Murder, mayhem and mystery:is this the start of a new Cold War?

Is the result of last week's diplomatic row between Britain and Russia four-all – the number of diplomats expelled by each side? Or is another game being played altogether, one in which the gruesome murder of a Briton on British soil is likely to go unpunished?

By the end of the week, British and Russian officials were united in suggesting that honour had been satisfied on both sides, and that the cycle of provocation and retaliation would go no further. But profound mistrust remains, and there is plenty of potential for more trouble, particularly over Moscow's efforts to punish Boris Berezovsky, the oligarch who grew hugely rich under Boris Yeltsin, but fled to London in 2003 after falling out with his successor, Vladimir Putin.

Mr Berezovsky is at the centre of much of the recent bad feeling between Britain and Russia. Alexander Litvinenko, who suffered a slow, agonising death in London's University College Hospital last year after being poisoned with radioactive polonium, was a former KGB agent who sought asylum here after saying he had been told to kill the oligarch. (He took British citizenship shortly before he died.) Mr Berezovsky funded publication of the book containing Litvinenko's accusations and has pledged to use his wealth to fund Mr Putin's overthrow.

If that causes indignation in Russia, which has failed three times to extradite Mr Berezovsky, Britain is appalled that the flood of Russian wealth into London has been accompanied by gangsterism and political assassination. It suspects Andrei Lugovoy, a former agent of the KGB's successor agency, the FSB, of leaving a trail of polonium contamination across the capital before killing his former associate. Last week the new Foreign Secretary, David Miliband, said four Russian diplomats were being expelled because of Moscow's refusal to extradite Mr Lugovoy and to emphasise Britain's commitment to "the safety of British citizens and visitors".

As if to underline the latter point, it emerged the next day that a Russian "hitman" had been arrested at the Hilton hotel in Park Lane in mid-June, suspected of plotting to murder Mr Berezovsky. Scotland Yard confirmed that a man had been arrested on suspicion of conspiracy to murder and handed over to the immigration service two days later after his visa had been cancelled. It would say no more, but Mr Berezovsky, never one to miss an opportunity to discredit the Kremlin, said he had left Britain for a week after being warned of the plot, returning after he was told the threat was over.

The affair remains murky, but senior sources close to MI6 confirmed the plot. Another intelligence source said: "The reason why they let the suspect go was that they had no hard evidence. Details of the plot had been picked up by eavesdropping, so that they knew roughly what was going on. But they couldn't produce that kind of material in court. The assassin was not carrying a gun and denied a plot. All they could do was get him on immigration non-disclosure and throw him out."

But if that cast Russia in a bad light, Mr Lugovoy had accusations of his own. In Moscow he claimed that both Mr Litvinenko and Mr Berezovsky were agents of MI6, which had also tried to recruit him. Although the latter allegation is by no means implausible, the intelligence source said Mr Berezovsky "doesn't need to work for MI6", even though their interests clearly coincided. The oligarch was "a very well-informed man with a great number of supporters, in positions of power, inside Russia".

A Whitehall source added: "It's widely believed that Russian spying in Britain dropped off after the end of the Cold War. That is not true. There are around 30 Russian intelligence officers here at any one time. Their interests are much the same as in the past: politics, technology, economics, etc. The only thing that has increased noticeably is interest in energy resources." The Russians, however, will retort that Britain too remains active in the spying game: TV last year showed British embassy officials in a Moscow park, apparently retrieving data from an electronic device hidden in a fake rock.

The latest flare-up comes at a time when speculation about a new Cold War had already been aroused by a series of disputes, including Mr Putin's threat to re-target nuclear weapons at Europe in retaliation for American plans to site parts of its missile defence system in Poland and the Czech Republic, and Moscow's decision last week to suspend the Conventional Forces in Europe (CFE) treaty, which limits tanks, heavy artillery and combat aircraft. The view from Moscow is somewhat different.

Not only had the US scrapped the anti-ballistic missile treaty, Russians point out, but also Western countries had ignored Russian pleas to change the "outdated" CFE treaty. The Baltic states are not signatories; moreover, Russia is the only country to have ratified the 1999 amended version of the treaty. "We are interested in an arms control treaty in Europe, but it should be beneficial to everyone," said Anton Mazur, a Foreign Ministry official. "We've told our Western partners that they need to ratify the treaty, and they haven't."

This failure of the West to listen extends to many other issues, say Russian analysts. Moscow is told not to bully neighbouring Estonia, for example, but the Baltic nation's poor treatment of its ethnic Russian population is glossed over. And, a common argument goes, Russia is endlessly told how disappointing it would be if it changed its constitution to allow Vladimir Putin a third term, only for Mr Miliband to suggest the clause preventing extradition of its citizens should be changed. "It's an extraordinary idea," said Dmitry Suslov, deputy director of the Council on Foreign and Defence Policy. "Russia is not a British colony; it's a great power."

To Western ears, such a statement demonstrates the sense of wounded pride that can make Russia difficult to deal with. "I don't think Russia really knows how to communicate with the West," said Bobo Lo, head of the Russia and Eurasia programme at Chatham House in London. The Kremlin itself realises this, and has even hired the American PR company Ketchum, which is reported to have a contract worth millions of pounds to improve Russia's image. But it doesn't seem to be working. "Russia became very strong very unexpectedly, and the Russian political elite is not able to handle it," said Sergei Markov, a Kremlin-connected analyst.

With the economy surging as Russia wallows in oil earnings, it can sometimes seem that the country is behaving like the most heedless of nouveau riche. "As well as this misunderstanding, there is an arrogance of success," said Mr Lo. "The West's influence over Russia is at its lowest point for at least 20 years, and the Russians feel they can use this to get what they want."

Opposition, often in uncompromising terms, has been expressed over issues such as independence for Kosovo. Harsh economic sanctions have been implemented against former Soviet states seeking to extricate themselves from Moscow's geopolitical orbit. In Russia, this is seen as natural – the country for many years was unable to stand up for its interests on the international stage, and now it will do so. "Russia doesn't want a confrontation with Western nations," said Mr Markov. "But we have overcome the period of chaos and anarchy and insist that our rights are respected."

What distinguishes this era above all else from the Cold War, however, is that too much hostility between Britain and Russia would have undesirable economic consequences for both sides. Trade between the two countries is growing at more than 20 per cent a year, and Britain is the main foreign investor in Russia, with BP's $6.75bn TNK joint oil venture the biggest. Russian companies raise more money on the London Stock Exchange than anywhere else: $30bn last year. "We both need each other," said Neil Cooper, Russia director of the Russo-British Chamber of Commerce. "The two economies are intrinsically interlinked."

That goes a long way to explain why both capitals, for all the Cold War rhetoric, appear equally reluctant to allow what Mr Putin called a "mini-crisis" to get out of hand. It may be no consolation to Alexander Litvinenko's widow, but the days are gone when Britain was prepared to expel shiploads of Russian diplomats on a point of principle.

Additional reporting by Paul Lashmar

Further reading 'The Litvinenko File', by Martin Sixsmith (Macmillan, £16.99)