Russia ended the last century under the fading shadow of the Soviet Union and its relationship with the United States still under a cloud.

For President Vladimir Putin, 2002 was the year when the international skies cleared. In spite of his relentless war in Chechnya, slow progress toward economic reform and scant respect for human rights or freedom of the press, Putin is now firmly in the American camp as an ally against global terrorism.

Putin and US President George W Bush have much in common in their various 'wars' on terror. Both have serious economic problems at home, nervous populations and little political opposition. Both have experienced unprecedented personal popularity based on crises of violence and terrorism. And both are more concerned with power than democracy.

The partnership between the two men is not an untroubled one: trade disputes, spying allegations and quarrels over nuclear aid to 'rogue states' have made for difficult moments. But Bush's overarching need for allies as he moves to war against Iraq has made the path ahead much smoother for Putin and for Russia.

The past year has seen a decisive shift, too, in Russia's own global ambitions. It appears that Putin, once a dedicated KGB official, has abandoned the quest for superpower status and accepted a more viable role as a power broker - in both international affairs and the international oil market.

But it is Russia's internal conflict with Chechnya that has held world attention more than any other issue in the region in the past year.

The capture of 800 theatre-goers by Chechen rebels in Moscow in October, and the violent conclusion which left more than 120 dead when police attacked the building with an anaesthetic gas, was the most dramatic event in Russia since the second Chechen war broke out in August 1999.

Russia has been trying to pull the small, rebellious mountain republic back into its fold since the crumbling of the Soviet Union. But two brutal wars have left tens of thousands dead, levelled towns and villages, and reduced the Chechen people to desperation and dire poverty. Thousands of Russian soldiers, too, have lost their lives and dozens continue to die in ambushes each month.

Oil lies at the heart of the Chechen conflict. Beneath this well in Chechnya runs the Russian underground pipeline carrying crude from the Caspian Sea. Heidi Bradner / Panos Pictures

In August, months before the hostage-taking, a shocked Russian public learned of the death of 116 soldiers when an overloaded military helicopter crashed into a minefield in Chechnya. The disaster reminded Russians that in spite of Putin's uncompromising rhetoric the war had not been won - and their sons were paying the price. A gradual groundswell of opposition began to build and Putin appeared to yield to pressure for a political rather than military settlement.

But he still maintained that Chechnya's elected president and commander of its guerrilla army, Aslan Maskhadov, was incapable of negotiating for peace and was plotting with 'foreign forces' like Osama bin Laden's al-Qaeda network. In the absence of a negotiating partner efforts to find a political solution were abandoned. Those efforts died altogether with the Moscow hostage crisis.

Meanwhile, the protests of human-rights organizations have gone increasingly unheeded. Putin has equated his struggle with the Chechens with Bush's fight against al-Qaeda, stressing links with global terrorism and claiming that Russia is a target of Islamic extremism. As a result Washington has gone quiet on the subject of Chechnya.

As the year moved on the US focus shifted from Afghanistan to Iraq and with it the international agenda. Russia, a long-term Iraq ally with billions of dollars in debts still outstanding from Baghdad, took a much softer line on Saddam Hussein than his Washington counterpart.

In August, Russia upset its new-found Western allies by announcing plans to sign an economic co-operation deal with Iraq worth up to $60 billion. It would include contracts for Russia to help modernize Soviet-built infrastructure, of which Iraq's oil fields are a major part.

Alarm spread in the back rooms of Western oil companies when Iraqi Foreign Minister Naji Nabri said that Russian companies would have 'full priority in Iraqi oil trading on the world market'.

Not surprisingly, Moscow rejected an invasion of Iraq and opposed an American-sponsored draft UN resolution that threatened the use of force if Baghdad didn't co-operate fully with disarmament efforts within a short timetable.

But a compromise was found when Washington persuaded Russia that its economic interests would not be overlooked. In the crucial UN vote Moscow not only dropped its objections but came out in favour of a new resolution that implied, though did not directly threaten, force. The volte-face came at a price for Moscow; Baghdad abruptly cancelled a multi-billion-dollar oil-exploration contract with three Russian companies.

The next hurdle for Putin was NATO's expansion eastward - taking in seven new members including Latvia, Estonia and Lithuania and bringing the once anti-communist military alliance to Russia's door. The Baltic countries, especially, have been wary of Moscow. Now they view the NATO membership as a line drawn under the Soviet era.

For years Russian officials had railed against the expansion, expressing outrage at the 'aggressive' move. But after a goodwill visit by Bush to Putin's home town of St Petersburg the Russian leader responded mildly: 'We hope to have a positive development in our relations with NATO countries.'

Putin had already taken the historic step of agreeing to launch a joint NATO-Russia council. And the two leaders papered over their final differences with speeches of mutual concern on terrorism.

Almost simultaneously a package of military reforms was announced, promising the creation of a new, more professional Russian army that would be geared to dealing with terrorist threats. The emphasis on terrorism, in fact, overshadowed one of the most important disarmament events of the decade, a Strategic Arms Limitation agreement for both Russia and the US to cut their warheads from 6,000 to 2,000 - taking both countries one more step away from the Cold War years.

With such expressions of East-West solidarity - and the prospect of a new war looming - Russia's nuclear aid deal with Iran and a visit from 'axis of evil' President Kim Jong-il of North Korea raised little comment from Washington.

Russia proved itself a firm economic as well as strategic ally for the West in 2002. Moscow's decision to go it alone on the international oil market, unpegging its production quotas, was a slap in the face for the Arab-dominated OPEC cartel and a welcome sign to an oil-hungry Western market. Now near the top of the list of oil producers, Russia is increasingly dependent on its 'black gold' as a revenue-producer.

Strong sales have helped to bring Russia's economy back from the brink of disaster after a 1998 crash. But the success is only slowly trickling down to ordinary Russians.

Nevertheless, 2002 was a year that saw Russia handed the cleanest bill of financial health in its decade of transition from communism. It was officially declared a 'market economy' by the European Union and the US Department of Commerce. The decision is a boon to Russian steel companies, although it will ultimately mean more pressure on the Government to cut tariffs protecting its own market.

That will be a difficult step even for a government like Putin's which has virtually no opposition in parliament and no significant opposing voices in the media. During his three years in power he has quietly encouraged a cult of personality - with adulatory stories in the press, a thriving souvenir business selling portraits and memorabilia and more recently a pop song in which the female singer longs for a 'strong and sober' man just like the President.

More than ever, Putin is capitalizing on his reputation as the man who gave Russia back its pride. Whether pride goes before a fall, only the turbulent, testing year ahead will tell.