(FORTUNE Magazine) – THE SOVIET ECONOMY and chaos,'' growled an irate Muscovite as he slammed back a shot of black-market vodka, chasing it with a piece of bread his wife had spent 20 minutes in line that morning to buy. ''The words are practically interchangeable these days.'' He's right. Every week a few more consumer items disappear from shops while President Mikhail Gorbachev comes up with a few more reasons the country can't move more swiftly to the market economy he has long promised. Quips Georgi Arbatov, a Kremlin mouthpiece not usually known for tweaking his boss's nose: ''I am sure that Gorbachev deserves the ((Nobel)) Peace Prize, but I wouldn't think that he has deserved the prize for economics.'' In the vacuum created by Gorbachev's foot dragging, control of economic reform is rapidly shifting to a group of men who have been more decisive -- the leaders of Russia, the mightiest of the 15 republics that make up the Soviet Union. Led by the charismatic Boris Yeltsin, they are pushing ahead with their own version of a 500-day forced march to a market economy that Gorbachev considered and then greatly watered down. Yeltsin and his merry band have vowed to carry out their ambitious economic plans even if Gorbachev tries to get in the way. Elected to the Russian Parliament last March in the first fully free elections in 73 years, they claim that the Russian Federation is a self-governing sovereign state, obliged to obey the national government only when it chooses to do so. That notion has proved to be so compelling that even some parts of Russia itself are declaring their own independence. If allowed to stand, these constitutional challenges would leave Gorbachev a globally famous leader without much of a country to govern. At the least, it means Western dealmakers can't be sure just who has power to sign an agreement that will stick. Yeltsin, 59, a burly pol with a common touch that Mayor Daley or Boss Curley would have admired, is at the heart of this second Russian revolution. A onetime Gorbachev ally, he resigned from the Politburo in 1987 and broke with the Communist Party last summer. Once in opposition, he swiftly earned a reputation as a combative advocate of a faster road to democracy. For nearly three years he continuously baited Gorbachev for refusing to act decisively. Along the way, he became tremendously popular. Last May he was elected chairman of the Russian Federation's 252-member Supreme Soviet after a campaign in which he pledged to hold Russian law ''juridically higher'' than Soviet law -- a legal point that amounted to a declaration of independence. This was no small threat. The Russian Federation is so big and so rich (see map) that the Soviet Union would be a poor, relatively insignificant country without it. An enormous landmass that covers 11 time zones (twice as big in square miles as the continental U.S.), the region has most of the Soviet Union's oil, gas, and timber, and huge deposits of gold and diamonds. With 147 million people, it accounts for about half the Soviet population. Moreover, the notion of a sovereign Russian state had immediate political implications. If Russia is sovereign, then just what is Gorbachev in charge of? Gorbachev was so frightened by the notion of the maverick Yeltsin's taking charge of the Soviet Union's largest republic that he actively campaigned against his old ally. ''If we seriously analyze what ((Yeltsin)) has said,'' he pleaded on the eve of the vote, ''it turns out we are being called, under the banner of restoring Russia's sovereignty, to bring about the Union's disintegration.'' YELTSIN WON despite Gorbachev's heavy-handed opposition. Once in power, he wasted no time setting up a tough and independent-minded government. In addition to working a crowd like a ward boss, Yeltsin has shown remarkable ability to attract talented young technocrats. While Gorbachev continues to surround himself with time-serving bureaucrats, Yeltsin has appointed an extraordinary team of advisers to his cabinet and inner circle. Says a Western diplomat: ''These guys look like the student council at Berkeley in the Sixties -- young, tough, and radical. This is the kind of government perestroika needs.'' Leading the team is Finance Minister Boris Fyodorov, 32, an expert on international banking who gave up a promising career in the Communist Party to run the new government's budget. Also prominent is Grigori Yavlinsky, 38, an economist and deputy prime minister who sounds like Milton Friedman. Says he: ''Our goal is to get out of the bottomless pit we find ourselves in. In the entire history of human existence, no one has thought of anything more efficient than the free market. By mastering it, we will free ourselves from the abyss and gain the capacity to draw on the achievements of world civilization.'' YAVLINSKY was the first to propose the lightning-fast 500-day transformation to a market system. His idea was picked up and refined by a group headed by Stanislav Shatalin, Gorbachev's top economist. It would have become the national program had Gorbachev backed it more strongly. The Russian Parliament approved the plan almost intact after seven days of debate. The Soviet Parliament finally approved a package of economic reforms resembling Shatalin's plan, but only after an agonizing seven weeks of public hand-wringing. Acting on a compromise proposed by Gorbachev, the Soviets left out the 500-day timetable. Yeltsin was outraged over the fudge. At a hastily arranged speech before the Russian Supreme Soviet, he blasted Gorbachev for again dragging his feet and threatened to implement the reforms in Russia alone, even if this meant that the new government would have to print its own currency and set up its own customs services. Said Yeltsin: ''This will be difficult, but we'll have to follow this road.'' Yeltsin had already started down that road. In June he produced a far- ranging Declaration of Sovereignty, which the Russian Parliament passed. The document claimed, among other things, that the republic controlled all industry and mineral resources within its long borders. The first clash came in July when the national government broke its own decades-long ban on business with South Africa by agreeing to sell $5 billion of diamonds exclusively through De Beers's Swiss arm, De Beers Centenary. Gorbachev needed hard currency to meet debt payments, and he was not accustomed to asking anyone's permission to sell what came out of Soviet mines. The Russian government, claiming that it had not been consulted, promptly issued a decree rejecting the transaction and claiming that none of Russia's ''strategic natural resources'' could be sold without the ''approval of the appropriate Russian Federation authorities.'' De Beers officials were caught off guard. Says Roger Van Eeghen, a spokesman + for De Beers in London: ''Our position is that we still have a legitimate deal with a legitimate government.'' Gorbachev responded with a sharply worded presidential decree, rejecting Russia's claim and vowing that ''the foreign economic deals that the Soviet Union has concluded shall be strictly fulfilled.'' The Russian government has sent signals that it will not block the transaction, but it still refuses publicly to acknowledge that the contract is valid. In the meantime companies like Chevron, currently negotiating to drill oil in Kazakhstan's huge Tengiz field, have had to open parallel negotiations with local authorities to ensure that they have all the permissions they need to go ahead. Says a Western executive close to the Chevron deal: ''These days you need to negotiate with everybody, or you risk unpleasant surprises.'' IN AUGUST, Russian officials charged that the Soviet government was selling Russian gold on foreign markets to raise cash and challenged its right to do so. This time, instead of issuing decrees bound to be ignored in the Kremlin, Justice Minister Nikolai Fyodorov, 32 (who is not related to the Finance Minister), appealed directly to world gold buyers. Said he at a crowded Moscow press conference: ''In the name of the Russian government, we again urge foreign partners, and the world community, that they take into account that the Soviet Union consists of a number of sovereign republics. Without the agreement of the authorized bodies, we recommend them not to conclude any deals.'' The Soviet Union has no way of resolving such disputes. The court system is primitive, and there are no laws or precedents that could be applied to feuds between a rebel republic and the central government. The result has been a standoff amid confusion. Says a Western diplomat who closely follows trade issues: ''Lines of authority are not very clear right now. And foreigners are getting caught in the middle.'' A new so-called Union Treaty is being negotiated among the republics and the Kremlin. Western businessmen hope it will determine precisely who controls natural resources, but some worry that the final document will smooth over such divisive issues in order to entice as many republics as possible to stay in the Union. The Russian government has come up with its own proposal. Says Yeltsin: ''The republics should delegate authority to the center, and not the other way around.'' Under the Russian plan, the interminable Soviet bureaucracy would be cut to six ministries -- defense, railways, foreign policy, shipping, civil aviation, and energy. All other powers, including regulation of industry, would devolve to the republics. Gorbachev has yet to respond publicly, but analysts think he will oppose the plan since it would severely restrict his room to maneuver. WHATEVER confusion Yeltsin's separatist moves may have caused for Western investors, his government has given economic reform a strong push within the Soviet Union. In particular, his decisiveness has made a lot of friends for the Russian government within the growing community of Soviet entrepreneurs. Says Vyacheslav Khokhlov, deputy director of Tokobank, one of more than 350 commercial banks that have sprung up since talk of switching to a market economy began nearly a year ago: ''The Russians are the only ones who seem capable of leading us out of the crisis we have found ourselves in. They are far more qualified than the central government, both on the level of professionalism and competence.'' Ordinary Russians seem to agree. A recent opinion poll conducted by the Russian Parliament gave Yeltsin an 85% approval rating, far higher than his former boss scores. The Russian government wants to convince foreign businessmen that they should sign deals with the Russians first. Says Trade Minister Viktor Yaroshenko: ''We cannot hope to solve our economic problems behind an iron curtain.'' Yaroshenko, 44, has proposed leasing forests and unused farmland to Westerners, providing the outsiders promise to produce food on the plots. So far, most Western investors are deeply ambivalent about signing a deal with a rebellious government whose claims of sovereignty have yet to be established. Still, since no one wants to ignore this powerful new force within the Soviet Union, many companies have started conducting simultaneous negotiations. A Western diplomat in Moscow points out that Westerners can easily find themselves negotiating with three sets of officials -- national, republic, and local. He adds, ''It is not clear that the Soviets themselves know just who is in charge.'' Some Soviet managers, like Valerian Kuramzhin, the general director of Moscow's gigantic Neftecom oil compressor factory, think the time has come for Western businessmen to make direct contacts with their Soviet counterparts to help them figure out where they should consider investing. Says he: ''If the central government collapses, who is going to pick up the pieces? Nobody. , We're ready to advise investors where we think they should put their money. People on the ground always see things more clearly than people in the clouds.'' NO ONE CAN GUESS what the Soviet Union will look like in a year's time. Russia would seem to be in a commanding position. Even if all the other republics somehow are spun off, Russia would remain a powerful country. That is, if Russia itself can hold together. Within the Russian Federation are 16 distinct entities that enjoy some autonomy of their own from the republic's central government in Moscow. Under the influence of Russia's revolt against the Kremlin, nine of these regions have passed ''sovereignty'' declarations themselves, raising the distinct possibility that Yeltsin will face his own constitutional crisis. In addition, several entities within Russia, including the former capital of Leningrad (which inhabitants increasingly call St. Petersburg, the old Czarist name) and mineral-rich Sakhalin Island just north of Japan, have unilaterally declared themselves free-enterprise zones. As such, they claim the right to control their own natural resources and to set tax rates for businesses. Indeed, anarchy is spreading so fast that many people in the West and within the Soviet Union wonder whether anyone can hold together the empire forged by Czars and commissars.