OSTROMA, Central Russia -- Yury Marychev thought he had done almost everything right.


His textile factory, Zvolma, had been the first in this old industrial city to privatize, according to Marychev. He had found a foreign partner willing to invest. When old markets shrank he had opened up new ones and now 90 percent of Zvolma's production went abroad.


Zvolma's production line was rolling ahead, producing cloth, as the other old textile giants in the city were slowing down production and asking for government credits.


But now the factory director believes the sky is falling in.


"We're under real threat," said Marychev, a large bearish man who does not look easily intimidated.


The Kostroma tax police are threatening to fine Zvolma 2.5 billion rubles ($1.25 million) for failing to declare foreign currency earnings. At the same time local courts are challenging the company for not going through the right procedures when it privatized two years ago.


A few hundred yards away from the factory director's office, hundreds of bottle-green mechanical looms stood idle on the factory floor as the company carried out its annual clean-up. He said he was worried that the tax police would not let him re-open.


As the battle has dragged on, Marychev's Danish partner is pulling out and Zvolma's director said he was now applying to be re-nationalized.


"Mr. Marychev broke the law," said Vladimir Tozik, head of the local tax inspectorate. "So when he starts talking about threats he is not completely right."


The tax dispute dates back to January 1992, when Zvolma bought equipment abroad with foreign currency earnings that had not first been repatriated to Russia for taxation. At the time this was not against the law. But a presidential decree later in the year ruled such transactions illegal and imposed the restriction retroactively.


Marychev said he was exempted by a ruling of the State Legal Department in January 1993 and by the new constitution. Tozik said he was not.


In a country where the laws are often both vague and contradictory, it is hard to judge whether Marychev is a red-tape martyr, done to death by uncontrollable bureaucracy, or a tax dodger.


Natalya Sidorova, an adviser on industry to the governor of Kostroma, said that Marychev had "made a lot of mistakes" and was largely to blame for the mess he was now in.


But the factory director said that everything had been fine until he was hit by what he called "the second stage of bureaucratization."


He said none of the guidelines on privatization or the 52 taxes they had to pay were clear and he and his staff spent much of their time wrestling with the vagaries of officialdom.


"A western businessman would not have survived in our circumstances. He wouldn't have thought it was worth it," Marychev said.


Despite the looming storm clouds Zvolma is still clinging to its reputation as a success story.


The company has lost almost none of its 2,000 workers, while the Lenin Factory next door has shed 4,000 jobs. And when the government pledged credits to bail out the big textile factories in Kostroma it paid Zvolma the compliment of leaving it off the list.


Whatever the rights and wrongs of the dispute, Zvolma looks good compared to other enterprises this old textiles town, 300 kilometers northeast of Moscow.


All the key branches of industry in Kostroma are virtually dying on their feet, according to the local governor's adviser on industry, Nikolai Dazhin.


The three pillars of the local economy -- timber, textiles and engineering -- are all getting deeper into trouble, Dazhin said. Production fell 65 percent in the first five months of this year compared to 1993 and unemployment was mounting.


"It is getting worse in Kostroma every month and every day," he said.


Dazhin said local industry was facing a jungle, not a free market, in which factory directors were resorting to barter and pleas to the government to survive.


A gloomy Vyacheslav Zatrubishchikov, the head of the Nerekhta State Mechanical Factory, said while waiting in the outer office of the Kostroma governor that his plant was simply grinding to a halt for lack of income. "We haven't got a ruble, we haven't even got a kopeck," he said.


His plant used to import parts from the Baltic republics, Ukraine and Belarus and then sell the bicycles and fridges that it manufactured back to the same places and to Azerbaijan. Now he said "those markets have disappeared."


Zatrubishchikov said the government showed no signs of wanting to help his ailing industry. "Those in power don't know what's going on," he said. "Or if they do know it they don't want to admit it."