By Michael Stott

LONDON (Reuters) - It sounded too good to be true: autocratic ruler with one foot in the past relinquishes power to trusted, more liberal protege, setting country on road to reform.

Such happy endings are rare anywhere - least of all in Russia, a nation where strong rulers are a way of life and their reigns often a prelude to tragedy.

The weekend news that Vladimir Putin plans to return to the Kremlin next year, pushing aside his hand-picked successor Dmitry Medvedev as president, gave succour to the cynics who had always held that Putin never intended to surrender real power and saw Medvedev as a convenient puppet to get around term limits.

The truth may be more interesting.

When Medvedev arrived at the Kremlin in 2008, many well-connected ambassadors, government officials and top business people in Moscow believed that Putin had made a conscious choice to step back and cede real power to Medvedev, as part of a strategy to modernize the country.

So did Putin change his mind during Medvedev's presidency - and why?

Putin's reasoning - and Medvedev's reaction to the decision to drop him after a single term - matter because the relationship between Russia's two most powerful men remains crucial.

Under the deal announced last Saturday, Medvedev is set to become Putin's prime minister - an arrangement that has already triggered the sudden departure of Putin's long-serving Finance Minister Alexei Kudrin, who said he did not want to serve in a Medvedev government.

Declarations by Putin and Medvedev about the 2012 election offer some clues about the real nature of their unusual and long-running political partnership, which began when they worked together in the St Petersburg Mayor's office in the early 1990s.

When he announced last Saturday his decision to return next year, Putin said the two men had reached an agreement "several years ago" on who would do which job in the future.

Yet as recently as April this year, Medvedev was still saying publicly he was considering running again in 2012, portraying himself as an agent for change and predicting that a decision would be reached soon.

So was Medvedev under the impression he still had a chance of a second presidential term, while Putin had in fact already decided that his protégé was not up to the job?

To gain an insight into Kremlin thinking - by its nature obscure and shrouded in secrecy - look back to 2007, when Putin was nearing the end of his second four-year term and facing a constitutional requirement to step down.

Critics and cynics were unanimous - Putin would change the constitution and stay in power. The former KGB spy and ex-committed Communist, who once described the breakup of the Soviet Union as the greatest geo-political tragedy of the 20th century, would never surrender power.

Yet Putin sprang a double surprise. Not only did he leave the Kremlin at the peak of his popularity to take the hitherto poorly regarded post of prime minister, he picked as his successor the more liberal and Western-leaning of the two front-runners.

The son of bookish Leningrad intellectuals, Medvedev was a long-time confidante and Putin associate - but also a man noted for his fondness for British rock bands Black Sabbath and Deep Purple and his obsession with the Internet.

Why did he do it? Russia-watchers said that Medvedev represented an ideal way forward - a closely trusted ally free of a KGB spy past who could deliver controlled and limited reform without threatening the edifice of power which Putin had built. Medvedev certainly believed he had been picked to lead a big reform project and change Russia.

"I believe my most important aims will be to protect civil and economic freedoms....We must fight for a true respect of the law," he said in his inauguration speech.

When Reuters interviewed Medvedev after his election, he told us: "The defining values are freedom, democracy and the right to private property."

But he came across as shy and awkward, almost blinking as he emerged from the Kremlin corridors where he had worked for so long into the glare of the public spotlight.

Close Medvedev associates like his economic aide Arkady Dvorkovich and his press secretary Natalia Timakova believed in a Medvedev reform program. So did some of the country's Western-leaning oligarchs, who started whispering in private conversations about prospects for real change in Russia.

Foreign governments took notice too.

The United States was quick to endorse Medvedev and announced plans to "reset" the fractious relationship between the world's top two nuclear powers. President Barack Obama told reporters before his first visit to Moscow that Putin had one foot stuck in the past. He went out of his way to lavish praise and time on Medvedev.

The result was a new pact cutting the countries' nuclear arsenals, better diplomatic relations and a boost to Russia's historically bad image in the United States.

Yet at the same time, critics began to notice what would become a constant theme in Medvedev's presidency - the leader's inability to connect to the Russian people, to capture the popular mood and to translate his lofty theories into practical steps. These were traits Putin had honed to perfection during his first two terms at the Kremlin from 2000-2008.

Events did not help him. Medvedev's first challenges in office turned out not to be economic competitiveness or the rollout of broadband technology but war with a neighboring country, followed by the impact of the global economic crisis.

When Russia went to war against Georgia in 2008 after Tbilisi tried to occupy a rebel pro-Russian piece of its territory by force, it was Putin who was first to appear close to the fighting to meet refugees and troops. Medvedev was nowhere to be seen.

And the global economic crisis hit Russia unexpectedly hard, exposing how heavily indebted its oligarchs were and how dependent the country was on raw material exports.

Again it was Putin who was showing his face on factory floors and in crisis-hit towns across Russia, meeting workers and factory bosses and trying to get production going, while Medvedev continued to make speeches in Moscow.

And those big speeches were not leading anywhere. In September 2009, the Russian president launched a blistering attack on Russia's political backwardness and its economic dependence on raw materials.

"Today, for the first time in our history," he wrote, "we have the chance to prove to ourselves and the world that Russia can develop democratically."

Ambassadors and business people in Moscow were excited. The openness and frankness of Medvedev's criticisms were striking. Nobody in the Putin era had ever spoken out that openly.

Yet despite the president's clarion calls for reform and his frank, withering critique of Russia's endemic corruption and political backwardness, there were no clear plans for implementing change.

Two months later, during his annual set-piece speech to the Russian elite in a grand Kremlin hall, Medvedev noted he had already laid out his political agenda. It was time for specifics.

"In today's Address to the Federal Assembly I want to outline the first specific steps for implementing this strategy. I will tell you about the immediate tasks ahead," he said.

He then proceeded to ramble for the next hour about the need to boost domestic production of medicines, to reduce the number of different time zones in Russia, to boost the space industry, to lay more fiber-optic cable and to put more state services online.

By the time he sat down, the implication was clear: for all the grand talk of reform, there would be no major changes.

As Medvedev spoke, Putin stared at the ground in front of him, shuffled awkwardly and looked alternately irritated and bored. Had he made up his mind already to dump Medvedev?

The following summer - 2010 - Putin launched a frenzy of activity that looked suspiciously like a pre-election campaign. He was pictured piloting a plane extinguishing forest fires near Moscow, riding a Harley Davidson motorcycle, shooting darts at a grey whale in the name of science and driving across part of Siberia in a yellow Lada car and giving a long interview to a favorite reporter.

Tongues began to wag: Putin, it seemed, was already gearing himself up to stand again for president.

At the end of the summer, in a move little remarked on at the time, leading foreign experts on Russia, invited for an annual set of meetings with top officials known as the Valdai Club, discovered they would be meeting Putin as usual - but not Medvedev or any of his aides, which they had done for the previous two years. Another signal that Putin's mind had been made up?

When Medvedev, in a rare signal of determination to force change, fired one of the country's most powerful old guard politicians, Moscow mayor Yuri Luzhkov, at the end of September 2010, Putin forced his right hand man Sergei Sobyanin on Medvedev as Luzhkov's replacement.

By the summer of this year, political sources were already telling Reuters that Putin was considering running again in 2012 because he was disappointed with Medvedev.

So why did Medvedev's reform project never get off the ground? Even the president's signature reform project - a Russian Silicon Valley located on the edge of Moscow designed to lure Web start-ups and incubate world-beating research - became a focus for scorn and ridicule. Medvedev, critics said, had failed to change his country, so he needed to create a new one instead.

Some canny oligarchs decided to avoid the project, calculating - correctly as it turned out - that it was a waste of time and money to invest in a Medvedev project that Putin didn't have much time for.

One of Medvedev's closest supporters, businessman Igor Yurgens, warned me as far back as June 2008 that Medvedev faced a "silent war" from Kremlin hardliners against plans to reform.

In comments that now look prophetic, Yurgens said: "If (Medvedev) doesn't build a coalition in this struggle, he will lose, like some of the previous reformers in Russian history. If he manages to build up such a coalition he will win."

In the end, Medvedev seemed unable to build that coalition.

His wooden public persona, dull speeches peppered with technicalities, and his obsession with projects that had little appeal to ordinary Russians, such as online government, democracy, better relations with the West and technological innovation, left him looking remote and out of touch.

His popularity ratings never approached those of Putin, who remains a master of the Russian popular mood, as comfortable chatting to soldiers and babushki in the market as he is negotiating a gas deal with the leader of a neighboring state.

One anecdote illustrates the size of Medvedev's image problem: this summer, the president visited the Tambov region of central Russia to meet farm workers harvesting the grain. One of those present described it thus:

"Medvedev came up to them trying to look in charge but seemed embarrassed when he shook the dirty hands of these hard-drinking peasants, as if he was patting a dog despite dog phobia. It was evident that the peasants didn't like him either. When he left, I heard them saying: "Thank God this show is over, now we can get down to work" (Additional reporting by Guy Faulconbridge; editing by Janet McBride)