(FORTUNE Magazine) – Why were most of the 1990s so bullish and euphoric a time? The answer, in no small part, is because we stopped having to worry about Russia. The collapse of the Soviet Union lifted a huge fear that had dominated people's lives for more than 40 years. With the Cold War over and Russia, the Soviet Union's main successor, slogging toward capitalism and democracy, we were sure that the world would be a better place.

But now the ghost of Lenin seems to be on the march. Voices in Russia grow louder calling for an end to the experiment with free markets and the open economy. What have these brought, opponents ask, but hardship and crisis, fabulous wealth for the corrupt few, and bitter poverty for the masses? State control is the right answer for Russia, they say; let us do away with prices that gyrate, porous borders that expose us to global crises, and the rule of capitalist oligarchs. It is like a siren song, pulling Russia back to the past, and more and more Russians are ready to listen.

The new private banks, which were the prime symbol of free-market Russia, have collapsed. The emerging middle class, on which democracy depends, is being hit hard. Its savings are being destroyed, its jobs eliminated, its confidence in the future betrayed. Millions of people go for months without being paid. The ruble is in free fall, and no one can predict where it will level off. Hyperinflation looms, as it did in the early 1990s. Credit is unavailable at any price. Travel agents are not even able to issue tickets to those with enough resources to get out of the country, because they are unable to price the tickets. And every day Russians are treated to the spectacle of their elected leaders being unable to govern. How can anyone cope with an economic crisis during the last act of the tragic opera Boris the Czar, perhaps even the final scene?

Outside Russia, Western banks and hedge funds are working overtime to figure out their exposures and tally their losses (though direct investors are taking more of a wait-and-see attitude). In the West itself the inevitable argument is beginning over "who lost Russia." What happens next is up to the Russians. When President Clinton visited Moscow in early September, he could offer little more than homilies about the rewards of the market and the virtues of reform.

But Russia's "market decade" need not necessarily turn out to be a mere historical aberration. What began with Mikhail Gorbachev's perestroika in the mid-1980s was a genuine revolution, one that has already altered the face of Russia and that will not be so easily undone. Several years ago, Boris Fedorov, Russia's onetime Finance Minister and now a likely reform leader, was asked whether he thought Russia could ever have a functioning market economy. "Why not?" he replied. "We already have a malfunctioning market economy."

Since then Russia has moved much further down the road toward the market--but not far enough. On Aug. 17, Russia's government froze payments on its short-term debt and allowed the ruble to float--at once a default and a devaluation. The starting point was the government's chronic inability to control its spending and bring in taxes. Well over half of the economy has been operating on barter, nonpayment has been a way of life, and both companies and individuals have been massively evading a monstrous, incomprehensible, punishing tax system. What drove the economy to the wall were mounting budget deficits, which it funded by borrowing at high interest rates from the private capital market.

Two external shocks turned the deficit into a crisis this summer. The contagion from the Asian economic crisis--and the attendant recalibration of risk--led international investors to change their minds about Russia. Last year Moscow was among the best-performing stock markets in the world. But now investors have decided they no longer like what they see in Russia's capital markets. The specific trigger was the realization that the government's immense debt problems were matched by highly risky and unregulated speculation and borrowing by private banks. That is what really started investors stampeding for the door.

The economic crisis has been made much worse by the lack of political leadership and a confrontation over the constitution of the Russian Federation that is reopening the political battle of 1993, when Boris Yeltsin ordered the shelling of the Russian Parliament. But now Yeltsin is far weaker, politically and physically. He has lost most of the credibility and legitimacy that he had gained as the man who took on the Soviet system and stood up to the Communist tanks. This time his opponents are unrelenting. They smell blood.

Some fear that events are now on a course that will end, in five to seven years, with the West plunged back into some new kind of confrontation--reminiscent of the Cold War--against a dictatorial, antidemocratic, anti-American, extremely nationalistic, and vengeful Russia. It could happen. But it is by no means inevitable, for the market revolution through which Russia has been going in this decade has changed the country in five indelible ways:

--In the space of a few short years, most of the country's wealth and property passed from the state into private hands. The spread of private property, however loosely defined, creates a broad constituency against reversal.

--Money--as opposed to rank or political power--returned to center stage as the vehicle through which goods and services are allocated.

--The output of the Russian economy shifted almost overnight from weapons and heavy industry to commodities and services.

--The central state weakened and shrank, while power shifted to regional and local government and the new private sector.

--And most important of all, the entire structure of the Soviet system--its ideology, its institutions, its all-embracing party apparatus--was destroyed.

The new Russian revolution has only gone partway: The regulatory mechanisms and moral values of a market society are not yet in place. Protection for property rights and contracts remains weak, and "corporate governance" is still an exotic concept. But a return to communism or even to central state control is not in the cards.

What, then, is going to happen?

There can be no fundamental improvement until the basic causes of the crisis have turned around. Four conditions must be met: a turnaround in the Asian economic crisis (which is generating the flight to quality in world capital); a reversal of low world commodity prices (which are cutting into Russia's export income); a resolution of the political succession crisis (which is depriving Russia of leadership); and an improvement in Russia's state finances (which generate an addiction to short-term financing).

These are not impossible conditions; indeed, within a couple of years they could be well on their way to fulfillment. Therefore the key question is, How can Russia get through the very tough intervening period without abandoning the path to democracy and the market? The next few months, indeed weeks, will be crucial in providing the answers.

The greatest danger to the Russian economy and democracy, the one with the greatest potential to inflict permanent damage, is hyperinflation. Can it be stopped before it gets started? Technically, yes. A currency board--an arrangement in which Russia would fix its exchange rate and then back its money supply with foreign exchange--could restore confidence in the ruble virtually overnight. What seemed impossible to consider only a few weeks ago is now talked about seriously. The arrival in Moscow last week of Domingo Cavallo, father of the Argentine currency board, was greeted not only with fanfare but also with tango music on Moscow radio.

But to make a currency board work would require a strong political hand and a large initial bankroll of dollars. Is either condition likely in the near term?

It could play out this way: If Prime Minister-designate Viktor Chernomyrdin were confirmed by the Parliament, he could then designate a two-fisted, reform-minded figure, such as Fedorov, the former Finance Minister, to implement a currency board. Chernomyrdin has already chosen Fedorov as one of the key members of his economic team.

There is another requirement, however: A currency board needs an initial war chest of several billion dollars. If there were ever a time when Western governments should consider one last infusion of money into Russia, this is it. Hyperinflation in Russia is the one disaster scenario that all Western governments should actively seek to avoid.

But how likely is such an outcome? What if Chernomyrdin is not confirmed as Prime Minister, even after three tries? At that point, the constitution calls for the president to dissolve the Parliament and call for new legislative elections.

But what if the legislature refuses to go? Russia might then be plunged back into a replay of the constitutional crisis of 1993, when Yeltsin surrounded the Parliament and dispersed it by tank fire. This time, in his vastly weakened state, Yeltsin would probably get no support from the army for the use of force. A constitutional stalemate between the President and the Parliament could last for weeks.

Its outcome, this time, could well be Yeltsin's resignation, under the combined pressure of the oligarchs, the governors, the armed forces, and nearly every other influential group in Russia. There is no Vice President--the constitution, after all, was tailor-made for Yeltsin. The next step would be an early presidential election or the appointment of a temporary government of national salvation, headed by some providential figure such as Aleksandr Lebed, general turned provincial governor, or Yuri Luzhkov, the tough mayor who makes Moscow work.

But if Yeltsin refuses to resign and the stalemate is prolonged, then the likely next stage would be violence in the streets, the worst outcome of all. At that point the political situation would become highly dangerous and quite unpredictable.

Short of a wholesale restoration of state ownership, there is still plenty of damage a reactionary coalition could do by attempting to use government controls to manage the inflation. A combination of price controls, state subsidies and credits, mandated exchange rates, and protectionist barriers would drive much of any remaining commercial activity into the underground economy. Even with strong Soviet state power, such measures did not work. But given today's weak state, the result would be a sort of economic Chechnya, and for the exactly the same reasons--no strategy, no will, and no competent troops. Yet the Russian players in this drama are acutely aware of the dangers, and Yeltsin may end up accepting some other middle-of-the-road figure as Prime Minister.

Still Russia always surprises us. There is good reason to believe that it is not quite as weak as it seems today--precisely because the country is only halfway to a market economy. As much as 75% of the Russian economy still operates on the basis of barter and IOUs; thus it is not crippled by inflation. Since there are no effective bankruptcy laws, an insolvent banker or businessman can hunker down and wait out bad times without actually being forced out of business. In bad times, many Russians can retreat to their dachas and garden plots, where an astounding 50% of all Russian potatoes and vegetables are grown. In the best of times, the Russian economy was still very largely a subsistence economy; in the worst of times, this fact will help to see it through, just as it did in the darkest days of 1991-93.

Millions of Russians in the past few years have made the bet on the future that is the basis of capitalism. They have founded businesses, changed careers, taken a chance. They are the core of the new middle class that was starting to emerge in Russia. The next few months will determine how good a bet it was.

DANIEL YERGIN AND THANE GUSTAFSON are chairman and director, respectively, of Cambridge Energy Research Associates. Yergin is co-author of The Commanding Heights: The Battle Between Government and the Marketplace, and Gustafson is author of the forthcoming Capitalism--Russian Style.