Illustration: Sarah Grillo/Axios

Despite "tough" U.S. sanctions, Russia's economy is picking up steam, and its financial markets are delivering massive rewards to investors.

Why it matters: In an era in which the U.S. has made economic punishment its foreign policy weapon of choice, Russian President Vladimir Putin and others continue to defy the U.S. and are finding the consequences to be quite bearable.

Driving the news: Far from crumbling under the weight of sanctions, Putin recently introduced a set of constitutional reforms that the New York Times suggests "could create new avenues for him to rule Russia for the rest of his life."

  • The changes are backed in part by an economy that is showing life after struggling in recent years.
  • The IMF's latest World Economic Outlook calls for growth to pick up in Russia and Turkey, which also is facing sanctions, as a big factor in the European economy's recovery over the next two years.

What's happening: Russian stocks and bonds had a banner year in 2019 and look poised for more of the same in 2020.

  • The country's benchmark stock index has bested the S&P 500 by 13 percentage points over the past one-year period and its 10-year government bonds have delivered a world-beating 210 basis point decline in yield.

What they're saying: Of the 21 countries TIAA Bank follows, which includes the U.S., eurozone, Singapore and other global heavyweights, "Russia is at the top of the list," TIAA Bank President of World Markets Chris Gaffney, tells Axios.

  • "Russia has used the US/China trade spat to strengthen ties with their southern neighbor, and continues to establish new trade relationships throughout the east as a way to soften the impact of western sanctions."

With most U.S. sanctions directed at individuals, rather than Russia as a whole, investors "decided that the fundamentals of the Russian debt market are so attractive that they completely outweigh the sanctions," Ed Al-Hussainy, senior interest rate and currency analyst at Columbia Threadneedle, tells Axios.

  • Russia has managed to get its economy on track by bolstering its current account, bringing its debt-to-GDP ratio below 15% and accumulating hefty reserves, Gaffney and Al-Hussainy say.

The big picture: It isn't just Russia that has managed to fight off the strain of U.S. economic sanctions. The U.S. has dramatically increased sanctions on Syria, Cuba, North Korea, Turkey and Iran with the goal of regime change or shifts in behavior, and so far has little to show for it.

Expand chart
Data: FactSet; Chart: Axios Visuals

In stark contrast to broader emerging markets, which have badly underperformed U.S. stocks, Russia's benchmark RTS index has driven returns well above the S&P 500 over the last year.

  • That has continued in 2020, as the RTS has delivered around 5% gains, doubling the S&P 500's 2.4% rise.
  • Russian 10-year government debt has netted 15% total return over the last year, according to FactSet data.
  • The strength of the ruble against the dollar, one of the few EM currencies to appreciate against the greenback in 2019, also meant even more bang for the buck in Russian debt and equities.

Yes, but: "It's important not to confuse financial markets with economic well-being," George Friedman, founder and chairman of Geopolitical Futures, tells Axios.

  • "Outside Moscow and St. Petersburg conditions are pretty bleak. This is why I don’t hold financial markets as predictive. In Russia, markets are up and towns outside the major cities are getting hurt."

Go deeper:

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