PETROZAVODSK, RUSSIA -- For nearly three centuries, this far-northern city near Finland was a provincial backwater that humbly accepted whatever the Kremlin sent, from czarist political exiles to imperious Communist Party hacks.

Today the people here, as across the country, are reversing the flow of power and the momentum of Russian history. Founded in the 18th century by Czar Peter the Great as a place to build guns for his army, Petrozavodsk is now the capital of a semiautonomous republic with its own laws and parliament, its own economic policy and even a Ministry of External Relations.

Often simply ignoring federal laws it does not like, this wooded republic of Karelia, like dozens of other Russian regions, is taking advantage of political strife in Moscow to seize more and more power from the center. In such traditionally Kremlin-controlled areas as banking and taxation, child adoption and tariffs, Russia's localities are setting their own rules.

Some fear this sea change in the way Russia works will lead to the country's disintegration. Others praise it as a first step toward democracy, federalism and free markets.

For better or worse, it is clear in this newly confident capital on the shores of Lake Onega that a profound revolution is underway. And with President Boris Yeltsin and his anti-reform opponents in Moscow wooing the regions to support competing drafts of a new constitution, the process has accelerated in recent weeks.

"This doesn't mean that we're out to break up Russia," said Viktor Stepanov, who as parliamentary chairman is effectively Karelia's governor. "It does mean we're going to be solving our own problems from now on."

Until recently, Kremlin apparatchiks decided everything for Karelians, from the price of bread to the opening and closing dates of the annual hunting season, Stepanov said. Now, Karelia would ignore such edicts if bureaucrats in Moscow dared promulgate them, which they do not.

The confrontation in Moscow "is good for the regions, because we realize we have to build everything for ourselves, we cannot wait for instructions from Moscow," said Zinaida Strogalshikova, a member of the Karelian parliament. "The wisest leaders make use of this to gain control over their own wealth, and Karelia is no exception. Karelia is doing well for itself."

Indeed, a number of U.S. governors might envy Karelia's recent gains. Yeltsin, eager for Karelia's backing in his struggle against a Russian parliament that has resisted his political and economic reforms, signed a decree allowing Karelia to keep 90 percent of the tax revenues that ordinarily would flow to Moscow. Another decree, awarding Karelia similar rights in customs duties and export licenses, is in the works, officials here said.

The republic has been privatizing its large state-owned firms in a way that clearly violates Russia's laws, according to Natalia Kotsyuba, deputy director of the local privatization committee. Nonetheless, officials in Moscow recently resolved a yearlong dispute in Karelia's favor, awarding the republic ownership of its forestry industry, which Moscow had claimed for itself, she said.

The man most responsible for these successes is Stepanov, an agile politician who is riding the region's increasing influence to national prominence.

Stepanov, 46, is a former Communist Party worker who says he retains his faith in dialectical materialism. Yet, with his silver hair and well-cut suits, he also seems quite at home discussing his trips to Germany to attract foreign investment and showing off photographs of himself with Russian Orthodox Church leaders.

In a recent interview in his daughter's apartment in Moscow, Stepanov denied that he and leaders of other Russian republics want Moscow's power struggle to drag on so they can continue playing one side against the other. The confrontation hurts everyone, Stepanov said, because Russians "more and more lose confidence in authority and the law."

But Stepanov said decentralization should and will continue. Moscow can handle defense, space exploration, the continental shelf and human rights, he said; most everything else should be left to local governments.

"Moscow was full of paper-pushers who did nothing but prohibit this or that," said Stepanov, relaxing on a Sunday in a Lacoste shirt as he offered a guest his wife's homemade cabbage pirogi. "The system was good for somebody, of course. But it wasn't good for democracy."

Like Karelia, which has roughly the territory and population of South Dakota, many of Russia's 21 autonomous republics are rich in land and resources but small in population. But, as is the case with sparsely populated states in the U.S. Senate, they have gained outsized influence in the debate over the constitution, in part by playing on fears that they might secede.

Oil-rich Chechenya already has entirely withdrawn from Russia, a move Moscow opposes but has done little to reverse. Tatarstan, another major oil producer in Russia's heartland, has come close to doing the same, approving a constitution that holds that "the Republic of Tatarstan will build its relations with the Russian Federation on the basis of a bilateral treaty."

All 21 republics, from Karelia in the west to Yakutia in the Far East, have claimed sovereignty and some degree of control over their natural resources. And now Russia's 67 smaller regional administrations are eyeing the republics jealously, demanding the same legal rights in any future constitution.

For foreign investors, nothing is clear: whose laws to obey, which taxes to pay, whose claims of ownership to believe.

"You don't really know on any given day to what degree the laws of Russia are going to be honored," said Richard Conn, an American lawyer in Moscow who advises American firms and the Russian government. "It creates interesting legal issues."

But Conn and many others see the regional power grab as a generally healthy response to decades and even centuries of heavy-handed bureaucratic control from Moscow. "Our early history was a process of the states surrendering power to the central government," Conn said. "Here, because of this nation's strange history, regions are wresting power away from the center, as individuals wrest power from government."

Because the republics were formed around minority nationality groups in a sham effort by the Soviet Union to show respect for ethnic rights, the politics within them are complex. Any attempt to secede would undoubtedly alarm an area's ethnic Russians, who comprise minorities in some republics and majorities in others.

In Karelia, for example, the indigenous peoples -- Finns and related Karelians and Vepps -- represent less than 15 percent of the population. Still, some Karelians are campaigning for incorporation into Finland, while others are lobbying for special rights to preserve their language and culture after decades of Stalinist persecution and subsequent repression.

For most residents here, though, sovereignty means not separation from Russia but local control over most aspects of life and the economy. Alexei Morozov, Karelia's deputy foreign minister, said he is happy to let Russia's Foreign Ministry handle Bosnia if Karelia is left to take care of its own trade, investment and other economic matters.

"Russia can no longer be a centralized state in the way we were before," he said. "If anyone thinks that everything can be ruled from Moscow, this is quite an illusion."

But Morozov acknowledged that the process could go too far. "If the center can't find a compromise with the regions, Russia can cease to exist as a state," he said. "This is the most terrible thing that could happen."