(FORTUNE Magazine) – If Russia were a stock, most Westerners would be shorting it viciously now. Judging from the barrage of bad-news headlines, the country is spiraling into chaos--its businesses plagued by mobsters who think nothing of shooting their competitors (more than 500 businessmen murdered in 1994); its politics corrupted by the horribly botched and morally dubious invasion of Chechnya (more than 10,000 dead so far); and its economy, which seemed briefly to be righting itself, once again buffeted by runaway inflation and a plummeting ruble.

At the helm, President Boris Yeltsin, who for so long sheltered flickering reform behind his broad political back, suddenly seems the captive of black colonels and flat-earthers from the military-industrial complex. Nothing but trouble--and plenty of it--appears to lie ahead. Echoing a widely held view, former U.S. Defense Secretary Dick Cheney (a healthy 54) concludes: "For the rest of my life, the world will be dealing with the problems stemming from the disintegration of the former Soviet Union."

He's right. And yet such well-founded pessimism overlooks an equally important and undeniable fact. Amid all this turmoil, real and lasting change is slowly taking root, change that raises the odds that, in time, Russia may yet muddle through toward something approaching normalcy.

Lay the newspapers aside for a stroll through Moscow or St. Petersburg, and one finds a good deal of evidence that life has gotten better during the more than three years without communism. In place of lines forming grimly before dawn, there are plenty of goods and plenty of shoppers with money to buy them. The ill-lit hangars called Soviet stores, where what they had was what you got, have begun to show some flair for service. Here a new department offers fresh-baked bread, there an optician's booth hawks stylish imported frames.

Conversations with ordinary people in any large Russian city reveal much deeper changes. From their ancient habit of passivity in the face of arbitrary power, millions of Russians have turned to seeking their fortune with an aggressiveness that can overwhelm the hardest-nosed Westerners. "These people are ruthless," exclaims Bernard Sacher, a Goldman Sachs veteran who now manages the Moscow brokerage Troika Dialog. "You rarely see a Russian leave anything on the table."

From terror and disorientation in early 1992, when 35-year-old economic czar Yegor Gaidar cut the Gordian knot of fixed prices, countless citizens have, by early 1995, found a new way to live. Most feel some ambivalence about what was lost and what was gained. But they, and society as a whole, grow ever more convinced that the clock cannot be turned back. One way or another, Russia believes it will have to contend with capitalism--with money and with the rest of the world that lives by its dictates.

Indeed, for once in Russia's history, the people are pushing the state, rather than vice versa. At the top, Yeltsin, whose heart seemed more with the market than previous Russian leaders' did, has allowed his executive branch to become such a corrupt, anarchic tangle that business people, domestic and foreign, can barely take a step without tripping over it. The Russian government is not only crooked, but unpredictable and capricious in its crookedness. It changes the rules of the game with maddening nonchalance. "We have people who've worked before in India or Africa," relates Jack Helton, who manages SeaLand's very active operations in the former U.S.S.R. "There the facilities may be primitive, but you know they'll be there every day. Here you never know what you'll get."

ANarcho-corruption, plus a tax code that assesses about 80% of gross earnings, makes it still virtually impossible to run a business in Russia legally. This is reform's greatest failure, though it somehow escapes the attention of an outside world bewitched by IMF-style macroeconomic analysis. The state's forced criminalization of the economy is also the lifeblood of the infamous Russian mafia. "Organized crime is an alliance of a gangster and a bureaucrat," notes Konstantin Borovoi, founder of the Russian Commodities and Raw Materials Exchange. "But it is the bureaucrat who initiates it."

Yet entrepreneurs battle back tirelessly. If Russian business has a face, it might well be that of Vitaly Sokolov, 28, president of the small but growing MosDepositBank. "I always knew I wanted a career," Sokolov reflects. "I was going to join the Party, get my Ph.D., and head up the ladder." He got as far as an undergraduate degree in mathematics before the ladder disappeared. He had to try capitalism instead. In late 1991, Sokolov landed a job as a stockbroker. Market conditions were excellent--those Russians who had money would buy anything rather than yield helplessly to hyperinflation. Most of the company founders whose shares Sokolov hawked soon closed shop and made off with the kitty. But a few went on to build leading banks and trading houses.

By mid-1992, Sokolov was in business for himself. After various false starts, he hit upon a deal exporting polyvinyl chloride powder from a Russian factory to Turkey, which earned him a few hundred thousand dollars. With some partners whose histories were similar, he launched his bank in late 1993.

Sokolov's everyday business problems would terrify most Westerners. He by necessity accommodates a million different bureaucrats in a million different ways, none of them taught at the Harvard business school. He deals with gangsters claiming to represent government agencies, gangsters representing other banks, and gangsters simply representing themselves.

Before filing suit to recover $180,000 from an errant Georgian client, Sokolov thought it prudent to buy a bulletproof vest. The almost daily reports of business disputes settled fatally indicate he is not just being a worrywart. "Of course I'm frightened," he says. "But I can't afford to lose the money."

Everybody Sokolov knows is living some variety of this edgy life. Two of his old stockbroker buddies are traders at Orgbank, a cartel set up to help regulate the interbank funds market. One is a liquor wholesaler. One fell in with a Chechen firm and became, to Sokolov's dismay, "a bandit."

All these young men have bought or are saving for modest apartments and Russian-made cars. Sokolov himself drives a Zhiguli (though the bank reluctantly accepted a company Mercedes from an investor short of cash) and is shopping for a flat in the $40,000 range. These are not the "rich Russians" of media fame; they are the pioneers of a middle class. Not one of them is certain that what he does will still be permitted two or three years hence, but all are living as if it will be.

Russia's new business activity, though densest in Moscow, is by no means restricted to the capital. One thousand miles to the south on the Black Sea lies Novorossisk. With the breakaway of Ukraine, this city is now the sole deep-water port to the Mediterranean for a country whose trade is larger than Brazil's ($48 billion in exports last year and $27 billion in imports, according to the shaky official statistics). Novorossisk is a mess, but a vital mess. Turkish convoys carrying citrus have rutted the two-lane road heading north. Pelting coastal rains regularly turn the streets into lakes. There are no container freight facilities, no grain-loading facilities. And this is before the expected gusher of oil from the Caspian Sea shelf of Kazakhstan and Azerbaijan, for which Novorossisk is the logical export outlet.

To Mikhail Bobryshev, 38, a veteran of the marine cargo agency SovMorTrans, however, chaos means opportunity. He starts his day discussing Turkish prices of Hyundais and Toyotas over coffee with the mate of a cruise ship bound for Istanbul. Later Bobryshev drops in on the wharfside office of a company he may do business with that has bought three well-used cargo boats and rights to an out-of-the-way dock. Strolling the quay, he is accosted by a grizzled sea captain who has been making the southern citrus run in a 1950s German fishing trawler but dreams of something more up to date. He needs a mere $500,000, he tells Bobryshev, and can stake as collateral the rights to a sports complex in the Volga River industrial center of Saratov. Though skeptical, Bobryshev promises to raise the matter with his bankers the next day.

After lunch Bobryshev pops in at Novo Hellenic International Management, an agency he founded to provide Russian sailors for Greek ships. Business is fairly brisk. Then he heads out to do spadework on his real dream, turning Novorossisk's devastated heavy industry into an international center of automobile production. "This facility will do fine," he assures the depressed chief engineer of Hammer Factory, contemplating one of its several deserted assembly buildings. "A big factory should make something big."

In his spare time, Bobryshev runs a joint venture with SeaLand. His sundry enterprises have generated at least enough profit for a secondhand canary-yellow Mercedes, which he treats like a virgin bride, though alas he must start it with a screwdriver since the ignition lock was broken in a robbery attempt.

The emerging-banker, mover-shaker class represented by Sokolov and Bobryshev is one key to Russia's economic future. The other is its vast cadre of industrial managers. Many of them started out as roadblocks to reform but are gradually becoming bulwarks of the new market system, albeit a system tilted toward their interests. In the past few years the managers have experienced a great increase in wealth and power. In 1993 and 1994, Russia privatized, on paper, tens of thousands of formerly state-owned enterprises that employed some 70% of the national work force. Most of the companies, however, were simply given away to their workers. Unorganized and trained to submission, the employees quickly handed effective control back to their managers. From workhorses for the Party and the government ministries, the directors were transformed into barons.

Many bosses clearly use their plants as piggy banks, replenished by a government that is either cut into the take or too scared to let these enterprises go bankrupt. Stories abound of executives building themselves mansions while workers go months without pay. "Imagine if Lee Iacocca thought about nothing all day but how to steal from Chrysler," cracks Mikhail Harshan, chairman of Moscow's First Voucher Investment Fund. "This is the situation with 99% of our directors."

Optimists maintain that the better class of directors is fast realizing there is a bottom to the public trough. To stay afloat, these managers are seeking local and foreign investors, who should in time force the privatized enterprises to be run like normal businesses.

"One thing every Russian factory director needs is money," gushes Boris Jordan, director of CS First Boston's Moscow office and the man most responsible for luring $2 billion into Russia's fledgling equity markets last year. "We recently arranged a $100 million strategic alliance between BAT and Yava cigarettes. In 1992 the same director wouldn't talk to us."

One does feel more optimistic talking (in excellent English) with Sergei Terekhin, an ex-oil tanker captain and now deputy director for economics at Novoship, Novorossisk's former monopoly cargo carrier. While most Russian managers still think more of everything is better, Terekhin has mothballed a third of the 150 vessels he inherited, dropping average ship age from 14 to seven years. Thus trimmed, his company was able to tap international banks for $360 million to buy 12 state-of-the-art tankers. While others scheme to lock out foreign competition, Terekhin focuses on why Russians can beat it. "Our advantage is that we have our own sailors, who belong to one vessel," he says. "They know and love the ship like their own car, and you know in Russia it's nothing for a 20-year-old car to still be on the road."

A more mixed impression comes from a day with Giorgi Kovalenko, freshly minted general director of the Poliplast plastics factory in Rybinsk, 200 miles north of Moscow. Poliplast is a rare case of privatization working as advertised by its reform-minded architects. By buying up vouchers from the citizenry, Moscow's First Voucher Fund acquired a controlling stake (for about $600,000), threw out the bad old management, and put its own guy in.

Kovalenko, 39, has plenty of ideas and dynamism. But he is encountering obstacles Lee Iacocca would never dream of. Most concrete among these are three stout, emphatically unhappy babushkas occluding the exit of his office just before 5 p.m. They inform the director that their houses have neither heat nor gas. Like most Russian factories, Poliplast in its day built housing for its workers. Though the five apartment buildings are now owned by the city, the plant is still expected to provide heat and power. To add insult to injury, Rybinsk also demands property taxes.

"There's no heat because we have no money to buy fuel," Kovalenko tells the delegation with a show of toughness.

"Because you have no money, does that mean we have to freeze to death?" the chief babushka shoots back.

After a brief standoff, Kovalenko orders his garage to send the fuel over.

Poliplast has eager customers for much of its product line, particularly a tarpaulin-like film that turns out to be ideal for protecting home gardens from the spring rains. Kovalenko has also alertly opened talks with fisheries, which find that their traditional tin cans are becoming more expensive than the herring or sardines they contain. But between taxes, heating bills, and the $250,000 debt left by his predecessors, he doesn't have the cash flow to crank up production and call back some of the 80% of Poliplast's workers currently laid off.

There are other uniquely Russian irritations as well. Kovalenko finds himself powerless to fire the production manager, whom he holds responsible for ruining the place. She turns out to be a city council deputy, immune to inconveniences like losing her job.

Asked what is at the root of Russia's problems, Kovalenko recalls a Chinese fable about a peasant who drove the crows away from his field. "Why did you do that?" asked a wise old passerby. "New ones will come, and they'll be hungrier." The starving new crows, of course, are free Russia's government. Yet Kovalenko's final allegory is one of hope. "When water is stirred up, it's always muddy for a while," he reflects. "Our dirt will settle back down too."

Translated to the tongue of the boardroom, this same faith sustains the quietly growing cadre of multinational financiers and corporations that think Russia's ground floor is worth the hassle of getting in on. "Anybody who looks at this market in three-month intervals would probably have a heart attack," admits CSFB's Jordan. "But if you believe that the changes here are irreversible, there are great investments." Example: Surgutneftegaz, the proto-private new oil giant with reserves at seven-sister levels and a current market capitalization of less than $1 billion.

For manufacturers like Swiss-led multinational ABB, Russia's undervalued assets are human. "Some 20% of the world's engineers live in Russia," argues Maxwell Asgari, ABB's country manager. "They have already paid the price of industrialization. Now they just have to get their act together." ABB is clearly betting they will. The firm now has 18 joint ventures in Russia, most of them manufacturing equipment for the energy and transportation sectors.

Waiting for the Russians' act to gel can be agonizing, however, as John Harris, country manager for Cummins Engine Co., testifies. "I thought six months would be plenty to get this thing wrapped up," he recalls. "About the eighth or ninth month, I started to tear my hair out."

The thing in question is a $300 million to $500 million joint venture to manufacture new engines for Kamaz, Russia's leading truckmaker. Negotiations have been going on in some form since the mid-1980s. The talks moved smoothly enough during the collapse of the Soviet Union but hit a host of snags when Kamaz's headquarters fell under the jurisdiction of the semisovereign Republic of Tatarstan. Then Kamaz's main production facility burned down. This year, Harris believes, the deal is in the bag, though Cummins's European headquarters in London icily refuses to make predictions.

What's essential for Westerners to keep in mind is that the average Russian's time scale is much broader than the quarter-to-quarter scope of many corporate managers or the up-to-the-minute ones of news editors. These, after all, are the same people who gave up thousands of miles and millions of lives to Adolf Hitler without considering surrender. So to the emissaries of "time is money," Russians respond with their own cultural paradigm: "It's nothing. We'll get through it."

Most Westerners who have not seen a war zone would be taxed to imagine the current devastation of Russia's cities. But they would also be amazed by their buoyancy. There ought to be despair in the streets of Ekaterinburg, whose heavily militarized industry is almost completely shut down. Instead there is ever-burgeoning traffic and people with no time for the endless tea and philosophy of Soviet days. Everyone is too busy working on some scheme. The same is more or less true everywhere you go.

Can it last? There is a worst-case political scenario--a poisonous brew concocted of nationalist, law-and-order, and embittered have-not impulses--that could presumably squeeze the genie of money lust back into the bottle for a while. But with each passing day, market reform becomes less an idea and more a collection of interests, both broad and strong.

The far wings of Russian politics--Gaidar and his Russia's Choice Party on the pro-market, pro-democracy side; demagogue Vladimir Zhirinovsky on the neo-fascist right-remain highly polarized. But national--and much more so, local--voting patterns show the bulk of Russians inclined to support tried-and-true tough-guy pragmatists like current Prime Minister Viktor Chernomyrdin, a former state industry manager, or the shade more liberal mayor of Moscow, Yuri Luzhkov. (Yeltsin himself cannot be counted out for reelection either.)

While it's impossible to discount the emergence of some new charismatic reactionary between now and the national elections scheduled for 1996, even the most extremist leadership would have to marshal enormous political energy to chase capitalism back out of Russia. Three years ago a free economy was the outsider in this country, dependent on the political success of radical reformers. Today, for all its warts and perversions, it is ever more the status quo, clearly capable of surviving a conservative election victory.

Sick of revolution, Russia has chosen evolutionary change this time. This evolution may be slower and more tolerant of what it inherited than Western free-marketers would like. But the real progress it is making will be much harder to turn back.