders Can Learn
The Pepsi warships story isn’t really about military hardware. It’s about three business principles that still matter:
Political connections open impossible doors. Kendall’s friendship with Nixon got him the Khrushchev photo. That photo gave Pepsi credibility in Soviet markets that money couldn’t buy. First-mover advantage in massive markets often comes from relationships, not just capital.
Creative payment structures solve currency problems. When normal payment is impossible, barter works. Pepsi traded cola for vodka for years, then vodka for warships. Today’s founders face similar challenges entering markets with capital controls (China, Nigeria, Venezuela). The lesson: find what your customer has that you can convert to value elsewhere.
Geographic monopolies are fragile. Pepsi spent 20 years building Soviet dominance. Coca-Cola entered and competed effectively within months of markets opening. Monopolies based on regulatory barriers or political access collapse when those barriers fall. Real competitive advantage has to be structural, not circumstantial.
The Pepsi warships lasted only briefly. But the strategy behind them worked for three decades: use political access to enter closed markets, accept unconventional payment, build first-mover advantage.
Until the map changed overnight.
Kendall died in 2020 at age 99. His obituaries all mentioned the warship deal. Most got the details wrong. But the core truth remained: he turned a photo opportunity in 1959 into a $3 billion business by refusing to accept that normal payment methods were the only option.
The submarines are long since scrapped. The vodka deal is history. But businesses still face currency restrictions, closed markets, and customers who can’t pay in cash. Kendall’s approach was simple: find what they can pay with, get creative, use every connection you have. It remains relevant.
Just don’t expect to own a navy.
Selected Sources and Further Reading
Association for Diplomatic Studies: The Kitchen Debate
Atlas Obscura: When the Soviet Union Paid Pepsi in Warships
Foreign Policy: Pepsi’s Soviet Submarine Fleet
