Soviet Barter And International Trade
Soviet Barter And International Trade
Portraits of US corporations trading with the USSR and its leaders.
An interlude in a multi-part series on the operational details of Russia’s transition to capitalism
As I assemble Part IV on the Russian transition to capitalism, I wanted to zoom in on one particularly strange corner of Soviet money. Recall in Part III how the Soviet Ruble was designed to protect Soviet production from any and all price signals.
While we covered in detail how the USSR did this, the astute reader might have noticed a key missing detail: how did the Soviets protect themselves against international trade that itself would inevitably be driven by price signals?
The answer was simple: they didn’t trade with other countries. At least in theory, or on the record, or in currency. To make sense of the bizarre shape of Soviet trade, we need to first see how cross border trade happens normally.
Normally, in the import / export business, the company purchasing the goods needs the currency that the company selling the goods trades in. Intro Economics lecturers demonstrate this by describing trades happening in convoluted currencies, conjuring hypothetical scenarios like Moroccan soda importers, seeking to import Jarrito’s from Mexico, who need to change their local Dirham to Mexican Pesos. In the real world, they most will likely would just transact in USD, which has been the dominant currency for international trade for the last several decades.
Sounds like a huge pain in the keister, huh? Well it is. And we can even see a cosmic paw print of the weight of this headache, by looking at the malapportionment of the shares of the currencies that dominate international trade. Over half of all trade happens in US dollars, which—by the way—despite its massive share, is in fact at a 3 decade all-time low.
Just for fun, here’s a chart that demonstrates the network effect value that’s created from smoothing over currency pains in international trade1:
Now of course, Soviet factories would not accept US dollars for their goods. They’d be feeding into the global financial system set up by their geopolitical rival. Under the normal model of international trade, this means you’d need to get Soviet rubles to purchase Soviet goods.
Well, there was no way to get Soviet rubles, either “hard” or virtual, on foreign exchange markets. Nor was there any way to convert Soviet rubles back to a usable currency, because the only agent to take Soviet rubles, the USSR, jealously guarded its reserves of foreign currency.
But the USSR was one of the largest international markets, and its consumer base was famously and chronically underserved by domestic producers. So how did the enterprising importer trade with the Soviet Union? They bartered.
To import into Russia was to sell something to the Soviets. Specifically to the Ministry of Foreign Trade, who, after a lengthy negotiation, would agree to swap your goods for Soviet goods of similar value, as agreed upon by you and the Ministry of Trade. Once you received possession of your Russian commodities or merchandise then be on point for liquidating those goods into a usable currency.
These transactions were called “countertrades”. They were comprised of three separate contracts: an agreement for the Soviets to purchase Party X’s goods, an agreement for Party X to purchase Soviet goods at a later date, and a “protocol” to govern the relationship between the two contracts that would amount to good-for-good payment terms.
Sigh. All this work just to avoid prices set by markets. Was it worth it? From the perspective of Russia’s political economy, absolutely not. But as a tiny consolation prize, it did give us some of unbelievable scenes in international trade.
For example, a US computer company decided to swap its computers in exchange for Soviet Christmas cards. They completely flopped, because religious Americans would not buy Christmas cards stamped “Made in the U.S.S.R” on the back. That vignette is from one of the only examples I could find on the English-speaking internet.
Enter Pepsi
While there are many, many such stories that have been lost to the annals of time, perhaps the most well-documented case was the time Pepsi completed a "soda for war vessels" swap with the USSR. The swap of Soviet submarines for its soda facilities briefly made Pepsi "“the 7th largest navy in the world”2—tied with India, which at the time had a population of 800 million.
Upon receipt, Pepsi shipped them to a Norwegian scrapyard to melt them down and sell as scrap metal. Only upon arrival did they find out that the submarines had been constructed with asbestos, making them dangerous to melt down, and therefore dramatically lowering their real market value.
This cheeky anecdote is a distraction to the broader story of Pepsi’s launch in Russia. Which is a story, at its heart, about American corporate diplomacy. I want to stop on our hike here and take a minute to focus our attention on Pepsi.
Somewhere in the narrative arc of how Pepsi expanded into the Russian market, there exists a Wittgenstein ruler. I leave it up to you, reader or listener, to determine which relationship it might be.
According to NPR, Pepsi was the first “American consumer product to be manufactured and sold in the former Soviet Union”—an accomplishment as impressive as it is precise.
It was the result of a charm campaign that spanned three decades. The wingtips of that interval gave a sense of the level at which Pepsi was playing in launching in Russia.
Posing for photos alongside Richard Nixon, PepsiCo CEO Donald Kendall served his company’s flagship drink to Nikita Khrushchev (at the 1959 American National Exhibition in Moscow). Nearly four decades later, Pizza Hut, which at the time had just completed a spin off from its holding company PepsiCo, and Mikhael Gorbachev struck what we today would call an influencer marketing deal.
Gorbachev cameo-starred in a now infamous Pizza Hut commercial that aired internationally, but never in Russia. Twenty five years later, it feels like a stage production that captures some kind of pulse to what the vibe must have been back then, filtered through the funhouse mirror of a 90s pizza ad.
Now a weird internet staple, I embed its Youtube link below in case anyone hasn’t seen it or wants to save a Youtube search it watch it for old times’ sake:
Int. Pizza Hut—a family eating notices that former Soviet President Mikhail Gorbachev is sitting at a table nearby, feeding a child who seems to be one of his granddaughters.
Father begins to prosecute Gorbachev’s legacy. He and a late adolescent (?) son debate whether Gorbachev has created “economic confusion” or (classically) liberal progress and “opportunity”.
Mother breaks up the debate by finding common ground, saying he’s “given us many things, like Pizza Hut.”
Father and son reconcile.
Father, previously the prosecutor of Gorbachev’s legacy, rises to propose a toast, asking everyone to raise a slice for Mr Gorbachev. Gorbachev bashfully demurs their cheers.
Cue 90s disembodied voice narrator: “Sometimes nothing brings people together like a nice, hot pizza”.
Cut to shot of meat cheese melting off the slice as it tears.
The end.
For his appearance, PepsiCo paid the seal of the Soviet presidents a speculated $1 million USD ($2.4M in 2023). He reportedly put the funds towards his foundation meant to create an archive of perestroika. Gorbachev’s sponsorship payment, while not quite comparable to the nomenklatura privatization that happened around around him (which we’ll discuss in Part IV), invites some brow-raising followup questions.
What follows by no means constitutes legal advice—if you’re thinking of paying a former head of state for a sponsorship deal, consult your attorneys.
Exporting America’s Revolving Door
At the heart of American civic democracy is the principle that our policymakers are not for sale to the highest bidder. Over the years, we’ve developed a robust framework of laws and regulations to ensure this. Between stiff anti-bribery statutes and campaign finance laws, it is radioactively illegal to even suggest bribing a government official. Not to mention it is totally anathema to the spirit of the American Project.
That’s not to say that it doesn’t happen. Usually when bribery happens or is attempted (and the government finds out about it), the people involved go to jail. They can also go to jail for soliciting bribes while in office, like Illinois Governor Rod Blagojevich did when he conspired to sell the senate seat left vacant by Obama’s winning the 2008 presidential election.
The US federal government has extended this anti-bribery posture beyond its shores. In 1977 it made such payments a crime through the passage of the Foreign Corrupt Practices Act (FCPA), which prohibits US legal persons (including any company domiciled in any capacity in the United States) from bribing foreign officials. You may have heard it invoked in one of the most recent indictments levied against Sam Bankman-Fried by the Department of Justice, who allege he paid Chinese officials $40m to unfreeze $1B of Alameda Research funds.
Despite this anti-bribery mine field, there are legal ways to incentivize government officials to legislate and regulate in a manner amiable to the business community, or one of its myriad industries. In DC, one of the most powerful of these incentives is called the revolving door, a phenomenon whereby high level government officials routinely find themselves in high level private sector jobs after they leave office.
With government being government and the private sector being the private sector, this career switch comes with a steep jump in compensation. As a benchmark, after Hillary Clinton stepped down as Secretary of State, she could make as much from giving one speech as her old boss Barack Obama did in six months.
The revolving door is fascinating because unlike a straightforward bribe, it is retroactive and emergent.
The revolving door is retroactive in the sense that government officials have no firm promises of future high paying work. If they did, that would be pretty clearly a bribe. But they have a massive track record, and the general assurance that past performance, while no guarantee, often does predict future results. It’s hard to tease just how much government officials’ behavior is influenced by the very reasonable expectation of a lucrative, leapfrogged private sector career after they leave office. But it’s unlikely to be zero.
Finally, the revolving door is emergent. It’s not a single firm making the promise of future fortune, but rather the private sector job market for former prominent government officials. Professionals in many careers are infinitely more valuable when they have firsthand experience as the thing that they must interface with. Think about managers who are former engineers, or founders who have been in the market as a potential customer of the thing they’re building, or startup investors who have been founders.
Why would it be any different for high-leverage positions where one must interface with the federal government? How many US secretaries of state are there to give a keynote at your executive offsite? How many of them embody the shrewd, educated, highly calculating pragmatism that you hope to cultivate within your publicly traded bank’s leadership team? And of course, how much better off is your firm if current government officials can see the opportunities you have to offer for those who end their tenure on good terms?
So the revolving door behaves like a bribe made by no one in particular, as a nominally meritocratic exchange of money for services that are demonstrably differentiated by your previous work experience in the public sector.
And the swivel that holds the revolving door in place is a founding principle of American democracy, which Abraham Lincoln described in the Gettysburg Address as “government of the people, by the people, for the people.” So when government officials are regular citizens. And when they leave office, they are simply regular citizens again, free to do whatever ordinary citizens can. No longer in the cathedrals of power, they’re ambling in the bazaar, weighing their offers and their options.
This all leads to:
One Final Historical Puzzle
Was Gorbachev the first Russian beneficiary of the American revolving door?
I would say yes, obviously. He was the pusher of market reforms which both ended the Soviet barter that PepsiCo had to navigate and opened the door for Pizza Hut’s entry into Russia, as the mother in the commercial earnestly tells us.
And despite being the former leader of the USSR, Gorbachev in the ad plays a now-ordinary Russian citizen. Which conveniently, is exactly how Pizza Hut wanted to present the real-life Gorbachev, for reasons both commercial (see Andy Worhol’s “A Coke is a Coke”, and replace “Coke” with “Pizza Hut pizza”) and regulatory (see the average FCPA settlement, which is north of $70 million).
But there’s one complication to the case that he was the first revolving door beneficiary. While Gorbachev was pushing his market liberalization, there was no prior track record of Soviet politicians getting cushy corporate deals. In fact, the very notion of a Soviet revolving door would have have been considered semantically correct but logically impossible.
This isn’t some definitional hairsplit. It’s central to the revolving door phenomenon: how can the possibility of lucrative private sector income sway a politician if it has never been offered before in their country? Is it even the revolving door at that point?
While we know that Gorbachev was paid by a major US corporation, we have no clue whether as President of the USSR, he ever expected to be.
The answer to that question Gorbachev probably took to his grave.
Bibliography
Marcie Marino. "Bartering with the Bolsheviks: A Guide to Countertrading with the Soviet Union." Dick. J. Int'l L. 8 (1989): 269.
Paul Musgrave. “The Doomed Voyage of Pepsi’s Soviet Navy.” Foreign Policy. 27 Nov. 2021.
Obligatory note that other sources estimate about 40% of cross-border trade is now denominated in USD. The dollar’s hegemony is quite real, but has been in decline as other reserve currencies like the Euro have emerged.
This is a controversial stat that has become something of a lightning rod meme among a small group of very online historians.
First of all, PepsiCo was not a navy. And even if it was, submarine count alone is a very odd measure of the size of a navy. And even if it wasn’t, these were scrap submarines—totally useless—rather than functional ones. And even if they weren’t, PepsiCo never took actual physical possession of them. It was merely the ultimate beneficiary of their transfer to a Norwegian ship breaking company who then melted them down and liquidated the resultant metal on the scrap metal market.
Yet despite all these caveats, it’s still more true that PepsiCo was the 7th largest navy in the world in 1989 than you or I were.