Gramercy Funds CIO on emerging markets investing amid the Russia war,

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Emerging markets, specifically those in Eastern Europe, have been whipsawed amid the ongoing Russia-Ukraine conflict. With sanctions in place and Russia’s hard default deadline approaching in April, investors are particularly focused on the region’s sovereign debt — an area that Gramercy Funds has specialized in since its inception in 1998. 

Robert Koenigsberger is CIO of the $5.5 billion investment firm. He sat down with CNBC’s Delivering Alpha newsletter to discuss his investment in Ukrainian bonds and why a 2022 Russian default would be very different from the country’s financial crisis in 1998.

 (The below has been edited for length and clarity. See above for full video.)

Leslie Picker: You’ve 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 20s/high 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 we’ve 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: There’s certainly this notion and let us hope that it doesn’t 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 we’re 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 don’t 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, it’s going to take a…