That economy is booming. Foreign investment is pouring in, and the Kremlin is floating atop a huge budget surplus. And the reason for all this is, in a word, energy. Russia is the largest exporter of natural gas in the world, and it is the second-largest oil exporter; the two commodities account for an astounding 8 percent of the country’s gross domestic product and 40 percent of its tax revenue. When you talk about gas and oil in Russia, you’re talking about two companies: Gazprom and its state-controlled oil counterpart, Rosneft. For each $1-per-barrel rise in the price of oil, about $3.4 billion flows into the federal treasury over the course of a year, according to recent estimates. “Between the Kremlin and Gazprom, I don’t know who needs who more,” says Alexander Burgansky, an energy analyst at Renaissance Capital, in Moscow.

European leaders issued nary a peep when Shell gave in to Gazprom, and with good reason: Russia provides Western Europe with a quarter of its gas and oil. Putin could flip a switch and families from Paris to Milan would go to sleep with their coats on tonight. On New Year’s Day 2006, Gazprom chief Alexei Miller did more or less just that, cutting gas supplies to Ukraine amid a price dispute. The message to Europe was, in inimitable Kremlin fashion, at once oblique and menacing; look at a map and you can see that the gas Russia sells to Europe is routed in large part through Ukraine.

Not only Europe took note. Once Sakhalin II opens its pipelines next year, close to 20 percent of the island’s natural gas will find its way to the United States and another 20 percent will be sent to South Korea. The remaining 60 percent will go to Japan. “This is the project that’s going to make Russia an Asian power,” says Rawi Abdelal, a professor at Harvard Business School who has written a series of case studies on Sakhalin II.

Thanks to energy and the new Russian brand of “state capitalism” it supports, Putin has returned his country—not long ago considered the invalid at Europe’s doorstep—to center stage. He has revived Russia’s military, maneuvered Russia toward admittance into the World Trade Organization, blocked United Nations sanctions against Iran, and cut deals with Venezuelan president Hugo Chávez and North Korean leader Kim Jong Il, to name two of the West-irking politicians he has cozied up to. The country’s energy economy has allowed Putin to exert an ever-tightening grip on Russia, creating what some fear may become a kind of totalitarian republic. He has rendered the Russian Federal Assembly impotent, centralized control of the media, and jailed or exiled tycoons—all part of what the Kremlin, with its dependable flair for ominous understatement, calls “managed democracy.” Vast energy resources have also allowed Putin to set about making genuine governmental reforms, root out corruption, and pour money into social services.

And all of it—his despotism and benevolence alike—has left him wildly popular. While George W. Bush endures approval ratings of about 30 percent as his presidency sputters to a close, approval ratings for Putin, who is due to step down in March, hover around 70 percent.

To many observers both inside and outside Russia, the Kremlin’s dependence on energy is precisely the danger. A great deal of the country’s future is pegged to steadily rising oil and gas prices, but as history has shown, what goes up always comes down. The path the Russians are on is “a pretty risky one,” says Ed Chow, a senior fellow at the Center for Strategic and International Studies in Washington. “What else do they have to sell besides energy? There are only so many fighter planes you can sell to China.”

“There is gross inefficiency in the way the Russian energy market functions,” Burgansky, the analyst for Renaissance Capital, concedes. Inefficient or not, Russia has the advantage. The second-largest gas reserves in the world are in Iran, and those are roughly half the size of Russia’s. A Gazprom official in Moscow points this out with glee. “Who can be a bit more reliable,” he asks, the Russians or the Iranians?