YOU ARE HERE: LAT HomeCollections

Doing Business : Bloc-Buster Deal : Pepsico's $3-billion-plus Soviet expansion was the 'deal of the century.' Then, the deal crumbled along with the country. Here's how Pepsi put it back together.


MOSCOW — The deal was one of the biggest that a U.S. company had ever signed with the Soviet Union, and as far as Pepsico Inc. was concerned probably the best.

Over 10 years, Pepsi-Cola International would double its soft-drink sales here, open two dozen new bottling plants and launch its Pizza Hut restaurants in the country's biggest cities.

To finance the expansion, Pepsico would increase its sales of Russian vodka in the United States and begin a new venture selling and leasing Soviet-built ships abroad.

The retail sales of cola and vodka alone were to total more than $3 billion, according to Pepsico's estimate in 1990, and the ship sales were likely to be worth at least $300 million.

"It was an agreement that people in East-West trade dream about," Karl G. Nigl, a Pepsi-Cola vice president for Russia and Eastern Europe, recounted almost rhapsodically. "Steady growth was locked in over a long term, there was good technology transfer, our partners were able to add value to their exports all along the way, financing was built in. . . .

"It was barter, sure, but there was profit at very step, and structurally it was beautiful, assuring us convertible currency for our profits while financing a massive expansion."

But when the Soviet Union disintegrated late last year, with it went what Pepsico had called its "deal of the century."

The shipyard that was building the double-hulled tankers that Pepsico was selling to finance its Pizza Huts and new bottling plants in Russia was now in a different country, Ukraine, and the new Ukrainian government wanted the revenues from the ship sales.

The chemical plant that was to produce plastic two-liter bottles to expand Pepsi sales was in Belarus, also now independent, but the bottling plants that were to fill them were mostly across the border in Russia.

And the mozzarella cheese needed by the two newly opened Pizza Huts in Moscow had become a very expensive import--it was coming from Lithuania, which wanted to sell the cheese elsewhere or at least to be paid in dollars.

"All of a sudden, the whole thing was in pieces--hundreds of pieces," Donald M. Kendall, Pepsico's retired chairman, who had put the original deal together, said in an interview during a recent visit here. "We had a multibillion-dollar contract with a nonexisting entity--the Soviet Union.

"Put another way, one of our biggest partners, the Soviet Union in this case, had just gone out of business, and that's a major problem for any company."

While Pepsico has been able over the past six months to salvage its deal, Western business people say that scores of others collapsed along with the Soviet state.

And even in success, Pepsico's efforts illustrate the difficulty that American and European companies are having in doing business in Russia and the other former Soviet republics as those independent new states emerge from a single, centrally planned, state-run economy.

Selling to the Soviet Union, as well as other socialist countries, was always difficult because the ruble was not an internationally accepted currency and Moscow's foreign currency holdings were limited. So companies like Pepsico engaged in barter or counter-trade arrangements, taking payment in commodities that it could resell, such as cola syrup for ships.

On top of that longstanding problem, the collapse of the Soviet Union means that old contracts often are simply no longer valid under new regulations. The former Soviet partners may be bankrupt or unable to get raw materials; perhaps they have lost their managers. Suppliers and customers are now frequently in different countries, with tariff barriers going up almost every day. And taxes are imposed at rates that can turn an attractive profit into a serious loss.

Daimler-Benz AG, Germany's largest manufacturing company, for example, signed contracts in late 1990 to produce 2,500 buses a year outside Moscow. With Russia's economy continuing to contract at a rate of more than 15% a year and the country's foreign earnings almost totally consumed by old Soviet debts, Daimler-Benz's partner cannot pay the $132-million fee for the production license and technical assistance, and only limited production is under way.

"We have signed contracts, but they have told us they cannot stand up to the financial commitment," Edzard Reuter, the Daimler-Benz chairman, told a conference on Russian trade this month. Counseling patience, Reuter added, "It is in our interest to do what we can. . . . It's a dramatic transition."

Chevron Corp. had to renegotiate an agreement it had signed with the former Soviet government to develop the Tengiz oil field in Kazakhstan after the republic became independent--and in the process had to accept a 20% share of after-tax profits compared to the 28% it had originally won. Chevron will now invest about $10.9 billion over 40 years to develop a field likely to produce 700,000 barrels of oil a day and generate $5 billion a year in revenues.

Los Angeles Times Articles