(FORTUNE Magazine) – EUROPE is starting 1993 in a sour mood. The march toward economic and political unity has begun to look more like a parade of stragglers. With recession deepening and widening, big layoffs seem imminent. Yet the greatest danger is in the East: the ticking time bomb of Russia. If President Boris Yeltsin is toppled, radical nationalists who want to re-create the Soviet Union -- perhaps with force -- could take his place. Short of that, economic disintegration could send millions of refugees into Western Europe, weakening its already shaky economies. Barely 12 months after launching a dramatic bid to create a dynamic, market- oriented democracy, Yeltsin seems to be backing down. In mid-December, under strong pressure from conservatives, he removed his reform-minded acting Prime Minister, Yegor Gaidar, 36, and appointed a man he had once indirectly described as a ''dunderhead.'' The blatant compromise bought Yeltsin some time, but it also threatened to bury his fragile reforms under a morass of half measures that would intensify the economic crisis and could ultimately cost Yeltsin his job. The stakes for the West could not be higher. Since 1987, Western investment has totaled almost $1.5 billion in Russia, nearly $500 million in 1992 alone. Much of that has come from the U.S. If extremists overpower Yeltsin, foreigners may ultimately be thrown out. The mounting opposition doesn't want more democracy. They want to turn the clock back to a time when Russia was a superpower -- and an aging class of bureaucrats reigned majestically over a command economy. Some Western investors -- particularly those with money already on the line -- continue to tout Russia's long-term potential, though with varying degrees of confidence. Says James Tilley, head of Conoco's 12-person Moscow office: ''There will be ups and downs, of course. It's just a matter of how far those downs are going to be.'' Conoco so far has invested $75 million on pipeline and infrastructure projects in three Russian oil and gas regions. Adds Michael Adams, CEO of Young & Rubicam/Sovero, a joint venture: ''This is a lousy business environment, but there is great growth potential -- which is another way of saying things can only go up. Right now, most people are happy if they aren't bleeding to death.'' Their optimism, if you can call it that, is a fading reflection of the euphoria that followed Russia's renunciation of communism. Looking back, the transition was much more difficult than it seemed. When the totalitarian system was swept away, it left behind an impoverished nation of 149 million woefully unprepared for any kind of foreign investment. For more than a year, Yeltsin and Gaidar, who became acting Prime Minister last June, have tried valiantly to repair the damage. An academic who had not been in the Communist Party apparatus, Gaidar delivered more than many Western experts thought was possible. He: -- Legalized trading of all kinds of goods, which under Soviet law had been ''speculation'' that could draw a jail term or a one-way ticket to Siberia. -- Freed prices on almost all consumer goods. -- Launched an ambitious privatization program to turn more than 35,000 state- owned enterprises into privately held stock companies.

-- Replaced the Communist regime's highly regulated (and highly subsidized) exchange rate mechanisms with a floating, market-driven rate that allowed Western businesses to convert ruble profits into hard currency at a biweekly auction in Moscow. Gaidar believes that he accomplished all this ''without major social disasters.'' He's right in the sense that predictions of famine and riots in the streets did not come to pass. But he may have underestimated the hardships that did occur. Inflation began soaring some 25% a month. Ultimately Gaidar had to issue two trillion rubles of government credits to prevent collapse of the financial system. By December the inflationary pressure of the extra credits had caused a 75% devaluation of the ruble, to 447 to the dollar at the currency auction. At the Congress of People's Deputies in December, former Communists and disgruntled new-style democrats united to slow the reforms by blocking Gaidar's confirmation as Prime Minister. In a compromise, Yeltsin got the deputies to agree to a constitutional referendum this April. After that, elections probably will be held for a new Congress, which Yeltsin seems to think will be more amenable to his reforms. Then Yeltsin appointed as Prime Minister Victor Chernomyrdin, 54, a hardworking but unimaginative petroleum minister. With his barrel chest and gray complexion, Chernomyrdin (pronounced Cher-no-MIR-din) seemed the archetypal Soviet-era command-system manager. Reformers fear he is eager to dismantle the free-market structure that Gaidar built, and his first public comments were not encouraging. ''I am for a market,'' he said, adding grimly, in an apparent reference to the free traders now flooding Russia's streets, ''but not for a bazaar.''

Perhaps to offset criticism that he wants to undo the reforms, Chernomyrdin appointed Boris Fyodorov, 34, as deputy for economic reform. One of Russia's most radical free-market thinkers, Fyodorov has impeccable credentials as a reformer. In 1990 he helped draft a plan -- later stalled under Gorbachev -- to switch what was then the Soviet Union to a market economy in a lightning 500 days. MEANWHILE, conditions in Russia have become nearly unbearable. The current inflation rate of some 2,000% a year has wiped out savings. Though an explosion of grass-roots entrepreneurialism has filled the streets with kiosks selling everything from sex manuals to homemade vodka, railroad stations are also crowded with homeless and impoverished people. Crime increased 40% in 1992, according to the Interior Ministry, and Yeltsin recently allowed farmers to keep shotguns for self-defense. Still, a surprising number of Western companies are ready to gamble that Russia will overcome its problems. Mars candy and Wrigley chewing gum are widely sold in kiosks. Pratt & Whitney is selling jet engines to the Illyushin aircraft works, and Cummins is supplying diesel engines to the huge Kamaz truck factory. Coca-Cola is investing $12 million in Russia, some of it for a new plant outside Moscow. Microsoft and Bell Laboratories have hired top Russian scientists and programmers. Some small outfits are cashing in too. Anwar Fancy, owner of Fancy Electronics, a tiny maker of personal computers (1991 sales: $14 million), has seen his exports to Russia soar. Not everybody is having a positive experience. Washington has a list of 70 U.S. corporations that have yet to receive more than $4 billion owed by Russian enterprises and banks. Anglo-Suisse and Phibro Energy are pumping lots of oil in Siberia, but a $5-a-barrel surcharge imposed after the deals were $ signed has cut heavily into profits. Conoco managed to get an exemption from the surcharge by threatening to cancel its plans to help develop a 150- million-barrel field near Arkhangelsk. And the risk remains that Yeltsin will lose control of the situation and the West will wake up one morning to find an anti-Western tyrant at the helm of a country that covers one-sixth of the globe's land area. Just how bad can it get? Vladimir Zhirinovsky, the nationalist chairman of Moscow's ironically named Liberal Democratic Party, is campaigning for Yeltsin's job. He polled nearly seven million votes (out of 75 million cast) in presidential elections in 1991 -- enough to finish third in a crowded field. Vowing to forcibly reunite the 15 former Soviet republics into a Great Russian empire, he would also throw out most foreign businessmen in his first 100 days as President. ''We don't need your Marlboros,'' he says. ''We will raise ourselves up by ourselves.'' THE TRAGEDY is that Yeltsin was forced to pull back just when Gaidar's reforms were starting to yield results. While criticizing Gaidar, many factory managers had quietly begun to change the way they did business. At the Kirov works in St. Petersburg, factory director Pyotr Semenenko has stopped manufacturing the formidable T-80 tank and is now turning out bright yellow Kirovets tractors. Says he: ''In the past year, we have spent more time on new product development than we spent in the past decade.'' If the reforms are rolled back, a renewed arms race could follow. And forget about the cozy relationship with Russia the West has been enjoying in the U.N.

Ultimately, the question is whether Russia is ready to accept the kind of changes that Yeltsin and Gaidar were seeking. Even before communists seized power in 1917, Russia was a different kind of place. Its political and economic culture has often seemed as split as the country is divided geographically. It had a foot in Asia and a foot in Europe. Most of its political and economic traditions, however, were inherited not from John Locke and the Magna Carta, but from Ivan the Great, Russia's first czar, who molded fractious bands of Russian tribes into an iron dictatorship strong enough to expel Mongol invaders. This tradition is poor soil for democracy. Clearly, as the 20th century nears its close, the clash between Russia's European aspirations and its Asiatic political traditions has not been resolved. Will Russia find the strength to cast aside its primitive political culture and join the community of civilized nations? Or will the zealots win and by re-creating a mythical Great Russia plunge the world back into a Cold War, or worse? Much depends on how well Boris Yeltsin is able to maneuver.