The mighty Edward Lucas, in the Daily Mail, adapted from his forthcoming book The New Cold War. The piece was accompanied by the photograph above, with the caption "Naked Aggression." Ouch.

Few things embodied Stalinist terror more than the midnight knock on the door. For millions of innocent victims it heralded interrogation, torture and a lengthy - and all too often lethal - sentence in the Communist concentration camps of the Gulag. Now the heirs of Stalin's secret police are running Russia - and there could be few clearer signs of their true nature than the British Council's Russian staff being hauled from their beds to answer for the "crime" of working for a foreign employer.

The harassment of the British Council on transparently bogus charges of tax evasion has prompted a protest even from our supine Foreign Office. The extraordinary thing is that Vladimir Putin hardly seemed worth a footnote to Russian history when the ailing Boris Yeltsin named him Prime Minister in 1999. Few realised that the taciturn bureaucrat with a taste for judo was the harbinger of a silent putsch that would put the old KGB in charge of the Kremlin, with chilling consequences not only for Russia, but for the world.

The "siloviki" (literally "men of power"), as the spooks are called, have transformed Russia. They took over a pluralist country with a lively Press and strong pro-Western orientation, though still reeling from the Soviet economic collapse and the looting and corruption that followed it. Many at home and abroad hoped that a few years of heavy-handed rule by sinister strongmen would be the price of freedom and security.

They were wrong. The costs of Putin's KGB putsch have been colossal. Russia today is the epitome of bullying and crookedness. The independent media have shrivelled, with television in particular coming almost completely under the authorities' control. Almost every channel for complaint and dissent is blocked. Judicial and bureaucratic harassment, as well as physical threats, deter all but the bravest from speaking out. The authorities increasingly use forcible incarceration in psychiatric hospitals, the most loathsome weapon in the Soviet arsenal of repression, against their critics.

No wonder most international rankings no longer count Russia as a "free country"; no wonder they now list it as one of the most corrupt in the industrialised world. That is a shameful retreat from the hopes of the 1990s. Yes, living standards in Russia have soared under Putin, and most Russians believe they are living in a golden age. This is hardly surprising, given that the price of oil - a resource the country has had in abundance - has risen some five times since Putin came to power. And in a country where the media has been annexed for pro-Putin propaganda, is it not understandable that his regime has popular support?

In truth, Russia is being run by a corrupt, incompetent and despotic regime, and the huge windfall of high oil prices is being squandered. Now is the time to modernise Russia, using the vast influx of petro-roubles, but there is no sign this is happening. The oil and gas will not last for ever - their production is flat or falling and Russia is suffering power shortages; public services are a disgrace and the infrastructure pitiful. Grand plans are everywhere: Russia says it will spend a trillion dollars on public investment projects in the coming years. But the evidence so far is that this money is at best stolen, and at worst simply wasted.

After eight years of Mr Putin's rule, there is little improvement in roads, railways, power stations and pipelines. Abysmal standards of public health, dangerous workplaces, endemic alcoholism and dreadful road safety make male life expectancy only 58.6 years - worse than in Laos or Yemen. The so-called golden age is as phoney as Russia's elections that put Mr Putin and his cronies in power time after time. When his hand-picked successor Dmitri Medvedev "wins" the presidential election next month, the nameplates on the doors may change, but the political system Mr Putin and his fellow siloviki has created will stay: impenetrable to outsiders, impervious to criticism and lubricated with vast sums of money obtained corruptly. Mr Putin is reckoned to be worth $40 billion.

One source of this cash - though denied by all concerned - is an extraordinarily profitable Swiss-based oil trading firm that seems to have the miraculous knack of gaining almost limitless supplies of cut-price Russian crude oil to sell on the world market. True, the oil and gas have fuelled a remarkable boom in construction and retailing. Glitzy malls and towering skyscrapers are sprouting up across Russia. But the boom is fuelled by natural riches, not brainpower. Bright Russians with good ideas need the certainty provided by honest courts and solid property rights, and go abroad to find them.

Mr Putin talks of a "dictatorship of law" - but it is dictatorship, not justice, that has been the reality. The KGB regime in Russia is more than just a missed opportunity; it is also a direct threat to us. The best example of this came with a shameless act of nuclear terrorism in the heart of London barely a year ago. Alexander Litvinenko was a strident London-based critic of Mr Putin, accusing him of everything from mass murder to paedophilia. Poisoned with a rare radioactive isotope, polonium-210, at a meeting with three Russians at the Millennium Hotel, this British citizen died an agonising death; his last words directly blamed Mr Putin for his murder. Had the assassins come from any other country claiming to be an advanced European democracy, this would have led to intensive - and successful - cooperation between Scotland Yard and the foreign criminal justice system. Whether or not the murderer was extradited, he would certainly have been prosecuted. At the very least, careless handling of toxic radioactive substances is a crime and Andrei Lugovoi, the man British officials have named as their prime suspect, left a trail of polonium in his travels across Europe. But Mr Lugovoi enjoys Kremlin protection at the highest level. Despite having endangered scores, if not hundreds, of innocent Londoners with his antics, he has faced no penalty. Indeed, he has been feted in Russia, becoming a celebrated politician. The Kremlin scoffed at British concerns: why would London jeopardise important trade relations "for the sake of one man", a foreign ministry spokesman asked.

Some 20 years after Mikhail Gorbachev started dismantling Communism, Russia is reverting to Soviet behaviour at home and abroad. Thanks to billions of pounds in oil and gas revenues, the Kremlin can afford to be contemptuous of our values. So far our response has been perilously inattentive and complacent, partly due to greed and wishful thinking, and partly because of distractions. European countries have been so preoccupied with their distaste for George Bush's "war on terror" that they have all but ignored the threat from Russia. Those who downplay the threat say that elements of a new Cold War are missing. That featured a global military and ideological confrontation, when a surprise conventional attack in Europe by the Warsaw Pact could have reached the Rhine within three days, forcing the West to choose between surrender and starting a nuclear war. Half the European continent was under the ice cap of Communism, with even the most fleeting human contacts constrained by the climate of fear.

That Cold War is indeed over: I remember it when it was alive and - as a correspondent in Eastern Europe as Communism collapsed - I was there at its funeral. But so too are the rosy sentiments that succeeded it. The most catastrophic mistake the outside world has made since 1991 is to assume that Russia is becoming a "normal" country. From this Panglossian viewpoint, any problems that arise are mere bumps in the road that will be left behind in the progress towards Westernstyle freedom and legality. That idea always seemed optimistic, but now it looks downright fanciful; those who advocate it are deluding themselves and those who listen to them. Russia still, outrageously, belongs to the G8 club of big rich Western countries and the Council of Europe, a talking shop that also guards the continent's human rights conventions.

But that should fool nobody. Russia has explicitly abandoned Western values of political freedom, the rule of law and multilateral security, in favour of its own ideology, "Sovereign democracy". That is a mixture of xenophobia, nationalism, autocracy, self-righteousness and nostalgia for the Soviet - and Stalinist - past. Gangster capitalism is not international Communism. But it is still a fundamental threat to our political and economic system.

It is true that despite the colossal increases in its defence budget, the Kremlin is not yet a direct military menace to the West. Russia's newest warplanes may be formidably manoeuvrable, its submarines super-silent, its torpedoes terrifyingly fast, but it has not - yet - been able to produce these weapons in any quantities. Its surface navy is a pathetic relic, with barely 20 seaworthy big ships. Two-thirds of Russia's nuclear missiles are obsolete. But the Kremlin is a menace in a different way. It sells advanced weapons to dictatorial and anti-Western regimes. The Shkval [Squall] torpedo, for example, is an underwater rocket that creates a cone of water vapour enabling it to travel very fast. It is one of the few weapons that can sink an American aircraft carrier. Russia has sold that technology, Western spooks fear, to Iran. Its air defence systems are better than America's Patriot missile. As the Kremlin exploits Western disunity and weakness all over the world, arms sales give it teeth.

Yet high explosives, hardened steel and enriched uranium are still a sideshow. The New Cold War is fought with cash, natural resources, diplomacy and propaganda. Having cast off the dead weight of ideology, the former KGB men in the Kremlin are presiding over a Russian Klondike, a source of irresistible temptation for greedy outsiders. Russia is exploiting the West's increasingly desperate shortage of energy. We in Europe face growing dependence on scanty and expensive Russian gas, with little chance of alternative supplies. The Kremlin wields the energy weapon to bully its enemies and bribe its allies, and uses its financial clout to buy friends and influence.

The big strategic worry used to be the Soviet navy's capacity to blockade Europe's sea lanes. Now it is Gazprom's ability to blockade its gas pipelines. Once it was the Kremlin's tanks thundering into Afghanistan that signalled the West's weakness; now it is Kremlin banks thundering through the City of London. The growing business and financial lobby tied to Russia represents a powerful fifth column of a kind unseen during the last Cold War. Once it was Communist trade unions that undermined the West at the Kremlin's behest. Now it is pro-Kremlin bankers and Western politicians who betray their countries for 30 silver roubles. Western investment in Russia has already created a lobby for good relations with the Kremlin in the City, in German big business and in the energy industry across Europe. That is reinforced by the billions of dollars of Russian investment pouring into Western Europe and North America. When Russian tycoons — who these days run their businesses at the Kremlin's bidding — own big stakes in the West's biggest companies, they are no longer outsiders, but insiders. Russia is becoming a giant nuclear-armed version of Saudi Arabia: a country so rich and powerful that even its support for terrorism does not bring Western disfavour.

The main battleground so far — and one where the West is losing hands down — has been in the once-captive nations between Russia and the rich half of the continent. Russia makes no secret of its desire for a dominant say-so in its former empire: it wants to know everything that happens and to have the power to stop what it does not like. For its neighbours, Russia is like an aggressive man on crutches — no threat to the ablebodied, but still a menacing bully for someone in a wheelchair. That means a tussle in Central Europe, the Balkans and the Caucasus, and particularly in the Baltic states of Estonia, Latvia and Lithuania. They are the Soviet satellites whose loss the Kremlin resents most sharply. Their thriving economies and lively, open societies are a constant and glaring contrast to the authoritarian crony capitalism across the border.

Russia is putting the Baltic states under an energy squeeze, cutting off oil supplies to Latvia and Lithuania. It has incited riots in Tallinn, the Estonian capital. It has abandoned Yeltsin's policy of historical reconciliation. The Kremlin's line now is that the Soviet occupation of the Baltic states in 1940 — part of the shameful Hitler- Stalin pact — was legal. That should come as no surprise: Mr Putin, who says the collapse of the Soviet Union was the "greatest geopolitical catastrophe" of the 20th century, believes the history books written in the Yeltsin years paint the past in too bleak a light.

The strangest feature of all this is the West's unwillingness to admit what is happening. Officials and politicians ask haplessly: "If Russia is a political menace again, what on earth are we supposed to do about it?" The old Cold War imposed a demanding regime of mental and moral toughness on the countries of Western Europe: they knew that if they did not hang together they would hang separately. Now the Kremlin's central tactic of "divide and rule" has an almost free run. During the old Cold War, no NATO member would have considered doing private deals with the Kremlin: any overtures from the Soviet Union encountered hard-headed scrutiny, while few in Western officialdom made a career out of being nice to the Soviet bloc. Anyone in the business world who made a profit out of dealings with Communist countries was an instant target of suspicion, and risked ostracism. In the New Cold War, such deals are commonplace — most ominously in the big countries of continental Europe. Russian money and influence has reached astonishingly far.

Few would have believed that a former German leader, Gerhard Schröder, would have taken a lucrative post as chairman of a Kremlin-backed gas venture within months of taking office. It took the West 30 years after the Bolshevik Revolution of 1917 to realise the threat it faced from the Communists in the Kremlin.

How long will it take us to see the danger now that the most sinister force in the Soviet Union — the KGB — is using our own weapons against us?