Swapping soft-drink concentrate for vodka and merchant ships, Pepsico Inc. on Monday signed a $3-billion barter trade pact with the Soviets that it called the biggest, longest-running agreement ever concluded by the Kremlin with a U.S. firm.
“President Bush and President Gorbachev should during their meetings have Pepsi and Stolichnaya on the table to remind them what good agreements are,” said Pepsico Executive Committee Chairman Donald M. Kendall, whose experience in U.S.-Soviet trade goes back to the era of Nikita S. Khrushchev.
In 1974, Pepsico began shipping Pepsi concentrate in exchange for Stolichnaya Russian vodka to be sold on the U.S. market. That reciprocal trade pact has now been broadened and extended until the year 2000 to cover an estimated $3 billion in retail sales of Pepsi in the Soviet Union and Stolichnaya vodka in the United States in the coming decade.
Pepsico said the agreement would more than double its Soviet soft drink sales, now running more than 1 billion servings annually, and extend for another 10 years its exclusive rights to provide Russian vodka for the U.S. market. It now imports and sells 1 million cases of Russian vodka yearly through Monsieur Henri Wines Ltd. of White Plains, N.Y.
The accord’s fine print shows the flexibility needed to do business in the perestroika -era Soviet Union. Kendall, who appeared at a news conference after the signing ceremony in the Kremlin, said Pepsi is now committed to buying at least 10 Soviet-built freighters and tankers of 25,000 to 65,000 tons, which will then be leased on the world market through a Norwegian partner.
“We think we will have the same success in marketing Soviet ships as we have in marketing Soviet vodka,” Kendall said.
On news of the agreement, Pepsico closed up $1.50 at $66.50 on the New York Stock Exchange.
Swapping ships for cola concentrate is necessary because the Soviet currency, the ruble, is not freely convertible on the world market for dollars or other currencies, so profits from the Soviet Union cannot be exported in cash.
Kendall said he doubts that convertibility will come any time soon but that non-convertibility should be no barrier to superpower trade.
“If you wait for a convertible ruble, by the time we have a convertible ruble somebody else will have the market,” he said.
Thanks to Kendall’s promotional acumen, a cupful of Pepsi was given to Khrushchev at a U.S. exposition in Moscow in 1959, with Vice President Richard M. Nixon also getting a serving as news photographers snapped away. Since 1974, the Pepsi logo has become a well-known feature of the Soviet urban landscape.
In contrast, Coca-Cola, Pepsi’s chief competitor, began doing business with the Soviets only in 1980 and is less well known.
Proceeds from leasing the ships will be used to buy equipment and supplies for two Pizza Hut restaurants now scheduled to open in Moscow this year. Pepsico had announced that its restaurant subsidiary would be the first Western fast-food outlet in Moscow, but it was beaten to the punch in January by McDonald’s.
The number of Pepsi bottling plants will be increased from 24 to 50 in cities from Vladivostok in the Soviet Far East to Riga on the Baltic Sea. The agreement also calls for the development of plastic bottles and cans for the sale of soft drinks in the Soviet Union, where Pepsi is now available only in bottles.
Anatoly M. Belichenko, first deputy chief of the Soviet government’s food and procurement commission, said that after the expansion, “all big Soviet cities will have a Pepsi bottler.” He added: “I would like to give a commitment for everyone in the Soviet Union to be able to buy a bottle of Pepsi within 10 minutes of his home by the year 2000.”
Belichenko said the new agreement with Pepsico was in accord with President Mikhail S. Gorbachev’s campaign to improve the supply of food and drink for Soviets, one of the major challenges now facing the Kremlin leadership.
“Perhaps it doesn’t solve the burning issues of life in the Soviet Union, but it is in the mainstream of our work of solving the difficult situation of food production,” he said at the news conference.
Pepsico said the $3-billion value represents retail sales of Pepsi and Stolichnaya vodka until the year 2000 and assumes a devaluation of the ruble, which is not freely traded on world currency markets. Using Moscow’s official exchange rate for the ruble with no devaluation, the value of the deal is closer to $9 billion--$1.5 billion in Russian vodka and $7.5 billion for Pepsi in the Soviet Union.
Pepsico, whose brand names include Kentucky Fried Chicken, Taco Bell and Fritos, is based in Purchase, N.Y., and had total sales of more than $15 billion last year. It is one of the biggest consumer-product companies in the world.