emerging markets specifically those in eastern europe have been whipsawed amid the ongoing russiaukraine conflict with sanctions in place and russias hard default deadline approaching in april investors are particularly focused on the regions sovereign debt an area that gramercy funds has specialized in since its inception in 1998 robert koenigsberger is cio of the 55 billion investment firm he sat down with cnbcs delivering alpha newsletter to discuss his investment in ukrainian bonds and why a 2022 russian default would be very different from the countrys financial crisis in 1998 leslie picker youve been buying ukrainian bonds how much do you own at this point and can you explain your thinking behind this investment robert koenigsberger fortunately we owned no russia or no ukraine coming into the invasion on the 24th and quite frankly the analytics were simple we thought that unfortunately the probability of an invasion was pretty much a coin toss and back then ukrainian bonds were trading at 80 cents and russian bonds were trading somewhere between 100 and 150 so we felt that maybe ukraine had 10 points of upside in the fortunate occasion of no invasion or maybe 50 or 60 of downside post the 24th we saw assets trade bonds trade as low as perhaps low 20shigh teens and so that gave us the ability to establish initial position in ukraine and quite frankly be very dynamic with that position because we do expect that on the other side of this conflict that yes there will be a very strong and well supported ukraine by the west but i would also hope and expect that bondholders will be sharing the burden and the recovery and weve come up with this concept of a ukrainian recovery bond that can help ease the bridge back to the financial markets for ukraine eventually picker what do you make of the school of thought though which says to avoid ukrainian bonds because of the risk that ukraine actually becomes part of russia which would render that debt essentially worthless koenigsberger theres certainly this notion and let us hope that it doesnt become a part of russia but we have a long history of countries that no longer exist but their debt stocks remain a couple come to mind – yugoslavia way back when yugoslavia failed to exist but its debt stock was picked up by the subsequent republics that came from that and as long as were talking about russia the soviet union failed ceased to exist but its debt stock was still honored in a debt restructuring back in 99 and 2000…our base case is that ukraine will continue to exist we dont think it will be absorbed by russia it will continue to have a debt stock it will continue to have a vast portion of the assets and the debt service capability that it has today of course its going to take a lot of time for them to rebuild that but i would not argue that the debt stock is worthless picker what about the debt stock in russia right now have you been trying to trade that whether on the long side or the short side do you have a position there koenigsberger were completely uninvolved in russia we have been uninvolved for months before the invasion once the invasion risk became something with substantial weight just the riskreward the asymmetry just didnt make sense you know postinvasion russia 2022 is very different than russia in 199899 after that default a lot of the pain that russia suffered back then wasnt necessarily all selfinflicted a lot of the pain today is obviously selfinflicted but lets think about it bottoms up and top down why russian debt doesnt make sense here bottoms up were still hearing from clients this notion of selfimposed boycotts or sanctions i think its still really early in the game technically in terms of the amount of supply thats going to be sold by etfs and mutual funds and long unintelligible emerging market debt investors at a time when the pipes are broken and what i mean by that is the banks are ceasing trading the pipes to settle it  the euroclear the dtc what have you  are not settling so even if you want to trade its going to become difficult so quite frankly i see a bit of a bottoms up tsunami coming where theres inelastic supply that holders are told to stop holding this in a world where its hard to get rid of holding it which should mean lower prices and then top down what is russia going to look like the day after and i think one has to go back and look at how unstable russia was in the period from when the wall fell in the early 90s until when vladimir putin consolidated power later that decade it was very nerve wracking having to understand who was going to consolidate power what that was going to mean and i remember as an example in the old days when yeltsin was the president i used to get calls from our trading desk and they would say boris yeltsin is in the hospital and wed have to triage why he was in the hospital because one hospital was for sobering up and the other one was the cardiac hospital and if it was the cardiac hospital we had to be really worried about what that meant for power on the other side of yeltsin and unfortunately i think thats where we are today i mean many just say the solution to russia is that putin is no longer there but with the end of putin would become the beginning of what and so i think top down theres a lot of challenges about thinking about russian debt as well picker what do you think is the likelihood at this point of a hard default by april 15 koenigsberger so default is usually about the ability and willingness for someone to pay certainly in the case of russia they are indicating a willingness to pay but a lack of capacity or capability and that capability isnt necessarily because they dont have the financial resources that ability is because technically its going to be very difficult for them to pay…its not too dissimilar to argentina when way back when cristina kirchner put i think nearly a billion dollars in the bank of new york but since a court had said to bank of new york you cant afford that to bondholders it became known as a technical default so i think its quite likely that youre going to see a default in russia whether they try and pay or not picker do you think that this will be painful it will choke the economy in russia if it does go into a default or do you think they werent really planning on accessing the foreign markets for debt anyway their debt load relative to other countries their size is relatively small only 20 billion in foreign currency debt at this point so is it even that monumental for them from a sanctions standpoint koenigsberger i dont think the debt and isolation is that monumental russia is going to suffer deep economic consequences the velocity of these sanctions and the depth of these sanctions is unprecedented and just put debt stock aside i dont really think whether they pay or not its going to make a difference as to whether russia isnt an isolated economy which is different than 199899 when they had the default back then the thought was eventually russia is going to want to reaccess the capital markets that the debt default is the problem itself and therefore theyre going to have to resolve that very quickly in order to get access to the markets and in fact thats what happened within 12 to 13 months they restructured the vneshekonombank loans that then became russian federation bonds and they were able to access the markets whether they pay or not this week whether they pay the april maturity is not going to get them access to the markets and its not going to solve the dire economic consequences that that economy is going to suffer picker what do you think are the broader implications for emerging markets india china are major trading partners for russia so one would presume that if their economy is suffering as a result of this that it could have ripple effects to other emerging markets obviously europe and the us as well but im specifically interested in places that are in that emerging markets bucket that youve studied koenigsberger in the case of the russiaukraine conflict the impact on the oil market i mean immediately you can start to see winners and losers within emerging markets and em is always considered to be a commodity asset class well some places like mexico are exporting oil some places like turkey are importing energy so its hard to make a blanket statement in terms of what its going to mean that being said i believe that the events of february 24th took the world by surprise it was nobodys base case that there would be an invasion and also an invasion of what i would call a capital i invasion maybe there was going to be an incursion towards the east of ukraine but this caught everyone by surprise and therefore the ripple effect is probably going to catch people by surprise and i think that part of the challenge here is the cumulative effect right i mean we have just gone through a global pandemic and now were stapling right to that war in ukraine and the ripple effects of that picker not to mention theres already inflationary pressure central banks hiking interest rates which historically have had an impact on the emerging markets given the complicated macro backdrop where do you see that playing out who are the winners and who are the losers koenigsberger you start with oil you start with commodities you try and figure out which side a country or a corporation might be on that one of the other things that may be less obvious is this notion that  and this is a blanket statement which i dont generally like to make but  covid and this crisis is going to be a bigger challenge for sovereigns and their balance sheets than perhaps it may be for corporates so once they get about the investment implications sovereigns may be more challenged corporates may be a safer place to be not unlike last year when we saw that high yield corporates in emerging markets outperformed the sovereigns that was for a different reason because of the higher interest rates bringing lower prices but imagine a sovereign that has a decision of do we pass through prices to our society that cant afford these prices as it relates to food or do we subsidize that and i think the choice is going to be theyre going to subsidize to try and lessen the impact for their societies well in doing so not unlike weve seen with developed market balance sheets thats going to put stress on those balance sheets that wasnt there before from a debt perspective debt to gdp perspective debt sustainability perspective so thats certainly one of the things to look out for out here