Hi, I’m the History Guy. I have a degree in history and I love history,
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Soft drinks are hard business. The total value of the beverage industry worldwide in 2018 was
estimated at more than 2.2 trillion dollars. The net operating revenues for the Coca-Cola company
in 2016 were reported to more than forty billion dollars. The industry is so lucrative that it gave
rise to one of the longest-running Wars of the modern era, The Cola Wars. While industry giants
Pepsi Cola and Coca-Cola have been competing with each other since both were invented in the
19th century, the Cola Wars refers to a period of particularly aggressive advertising against
each other that started in the 1980s. And the Cola Wars took a unique turn in 1990, when
PepsiCo acquired a fleet of warships, yes actual warships, that at the time made them the sixth
largest submarine Navy in the world. And that unique event has to do with the defining conflict
of the post-world War Two era, a particularly enterprising businessman, and the peculiarities
of the world's second oldest national currency, it is a story that deserves to be remembered.
In 1316, Prince Mikhail of Tver defeated the Novgorodians in the Battle of Toursauch,
this was part of an interesting conflict with Yuri of Moscow, that eventually ended with Prince
Mikhail being executed at the hands of the Mongol ruler Tokhta Khan. While the Battle of Toursauch
was just a small part of a larger medieval civil war, it is significant for at least one reason,
the results of the battle were recorded on a birchbark document, noting that Mikhail took
from the defeated Novgorodians an indemnity of 5,000 Rubles. That is the first documented mention
of the Russian monetary unit. That over 700 year old note makes the ruble the second oldest still
existing national currency on earth, behind only the British Pound Sterling. The word Ruble is
derived from the Russian verb meaning, to cut, and it originally referred to cutting apart a
piece of silver. The Ruble was not originally a currency, it was a unit of weight representing
a specific amount of silver, much like the German Mark and the British Pound. Czar Alexis the First
made the first attempt to standardize the Ruble as currency in the 17th century, however the attempt
was abandoned after it resulted in counterfeiting in speculation, and actually spurred an uprising,
called The Copper Riot in 1662. The Ruble was not successfully standardised until a
monetary reform was enacted by Peter the Great in 1704. The Imperial Ruble was the Russian currency
until the Revolution in 1917. The Ruble offered a unique challenge for the Bolsheviks, in Marxist
theory money should not be necessary, and only encouraged a sort of personal desire that was
contrary to the idea of a classless society. As Leon Trotsky explained, “In a communist society,
the state and 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.” At first the answer was inflation, facing the economic stresses caused by
the first World War and then the Russian Civil War, the government printed money both as its
only means of finance and as a way of eliminating debt. This caused a period of hyperinflation,
which was eventually stabilized by temporarily linking the value of the Ruble to gold, but an
important aspect of the Soviet Ruble, as opposed to the Imperial Ruble and most national currency,
is that the Ruble was not convertible. That is, Russians were not allowed to use their Rubles to
buy foreign currencies, even the so-called ‘Gold Ruble’ was purely hypothetical. Russians could not
exchange their Soviet Rubles for gold. There is a reason for this, in capitalist countries
currency is a market, in fact its purpose is to support market mechanisms. In the Soviet Union
currency was a tool of centralized planning, with non convertible currency, Russians could only use
the money they were paid to buy from government stores, that only sold products sanctioned and
made by the government, with prices set by the government. That difference in economic philosophy
was the centerpiece of the defining conflict of the post-world War 2 era, the Cold War, and it
would become the centerpiece of a well-publicized debate that would eventually give rise to a novel
challenge to the in convertibility of the Ruble, and that debate occurred 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 Americas included a model home that
was meant to represent a typical American home, the model is actually based on a real house,
398 town Line Road in Commack, New York. The model house for the exhibition was split down the middle
down the middle hallway so that visitors could view the inside of the house and thus the press
coined the nickname Splitnik, and inside the house was a model kitchen, full of modern appliances.
And it was there that Nikita Khrushchev and US Vice President Richard Nixon got into an
impromptu debate about the relative value of their 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 summarised, “I am a lawyer for communism, you are a lawyer
for capitalism, let's kiss”. But as the debate raged on, a particular capitalist was watching,
Donald M Kendall was the vice president marketing for the Pepsi Cola Company,
and Pepsi Cola had a booth at the American National Exposition just around the corner
from the kitchen. Soda pop was very popular in the United States but was virtually unknown
in the Soviet Union, and Kendall recognized that there was an opportunity there. At the
exhibition he was desperate to get a picture of Nikita Khrushchev taking a sip of Pepsi. As
the debate grew heated, both literally and figuratively, Khrushchev began to sweat,
and up popped Don Kendall with a ice cold cup of Pepsi Cola, 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 just 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 not 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 the right to sell soft drinks in the Soviet Union,
Pepsi got the right to sell hard liquor in the United States. 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 rights 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 into
the United States. The deal was finally struck in 1972 but production didn't start until 1974
and that started the 15-year exclusive period that shut out rival Coca-Cola, but when it came
time to renew the deal 15 years later in 1989, the situation in the Soviet Union had changed.
Mikhail Gorbachev had become the Premier of the Soviet Union 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 three billion dollar deal was simply too big to be paid in vodka,
so the Soviets sold them something of which they had in excess. warships, specifically a cruiser,
a destroyer, a frigate, and sixteen 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 the Cold
War but just a year later in 1960 an American U-2 spy plane was shot down over the Soviet Union and
relations sunk again to new lows. The Cold War went on for more than another thirty years. Don
Kendall became CEO of Pepsi Cola in 1963 and continued in that position clear through 1985,
and then was chairman of the Executive Board until 1991. In addition to the deal of the Soviet Union,
he shepherded Pepsi through the merger with Frito-Lay that turned Pepsi Cola into PepsiCo
Inc. The 93 year old is now retired and lives in Washington State. The modest town home at 398
town Line Road in Commack, New York, which was the model for the 1959 American exposition is
still there, but the 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 until 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 hunt down cargo ships that were
carrying Coca-Cola, they were actually all sold for scrap; it was just another barter. But it is
ironic that at the very center of the Cold War, the lawyer for Communism took a sip out of a cup
that bore one of the world's most recognizable symbols of Capitalism and as a result Pepsi
played a notable role in the end of that Cold War. Right down to taking the very weapons of that war
and selling them for scrap. The day Pepsi got a navy is a day that deserves to be remembered.
I'm the History Guy. I hope you enjoyed this edition of my series, 5 minutes of history,
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