The public demonstration of the powers of the state prosecutors carries unmistakeable echoes of Communist times.

Trying to work out precisely what has happened has sparked a frenzy of speculation about Mr Putin and his advisers and possible splits in the Kremlin. But one conclusion can safely already be drawn: last week's developments confirm that Russia is charting its own course on the long road from communism. It is not following Poland and other central European states in a rapid transition from Marxism to liberal democracy and the market economy. It is instead showing every sign of evolving into an authoritarian state in which the Kremlin, and the huge administrative machine on which it rests, dominates political power.

"We are now living in a different country," says Lilia Shevtsova, an analyst with the Moscow Carnegie Centre, a think tank. "We will see the growing role of bureaucracy, with more corruption and less pluralism. The new reality will be pretty tough: there will not be repression, but a creeping bureaucratic coup."

There is no suggestion of a return to communism. Nor does the 51-year-old Mr Putin seem to be deliberately constructing a totalitarian state. Rather, as a former KGB man and bureaucrat he instinctively responds to challenges by reaching for the levers of administrative power - whether they are the public prosecutors, the security services or the tax inspectors.

There are those brave enough to warn Mr Putin not to go too far, notably Mikhail Kasyanov, the prime minister, who on Friday expressed "deep concern" about the Yukos investigation. However, the effects of last week will not be easily reversed. From the Baltic Sea to the Pacific, the Kremlin is recharging a machine that is rolling with increasing speed towards authoritarian rule.

This does not make Mr Putin into Stalin. There have been many far less extreme models of authoritarian rule. Nor is authoritarianism incompatible either with openness to foreign investment or diplomatic co-operation with the west.

To understand where Mr Putin might go next, it is necessary to consider where he has come from. Communism's demise destroyed the rules that had held together Soviet society, starting with the authority of the party itself. Boris Yeltsin encouraged the process, knowing that political fragmentation was the best defence against the threats of a communist revanche, a military coup or civil war. The main beneficiaries of this chaos were those businessmen, including Mr Khodorkovsky, who managed to grab control of lucrative natural resources. Through controversial privatisation deals, about a dozen men built empires worth billions of dollars.

In the state administration, a few officials became very rich through their corrupt co-operation with the oligarchs. The rest were enraged to see the world they had dominated through their paperwork collapse around them. The KGB, which had seen itself as the elite of the old order, felt this change especially keenly. "The KGB was the biggest loser in the process of Russian privatisation," says Olga Kryshtanovskaya, a sociologist.

When he took power in 2000, Mr Putin made a priority of rebuilding the Kremlin's shattered authority - to widespread acclaim at home and abroad. He tamed the governors of Russia's 89 regions by squeezing their budgets, removing their ex-officio rights to seats in the Federation Council, the upper house of the federal parliament, and appointing seven mega-region super-governors - five of them former security service or military generals.

In Moscow, Mr Putin struck a deal with the oligarchs: if they stayed out of politics, he would allow them to keep their controversially-acquired fortunes. Most accepted the offer. Two who did not - the flamboyant media tycoons Boris Berezovsky and Vladimir Gusinsky - were forced to leave the country for well-heeled exile.

Meanwhile, Mr Putin allowed economic reformers headed by German Gref, the economy minister, to work on a modernisation programme, including a popular 13 per cent flat rate tax.

As global oil prices surged, so did Russia's exports and economic output and government tax revenues. Foreign investors, frightened off by the 1998 financial crisis, returned cautiously. Mr Putin's domestic standing soared. So did his international reputation, especially after he backed the US-led war on global terrorism.

However, from the outset Mr Putin's democratic credentials have been suspect. Serving as prime minister in the months before he became president, Mr Putin launched an offensive in Chechnya, the troubled province on Russia's southern border. His political enemies accuse him of doing so deliberately to fan nationalist emotions in advance of the presidential elections, which he won with a landslide in early 2000. Mr Putin has repeatedly opted for force in pursuing the Chechen separatists in a war which has now cost tens of thousands of lives. International observers condemned recent elections as a sham.

Equally worrying for political liberals has been the approach to the media. NTV, Mr Gusinsky's television station which had been critical of the government, was taken over by the state-backed gas monopoly Gazprom. Pressure has been applied to television stations to avoid criticising the Kremlin.

Control over the media has been combined with a stifling of opposition in the parliament, or Duma. The belligerent sessions of the Yeltsin years have given way to a quiescent Duma in which the president's party United Russia has established a big majority. "I can't think of a single law that the Kremlin has wanted which has not been approved," says Boris Nemtsov, head of the liberal Union of Right Forces party.

Even in the economy, Mr Putin could not resist the pursuit of control. While he has pushed through some liberalising reforms, he has repeatedly postponed efforts to loosen the government's grip on banking - where reforms have been extremely modest - and in electricity. In gas, Mr Putin has grabbed back control of Gazprom, the gas monopoly.

Encouraged by these developments, state officials and security services officers have been imbued with a new confidence. The KGB itself was broken up in the early 1990s into different organisations but its former officers have spread through the government. Together with present and former officers from the army and other security services, they have coalesced into a loose force now popularly called the siloviki. Ms Shevtsova says: "For the first time, these different agents of power have started to act as one force."

Mr Putin has always allowed a measure of political dissent. As Grigory Yavlinsky, leader of Yabloko, the small liberal party, says, the president runs "a managed democracy". But he hates a real threat to his power, especially as Duma elections approach next month and presidential polls next March.

This is why he has reacted so strongly to the challenge from Mr Khodorkovsky. With his $8bn personal fortune, the ruthless Yukos chief is perhaps the only man in Russia able to mount an independent political attack on the president - and courageous enough to try it.

Mr Khodorkovsky has irritated Mr Putin for some time. He, or Yukos shareholders, have funded opposition parties including liberals and communists. He has proved extremely effective at lobbying, winning the support of MPs and using his contacts to block, for example, tax legislation unfavourable to Yukos. He has sponsored charities and think-tanks in Russia and abroad. He has even ventured opinions in foreign affairs, taking a more pro-US stance than Mr Putin.

Mr Khodorkovsky also made little secret of the fact that he planned to withdraw from business in 2007, just before the 2008 presidential elections, and go into politics.

The struggle between Mr Putin and Mr Khodorkovsky turned into a crisis this summer when the prosecutors started investigating Yukos - with far-reaching effects on Mr Khodorkovsky, on other Russian oligarchs, on foreign investors, on the Russian economy and on Russia as a whole.

Mr Khodorkovsky shows every sign of wanting to fight Mr Putin all the way. He almost certainly knew that he was courting arrest by refusing to back down or leave Russia. Mr Berezovsky says: "He is a very brave man. I might have been prepared to go to prison in Switzerland or in Britain, but not in Russia."

Yukos is putting a brave face on events, even though the detention of its main shareholder has complicated negotiations on at least two competing bids by western oil majors that were considering taking strategic stakes: ExxonMobil and ChevronTexaco. But Mr Khodorkovsky is now playing for much higher stakes than the future of his business. What he seems to be interested in is the future of Russia.

A question for many in Moscow is whether the attack on Mr Khodorkovsky will be extended to other oligarchs. Mr Berezovsky, who is himself wanted on fraud charges in Russia, says it will: "The oligarchs must recognise that they all could go to jail." But others think not. Mikhail Fridman, head of the Alfa grouping, said before the arrests of Yukos figures: "It seems that this [investigation] is connected with the political activity of Yukos shareholders."

Mr Putin himself may think that by making an example of the one oligarch who made an egregious attempt to break into politics he can silence the rest. Anatoly Chubais, the head of UES, says: "Business is not going to go on strike or come out on the streets, but it will vote with its feet and money will fly out of Russia."

However, the president may have started a juggernaut that he cannot stop. Across Russia, there are officials who believe they have their own scores to settle with business people, small and large. Last week the FSB raided Novosibirskenergo, a regional subsidiary of UES, possibly as a warning to Mr Chubais. Meanwhile politicians loyal to Mr Putin have demanded investigations of other companies, including Sibneft, the oil group controlled by the tycoon Roman Abramovich, which is currently merging with Yukos.

Attacking oligarchs is politically popular. According to opinion polls, a great majority of Russians think that all the very rich men in their country acquired their money through criminal means and should be prosecuted. Mr Putin may want to use this emotion to boost his ratings in advance of the elections, although the state television channels have all but ignored the Yukos investigations.

If an anti-oligarch campaign gains momentum it may prove difficult to stop. Not for nothing have wealthy Russians accelerated transfers of capital overseas. After importing capital on a net basis in the first half of this year for the first time since the fall of Communism, investors are moving money out again, according to estimates by the World Bank. Mr Abramovich has been the most high-profile example, extracting substantial profits over the last few months in the form of dividends from his company Sibneft and selling it to Yukos this spring. A few weeks ago he cut by half his stake in Russian Aluminium, the metals giant.

Aware of the dangers of destabilising investment, both Mr Kasyanov and Alexei Kudrin, the reformist finance minister, late last week quietly urged restraint in the legal proceedings against oligarchs. But the business lobby in the Kremlin has been weakened by the departure of Alexander Voloshin as chief of the presidential administration. Mr Voloshin, a survivor from the Yeltsin era, is closely linked with business allies of the Yeltsin family, including Mr Abramovich and Oleg Deripaska, the controlling shareholder in Russian Aluminium.

The oligarchs may take heart from the fact that Mr Voloshin's successor is no ex-KGB man but Dmitry Medvedev, a young official Mr Putin has brought to Moscow from St Petersburg. But whether he can be as effective as Mr Voloshin as a political counterweight to the security services' factions seems doubtful.

The immediate impact upon business of recent events has been negative. Markets have proved turbulent, important mergers and acquisitions have been put on hold, and bond issues have been delayed or cancelled. "It would be tricky for any Russian company to tap the international bond markets at present," said one foreign banker in Moscow.

But once the dust has settled, the underlying trend of growing foreign investment - from a very low base - may pick up again. BP, which this summer finalised a $14bn joint venture with the Russian oil group TNK, thinks so. Most of the big deals under study involve oil companies - which are well used to dealing with authoritarian regimes around the world. Some may even prefer closer involvement by the Kremlin as a guarantor of big investments. But all will have to be more careful about their local partners.

Many countries have managed to combine authoritarian government with strong economic growth, including Japan and South Korea. This is particularly common in resources-based economies like Russia.

But such a system brings heavy costs. Widespread bribery, favour-seeking and corruption risk sharply reducing efficiency and creating distortions.

Russia was in any case handicapped by this combination of over-regulation and rent-seeking behaviour. The European Bank for Reconstruction and Development, the region's multilateral bank, has repeatedly urged more liberalisation and transparency. But as one Moscow investment banker puts it following the replacement of Mr Voloshin: "We are definitely entering another phase now, with more administrative control and more bureaucracy, creating greater scope for corruption. Russia needs reform desperately, but we may now go through a period of stagnation for the next four years."

In Moscow there are some signs of support for Mr Khodorkovsky. But it seems unlikely that they will crystallise into any serious political force. Given the reach of the Kremlin, combined with Mr Putin's genuinely widespread domestic popularity, another strongly sympathetic parliamentary majority in December - followed by his own re-election in March - seems all but assured.

In the long term, Russia is not a country that will easily resist authoritarian rule. There are no deep democratic traditions, but rather an acceptance of authority and a fear of the knock on the door. "The fact is that Stalinism as a mentality continues to exist in today's Russia," says Sergei Grigorians, head of the Glasnost Fund, a liberal think-tank.

However, much depends on the sort of authoritarianism that Mr Putin and his allies follow. If they broadly control public life, while more or less respecting private rights and property, that is not the worst future for Russia, given that in the 1990s there were genuine fears of civil war.

It is a future that the west would probably tolerate - especially if Mr Putin continues to co-operate on big foreign policy questions. If western governments have been prepared to mute their criticism of Moscow over Chechnya, they will are unlikely to make serious protests over Mr Khodorkovsky's arrest. Senior US diplomats say their overall assessment of the relationship with Russia remains "positive", although the US State department this weekend said the freezing of Yukos' assets raised "serious questions", sparking an angry response from a Russian spokesman.

But in Russia, given the history of political violence, benign authoritarianism is not a foregone conclusion. The hardline approach in Chechnya has brutalised and further legitimised important parts of the security apparatus and underlined a resurgent nationalism.

Mr Putin may know exactly where he wants to draw the line. The danger is that some of his allies may already be pushing him further than he wants to go. And the president may be unable to stop them.

Financial Times (UK), November 3, 2003