Part one of this series focused on the structure of the USSR’s centrally planned economy and how that contributed to the Soviet ruble becoming worthless as international currency.
After the end of Stalin’s rule, Soviet Premier Nikita Khrushchev implemented a doctrine of ‘de-Stalinisation’ which sought to ease the repressive nature of the Soviet regime, and in a highly limited way, allow more openness and transparency in the economy and diplomacy.
This led to the Soviet Union hosting numerous international festivals, with delegates all around the world, including the United States, attending. The design of this was to showcase the USSR as a more tolerant and cooperative society, while simultaneously competing with the United States as a Cold War tactic.
One such festival was the ‘American National Exhibition’ which took place in Moscow. This festival was designed by the Americans to showcase the pinnacle of capitalist-driven ingenuity, with American design, fashion, and products on display – including Pepsi.
Vice-president Richard Nixon attended the opening of the exhibition but had unsurprisingly gotten into an argument with Nikita Khrushchev about the merits of capitalism and communism.
It was only when the vice-president of Pepsi, Donald Kimball, intervened and offered Khrushchev a cup of Pepsi. Khrushchev, having never tried such a mysterious Western concoction, reportedly enjoyed the drink. This set the stage for a trade deal between Pepsi and the Soviet Union years later.
As previously mentioned, the ruble was worthless as international currency, so the Soviets couldn’t trade with money. Instead, they offered to trade shipments of Stolichnaya vodka in exchange for shipments of Pepsi. Yes, seriously. This agreement was successful and heralded the first entrance of a Western soft drink into the East European market.
The trade deal lasted for a few decades, up until the Soviet invasion of Afghanistan. This invasion sparked international criticism, with America in particular boycotting Soviet goods and the Olympics which were held in Moscow.
This boycott of goods included a boycott of Soviet-produced vodka. Suddenly, the Soviet Union’s means to acquire Pepsi had fell through. Worse, this was at a time when the Soviet economy was stagnating due to the arms race and space race from the Cold War, as well as the costly invasion of Afghanistan which had been failing.
However, there was still a large demand for Pepsi. To kill two birds with one stone, the Soviets traded 17 warships in exchange for USD$3 billion worth of Pepsi, thereby making Pepsi the sixth largest military in the world, just shy of Iraq at the time.
The United States government, understandably, were upset with Pepsi for possessing a fleet of battleships. Donald Kimball’s response was “we’re disarming the Soviet Union faster than the Americans are”. Technically, had Pepsi chosen to have gone to war with Australia, we would have, in all likelihood, been absolutely decimated (at least at sea) which is equal parts hilarious and terrifying.[i]
Nonetheless, Pepsi’s trade deal with the Soviet Union presents a fascinating case study of barter and comparative advantage in a 20th century setting.
Money is such an important innovation for civilisation because it is a universal representation of wealth, and can bypass the problems entailed with barter economy, enabling specialisation of skills. In economic theory, comparative advantage refers to the ability of an entity to produce at a lower opportunity cost than other entities.[ii] Australia, for example, is rich in minerals and fossil fuels, and historically we have developed and invested in the infrastructure to extract these minerals at a lower cost. Hence, it is logical that our largest export is minerals, because that is what we have specialised in – if we tried to shift our main export to electronics, for example, we would face a high opportunity cost of not exporting minerals.[iii]
Suppose that the world had not conceived of currency, and nations still bartered between each other. It would be difficult to be able to capitalise on our comparative advantage because there is no guarantee that we would be able to sell our minerals to a country in exchange for something we need – such as electronics. Perhaps that country has enough minerals and does not need to trade with us – in that case we cannot import electronics from that country. While this is a simplistic example, it shows that money can bypass these issues and enable each nation to focus on what its good at, while ensuring seamless trade and maximising overall utility. [iv]
Sticking with the case of trading with Pepsi, the Soviet Union’s comparative advantage therefore lay in vodka and warships – which in all honesty is hardly surprising. However, it’s important to note that the Eastern bloc, which consisted of the communist Warsaw Pact nations aligned with the USSR, did accept the Soviet ruble (because they were effectively puppet governments) and hence the Soviet Union was able to trade, in a limited setting, using the ruble.[v]
Furthermore, it’s not unheard of for nations to resort to barter as opposed to currency. Countries such as Venezuela and Iran, for example, often had to barter to circumvent economic blockades and sanctions implemented by the United States. In one instance, Iran had to re-negotiate its trade deal with India, exchanging oil for rice.[vi]
Nonetheless, it is remarkable that the Soviet Union was practically forced to barter as a 20th century superpower, rivalling that of the United States. Having to exchange literal warships to acquire imports reflects the inadequacies of barter in a world navigated through money, and signals the failure of the Soviet Union’s currency. Such a development only highlights the extent to which the Cold War had developed and how tall the Iron Curtain became, separating the USSR from the West.
Given the sanctions Russia is facing currently, it is worthwhile to reflect on the history of the international political economy between Russia and the West and understand the legacy and precedent of the USSR’s economic isolation.
[i] Anne Ewbank (12 January 2018) ‘When the Soviet Union Paid Pepsi in Warships,’ Atlas Obscura, accessed 10 May 2022. https://www.atlasobscura.com/articles/soviet-union-pepsi-ships
[ii] Adam Hayes (2020) ‘Comparative Advantage’, Investopedia, accessed 10 May 2022. https://www.investopedia.com/terms/c/comparativeadvantage.asp
[iii] Department of Foreign Affairs and Trade (2020), Trade and Investment at a Glance 2020, Australian Government, accessed 10 May 2022. https://www.dfat.gov.au/publications/trade-and-investment/trade-and-investment-glance-2020
[iv] Yuval Noah Harari (2011) Sapiens: A Brief History of Humankind, Penguin Random House, London.
[v] Randall Stone (2021) Satellites and Commissars: Strategy and Conflict in Politics of Soviet-Bloc Trade, Princeton University Press: New Jersey.