(FORTUNE Magazine) – Three years ago, at the annual conference of the high and mighty in the Swiss resort town of Davos, the so-called oligarchs of Russia gathered for what would be their last bash. For a time they preened and were fussed over by the elites of the world. The oligarchs owned Boris Yeltsin--had bought him lock, stock, and barrel. But Yeltsin now was gone, Russia had a new president, and no one had a clue who he was or what he stood for. So the question was put to a group of Russian oligarchs and politicians: Just who is Vladimir Putin? The room was silent for a bit. A few people coughed, others shifted uncomfortably in their seats. The audience waited. And the silence went on. Until it became clear that the silence was the answer. Who was the new president? No one had a clue.

Do we know now? It has been four years since Vladimir Vladimirovich Putin emerged from the mists of a KGB career to become, first, Russia's Prime Minister and then, in that stunning, millennium-eve transition, Yeltsin's successor as President. They have been four years of extraordinary tumult abroad and drastic change within Russia. And yet the puzzle remains, even deepens, now that the Russian President has run the most successful of all the oligarchs into a dingy Moscow jail. Will the real Vladimir Putin ever stand up?

Is the man into whose soul George W. Bush peered a reliable partner in the war on terror and a tax-cutting, order-restoring economic liberalizer at home? Or is he, at heart, what the Russians call a chekist, happily dispensing what Christopher Granville, chief economist at Moscow's United Financial Group, calls "KGB-style selective justice"--most recently destroying Mikhail Khodorkovsky and damaging the company that he ran?

As Putin's extraordinary war against the jailed former CEO of Yukos Oil demonstrates, the answer the world needs to get used to is: He's both. A reasonable, reasoned interlocutor abroad coupled with a hard, my-way-or-the-highway man at home. The existence of one does not preclude the existence of the other. The more pressing question, particularly for foreign businesses now in Russia or contemplating getting in, is whether the two faces of Vladimir Putin can coexist without sacrificing the real economic gains Russia has made since he took power. As the Yukos crisis drags on, spooking investors and triggering yet another wave of capital flight from a country that can't afford it, that is the issue. As one Russian chief executive put it: "Are we going to throw the baby out with the bath water? We're about to find out. [Former Prime Minister] Viktor Chernomyrdin once inadvertently said something very Russian after the government screwed something up in the '90s. 'We tried to make things better, but the situation returned to normal.' That's unfortunately the way some of us feel now."

To Putin's defenders, both in his government and out, the doubts that the Yukos case have provoked are ludicrous. As Finance Minister Alexei Kudrin told a press conference in Moscow in early November, "One individual court case cannot cancel all positive changes in the economy and society, everything that has already been done and is planned for the development of the market in our country. This is not a redistribution of property and not a campaign against oligarchs, no matter what those who build their defense on this are saying. [And] there are no grounds to speak about any corrections in the current optimistic macroeconomic forecast."

Kudrin and others say the economic record speaks for itself. During the Yeltsin era, the legislature had been mostly hostile to the government, particularly in the latter half of the '90s, when Yeltsin was AWOL with illness and the oligarchs did as they pleased. By 2001, however, Putin and his political party effectively controlled the parliament, and he got results. The government passed a new, simplified tax code for individuals and small businesses. It was an unmitigated success: "There was a classic Laffer curve response--more revenue was generated for the government because more people filed taxes rather than avoided them," says Roland Nash, chief strategist at Renaissance Capital in Moscow. Putin also pushed through other important legislation, including land reform, that Yeltsin was never able to achieve.

Combine that with a period of relatively high oil prices and a competently run central bank and "you had what amounts to a Russian boom," says UFG's Granville. Growth was close to 7%; exports (mostly oil and gas) were surging; the current account and the budget were in surplus; a real middle class was growing in Moscow and a handful of other cities; and for the first time, more money was flowing into the country than was being shipped out (in the first half of this year about $6 billion poured into Russia, according to the World Bank).

While some of that was the result of big deals, like BP's $7.7 billion investment into TNK and Ikea's rapid expansion into the Russian market, a good chunk of the money flowing into the country was controlled by Russians. "In many ways it was the clearest sign that things were turning around here," says Evgeny Gavrilenkov, chief economist at Troika Dialog, a Russian investment bank. If for the average Russian the word bardok (chaos) described the Yeltsin years, the Putin economy seemed to bring at least the beginning of normalcy. "There is some real macro momentum built up here now, there's no question about it," says Granville.

Then, in July, came the beginning of the war against Yukos. And as things have gotten progressively uglier, businessmen, including foreigners, have been getting queasy. In the '90s, when they were making huge and easy money in the Russian bond market, Western bankers became abject apologists for the Yeltsin regime and for all that went on around it. The corruption was explained away--we had our robber barons too, don't you know--and as for economic activity that was just this side of the law, well, hell, it was better than communism, wasn't it? In the end, they all went off the cliff with Yeltsin in 1998, when the government defaulted on its debts and devalued the ruble. Bardok, indeed.

Now it is sweaty-palms time again. The Russian stock market is up 40% this year (even with a post-arrest decline), making it among the best emerging-market performers in the world. Foreign bankers have again been happily pouring dough back into Russia. The economy, as Granville says, has big "mo." And everyone wishes the Khodorkovsky messiness would just go away. Indeed, a meeting Putin had with foreign investment bankers after Khodorkovsky was arrested would have been comical had the subject matter not been so serious. It wasn't until halfway through that one of the bankers finally summoned the courage to ask about the only thing anyone cared about: the Yukos case. Putin smirked when the question came, but then said all the right things--there would be no rollback of the privatizations of the '90s, no further vendettas against the oligarchs.

The soothed nerves lasted less than a week. The Yukos affair, far from going away, was intensifying. The government announced that despite Khodorkovsky's resignation, Yukos shipments through a government-owned pipeline to Lithuania were going to be slashed. Then, the next day, the Minister of Natural Resources said that some of Yukos's licenses to develop Siberian oilfields might be revoked. Yukos's chief financial officer, Bruce Misamore, called that statement "extremely strange." Stranger still was Putin's reaction. At a European Union summit in Rome, again playing the role of Mr. Outside, the reasonable, everything-will-be-okay President said, "The state shouldn't strive to destroy [the company], because the economic consequences would be quite negative and it wouldn't serve any legal purpose." All of which is true, but it didn't explain why his minister had brought up the subject of revoking licenses--what Nash of Renaissance calls "the hydrogen bomb of official government pressure"--in the first place, nor did Putin say explicitly that this would not happen. Presumably he has no interest in, as Nash put it, "nuking the Russian oil industry," but the exchange spooked all concerned nonetheless.

Far from being apologists this time around, bankers in Moscow are increasingly nervous. No one, it's true, believes the Yukos affair can or will end as badly as the default fiasco of the '90s. But no one yet sees what the endgame is. The consequences are already apparent. Money has taken flight again. Since July, Russia has exported $7.7 billion more than it has taken in, a sure sign that many oligarchs and businessmen are taking no chances. And unfortunately for Russia, what the big boys do matters more than in many countries.

That speaks, in part, to how Russia hasn't changed under Putin. Despite his popular war against the oligarchs--Khodorkovsky's in jail, and both Boris Berezovsky, who in the Yeltsin era was arguably the most powerful man in the country, and former media magnate Vladimir Gusinsky are now in exile--overall corruption in Russia has not changed that much. The way you can tell, says Troika's Gavrilenkov, is to look at employment in the small-business sector. It's still less than 10% of the total, "which says that the pressure [small-business owners] are under" from greedy, meddlesome bureaucrats is still too great.

The hope among economists was that after the forthcoming parliamentary (next month) and presidential (next March) elections--which Putin and his party are certain to win--Putin would begin the second, tougher phase of a reform agenda. A key part of that is to get a grip on petty bureaucrats so that more small and medium-sized businesses can have a chance in Russia. With the Yukos war roiling Russia, that's a secondary concern at best. As Granville says, "There is a firefight now within the government." It pits all the ex-KGB people that Putin has put in place against the economic liberals, whom he also installed. In many cases, in fact, they work side by side. The head of the Ministry of Trade and Economic Development, German Greff, is one of the most energetic reformers in Putin's government. Yet four of his deputies are ex-KGB, and his ministry is home to many others.

Putin, the president with two faces, now needs to make a choice. Set aside the merits of the case against Khodorkovsky. If Putin is to be taken at his word--that the government moved against Khodorkovsky and not Yukos, and that the case does not presage a wider campaign to reverse the scandal-ridden privatizations of the Yeltsin era--then how the Yukos case is handled from here is critical. Russians and foreigners alike are closely watching what will happen to the 40% Yukos stake that is now frozen by the government. Yukos sources say voting control of the block, held by Khodorkovsky's Bank Menatep, has been transferred to Leonid Nevzlin, a Menatep and Yukos shareholder who left Russia after Khodorkovsky's arrest and is now living in Israel. If the government decides to take control of those shares, what will it do with them? Keep them, effectively giving ownership of the world's fourth-largest oil company to the government? That would be a disastrous outcome. Sell the shares to a foreign company, such as Exxon? That would be the ideal endgame scenario, says Nash, although it is one that doesn't look very likely.

But until some sort of resolution is visible, money will flow out of Russia, not in, and the economic momentum that the government had created will begin to ebb. Nearly everyone agrees that the longer this case drags on, the worse it is, economically, for Russia. For four years Putin has gotten away with showing the world two faces, seeing no contradiction in doing so. Now, that jig may be up. Time to choose.

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