(FORTUNE Magazine) – IT'S MORNING and a light snow is falling on Malaya Kalitnikovskaya Street in Moscow's working-class Taganskaya neighborhood. Outside the local shoe store, in an all too familiar ritual, a line of sturdy Russian women wrapped in bulky winter coats, colorful peasant scarves, and fur hats stretches for nearly 30 yards. Though the store holds only rows of empty shelves, they have come because of rumors that a shipment of goods might arrive later that day. Their faces display little emotion. And then the unexpected happens. As 10 A.M. approaches, a young woman shoves her way to the head of the line. ''Who has the list?'' she demands, referring to the written list of people queuing that day. ''Give me a look.'' Lines have become so regular in Moscow that scrupulous Soviets have begun keeping lists of who arrived first to make sure that no one cuts in front of them. A man sheepishly hands it over. The woman examines it briefly, and realizing that some 300 people are ahead of her . . . she tears up the list! Chaos ensues. The back of the line surges forward, aware that now is its chance to get ahead. Those in front turn angrily upon the woman who laid waste their efforts. ''Get her hat!'' one man shouts. A burly housewife rips off the woman's fur hat and begins grinding it into the snow with her boot. ''You swine!'' the lady shouts back, ripping off her attacker's hat and shredding it with her teeth. By now the crowd is out of control. People rush past the squabbling women, shoving and cursing as they press toward the door of the still unopened shop, where the shelves silently continue gathering dust. Welcome to Moscow 1991. The pictures here and on the following pages barely begin to convey the tension and sadness that now dominate life in the U.S.S.R. After nearly six years in power, Mikhail Gorbachev is presiding over the worst crisis to hit the economy since the Nazi invaders were driven back in 1944. Every day more staples disappear from Moscow's state-owned stores. Sometimes it's bread. Other days it's milk and eggs. Forget about meat. Televisions and condoms haven't been available in months, except on the black market. Nor have antibiotics. In Siberia, patients are warned to first obtain surgical gloves for their doctors' use if they need an operation. Increasingly, citizens speak with nostalgia of the time ''before perestroika,'' when there were goods on the shelves and jobs to be had. Gorbachev's failure to break decisively with the discredited command-and- control system he inherited lies at the heart of these failures. Though he has surrounded himself with strikingly pro-market advisers, he has continued to let the planning bureaucracy make most economic decisions and, despite his revolutionary rhetoric, tempered his reforms to accommodate their views. Growing political gridlock is accelerating the economy's decline. All 15 republics, as well as smaller regions and even some cities, have declared sovereignty, often asserting their right to nullify old central government statutes or Gorbachev's new presidential decrees. Many areas have begun holding back the goods they produce, preferring to consume them locally or barter them for things they need rather than sell them to Moscow for rubles that buy nothing. Despite a record harvest, potatoes -- that essential Russian winter vegetable -- are almost as rare in the capital as bananas. The result: Public opinion, which had been moving steadily leftward -- toward democracy and freer markets in Soviet parlance -- is now swinging to the right. Where glasnost and demokratizatsiya were once the watchwords, the political debate echoes with calls for poryadok (order). At the recent Congress of People's Deputies, even Leningrad Mayor Anatoli Sobchak, a reformer brought to power by the first open municipal elections ever held in that city, chided his fellow liberals for their endless, ineffectual debates. Why did they worry so about a military coup, he asked? Soon the economy would be such a mess that ''we'll go to the army on our knees and say, 'Come and have us!' '' Gorbachev has responded by getting tough. In places where ''a serious threat to the security of the state'' arises, he recently warned, he was prepared to declare a state of emergency and rule by presidential decree. In his most disturbing personnel move so far, he dumped his moderate Interior Minister and replaced him with Boris Pugo, former chief of the Latvian KGB. As Pugo's deputy, he chose Boris Gromov, a combat-hardened general who headed Soviet forces in Afghanistan. ON THE ECONOMIC FRONT, the man who issued a historic call last spring for a transition to a market economy -- and then spent the rest of the year equivocating as his advisers drew up plans to do just that -- is hunkering down as well. Recently, Gorbachev authorized KGB Chairman Vladimir Kryuchkov to go on TV to threaten black-marketers and independence-minded, pro-market radicals with ''the full force of the law.'' Kryuchkov later informed legislators that foreign trade and investment was a sinister, destabilizing force and admitted that the U.S.S.R. may have to accept ''the possibility of bloodshed'' as the price of restoring order. But how high a price and where? Now that the Parliament of the giant Russian Republic has voted to slash its budget payments to the central government by 84%, or 119 billion rubles ($66 billion at the inflated official exchange rate), Moscow rather than Riga or Tbilisi could provide the first test of the President's get-tough policy. ''This is more than a war of laws,'' Gorbachev thundered after the cut was announced. ''This will ((mean)) collapse not only of the economy, but of the country itself.'' Meanwhile, the Baltic states, which were incorporated into the U.S.S.R. in 1940 after the Soviet army invaded, continue to insist on their right to secede. Gorbachev has said they can, but only if they pass a referendum backing independence by a two-thirds majority. Under that scenario, Lithuania, which is 80% ethnic Lithuanian, would probably get the required votes, but Latvia, where natives hold only a slim ! majority, probably wouldn't. As a result, the Baltics have decided to put up a united front against Gorbachev's referendum call. Says Endel Lippmaa, an Estonian nationalist who represents that republic's interests in Moscow: ''No one asked us to hold a referendum when they invaded.'' Gorbachev has also said he is willing to abide by voters' wishes on the crucial question of permitting private landholdings, mainly for farming. Informal opinion polls show that a sizable majority of the people favor a return to private farming, and the Russian Parliament legalized it in December. But Gorbachev, despite the remarkable ''new thinking'' he has displayed in cultural life and foreign policy, remains a dogmatic Marxist about private ownership of land. ''People simply won't accept it,'' he has said. His friends in the West can only hope that Gorbachev holds his promised referendum on this issue soon. Even in the midst of the shattered Soviet system, the tiny private plots allotted to individuals working on collective farms have proved 30 times more productive than the vast state-owned tracts. BOLDLY ENDING most price controls and privatizing land and factories have in the past year moved to the top of Western analysts' wish lists for reform. That kind of one-two punch was also central to the 500-day plan for radical economic change that Gorbachev's advisers worked out with Russian Republic leader Boris Yeltsin -- only to have their boss support a watered-down version. An authoritative study, jointly sponsored by the International Monetary Fund, the World Bank, the OECD, and the new European bank established to aid Eastern Europe, recently spelled out their recommendations. They call for nothing less than freeing prices, breaking up big state-owned monopolies, and selling off smaller companies to halt the downward spiral. Such a course, which also requires huge cuts in government subsidies, would be temporarily painful. Before they spur new sources of supply, rising prices would first bite deeply into household incomes. In Poland, attempts to introduce similar reforms failed as long as they were backed by discredited Communists who lacked the moral authority to ask the people to put up with the necessary hardship. Only Solidarity and the democratically elected government it backed could introduce such austerity measures. Similarly, in the Soviet Union only one republic, Estonia, remains free of chronic shortages. Its secret: a popular government, chosen through free elections, that had enough authority to free prices last October. In a classic response, demand fell and supplies soared as prices climbed. Three months later the stores are full of goods and void of lines. Quips Marju Lauristin, deputy speaker of the Estonian Parliament: ''We were thinking of sending food aid to Russia, but we weren't sure how this could be organized.'' But Gorbachev seems to fear that this frontal assault would prove too much for a country where almost all prices have been controlled for 73 years. ''Sociological surveys have shown that ((Soviet people)) prefer lines and ration cards to rising prices,'' says Nikolai Petrakov, his senior economic adviser. ''After decades of living in a nonmarket situation, our population has developed a different psychology.'' More important, despite the justly high regard his foreign policy has earned him abroad, Gorbachev knows that he is too unpopular at home to risk submitting to the test of the ballot box himself. His dilemma is that by closing ranks with the party, the army, and the KGB to maintain his authority, he has aligned himself with the forces in Soviet society least likely to support jettisoning the gradualist approach to economic reform that has failed so miserably. So what will the new year bring? In a speech to the Congress of People's Deputies, Gorbachev declared that the time had come for ''responsible, maybe unpopular, decisions.'' Might this mean he aims to use the special powers Parliament granted him last fall to impose a more rapid march to the market by decree? Don't bet on it. What Gorbachev may be moving toward instead is a conservative scheme for monetary reform: Soviet citizens would be required to exchange, say, ten old rubles for a single new ruble. Combined with an end to price controls, that's the classic way to restore a currency's value. But that's not exactly the change that the conservatives have in mind. Their main goal is to punish successful entrepreneurs by simply taking away their profits. Without more sweeping price reform, even this confiscation of cash would only temporarily damp down inflation. As the conservatives are aware, all Gorbachev has agreed to do is to keep prices fixed but allow them to rise 60% on certain goods this year. In their report, the IMF/World Bank analysts dismissed such a policy as unworkable and likely to turn people against reform without achieving any lasting improvement. % POLITICALLY, Gorbachev will wait as long as possible before buttressing his tough talk with strong action to preserve the Soviet empire. Though shocked by Foreign Minister Eduard Shevardnadze's resignation and disturbed by his warnings of an imminent dictatorship, most Western politicians and businessmen remain sympathetic to Gorbachev's plight. The German and French governments even saw Shevardnadze's warning as a reason to step up Western aid. But a series of bloody crackdowns leading to even greater unrest -- and possibly even civil war -- would quickly dry up the foreign investment crucial to Gorbachev's strategy for saving the Soviet economy. So far, no foreign companies already in the U.S.S.R. have announced plans to pull out. The handful of new deals in the works, such as US West's joint venture with the Ministry of Communications to start providing cellular telephone service within Moscow this year, also seem to be going ahead. But the chill is palpable. A Western diplomat advises: ''Anyone considering investing in the Soviet Union should sit on his wallet -- at least until the summer. And no one should come who can't afford to lose his entire stake.'' After six years of zigzagging between left and right, Gorbachev is fast running out of wiggle room. The liberals, whose rise he encouraged, no longer trust him. His new friends on the right, whose views of the Soviet Union seem in so many ways fundamentally different from his own, undoubtedly feel the same way. As winter deepens, the liberator of Eastern Europe desperately needs to find some way to offer his own people the hope of a better life. If he fails, few of his countrymen -- certainly not the women who line up outside Taganskaya's shoe store -- will shed a tear should he fall.