The young men of Derry living in fear. Video: Laurence Topham guardian.co.uk

When the fatal bullets pierced the window of the living room, Andrew Allen was in the Irish Republic playing an Xbox football game online with a nephew back in Derry.

The match, featuring avatars of Wayne Rooney and Lionel Messi, came to an abrupt and bloody end when Allen fell to the floor inside his relative's house just across the border in Buncrana, County Donegal.

Uncle and nephew were pitted against each other in cyberspace because Allen had been warned just a few weeks earlier that he would be shot dead if he remained in his native city. Like dozens of other young men, he had crossed hardline republicans who accused him of dealing in drugs – a charge untested in any court of law and one completely rejected by his family.

It was a tragic irony that the 24-year-old boxer from a mixed religious background in Derry felt safe in the Republic. But on the night of 9 February this year the vigilante group Republican Action Against Drugs (RAAD) hunted him down to the County Donegal village where for decades Derry people had taken refuge from the Troubles.

His death left two small children without a father. His mother, Donna Smith, has become a figurehead in public protests against RAAD's terror campaign in Derry. She said the world needed to know the true face of this "city of fear".

"I actually know of young boys who are sleeping with hammers and baseball bats at the side of their beds because they are so terrified," she said. "I know a mother that has a big piece of wood barricaded against her door because her son is under a death threat as she is afraid at night that they will come in. "I would nearly be ashamed to say that I come from this city for what is going on here. This is going to be called a city of culture but how can you call it that when there are people murdering and butchering children?"

Yet despite several public demonstrations in Derry in the weeks after Allen's death, the shootings, beatings and exiling at gunpoint have continued. Republican hardliners unmoved by the protests, claim there is a lot of support in working-class estates and areas for the violent vigilante campaign.

Gary Donnelly, a former IRA prisoner and member of the Real IRA-aligned 32 County Sovereignty Committee, said RAAD or the other armed republican groups could not exist without some level of backing in the community.

In a grim cul-de-sac in the Shantallow housing estate with the flags of the 32 County Sovereignty Committee flying from every lamp-post and Real IRA graffiti scrawled on a gable wall, Donnelly said there was support for the continuing wave of so-called punishment shootings and exiling.

Shootings

"Anyone who thinks these groups are just travelling around looking for targets are seriously deluded. These punishment shootings, expulsions, attacks happen as a result of the demand from people from within these communities on these organisations.

"There is support for militant republicanism. There are people within these communities who shelter them, give them all sorts of backup … to say that they [the militant republican groups] don't have support [is] trying to delude people," he said.

Veteran Derry civil rights campaigner, socialist and author Eamonn McCann said RAAD and others were exploiting a "drugs panic akin to the Salem witches hysteria".

Standing on Derry's ancient walls overlooking the spot in the Bogside where many of the 13 Bloody Sunday victims were shot dead in 1972, McCann insisted that working-class communities left behind by the so-called "peace dividend" were turning in on themselves, and in many cases turning to still active armed republicans to police their areas.

McCann said: "If you look around the Bogside or the Creggan area and so forth there are a huge number of people in Catholic working-class areas, or indeed Protestant working-class areas, who feel they have been left behind by the peace process. They are told all the time that Belfast is buzzing, that Derry is going to be the city of culture, that everything is on the up and up, that sunshine is in prospect. Actually life is not getting better for them. In many cases it is getting worse.

"That is the context in which people begin to look away from constitutional politics and are then open to the appeal of people who say to them 'I will sort your problems out. I will get a few of my friends with guns to sort them out.' Constitutional politics isn't offering that." Judging by the voting patterns, the majority of people in Derry want peace and the survival of the historic compromise hammered out between unionists and nationalists, Catholics and Protestants, in the 1998 Good Friday agreement. The city itself is being physically transformed with a brand new "peace bridge" spanning the river Foyle, a symbol of unity linking the nationalist/republican majority west bank with the mainly unionist east bank or Waterside.

Garbhan Downey, a journalist turned novelist and publicity director for Derry City of Culture 2013, accentuated the positive about his home city. Next year it will host the most prestigious competition in British art, the Turner prize, hold an open-air concert with some of the world's biggest rock and pop acts on the planet and for the first time host the All-Ireland Fleadh music festival when tens of thousands of tourists are expected.

At his headquarters in a former army barracks used by King James II's army to fire cannonballs into the Protestant citadel behind Derry's ancient walls in a 1689 siege, Downey enthusiastically outlined what was ahead in the city of culture year.

"I think what you are seeing in Derry at the moment is for the first time the belief that we are, to quote Seamus Heaney 'on the far side of revenge'," he said. "We are at the edge of a sea change. 2013 is incredibly important for all the people in the city because there is a huge sense of civic pride here but they want to showcase the emerging greatness of this city to the world. Throughout loyalism and republicanism they are all taking part in this process and we would encourage everybody, all dissenting voices, to come and be part of it, to make your dissent a cultural dissent and not a violent dissent."

Antisocial activities

RAAD is an amalgam of former Provisional IRA members who believe that working-class nationalist areas of Derry are awash with narcotics.

Some RAAD members are ex-Provisionals who back the peace process but still take up the gun against members of their own communities accused of antisocial activities. Others connected to RAAD have joined organisations such as the Real IRA, which is also running a campaign of terror attacks against police officers, security installations and even high-street banks in Derry.

Martin McGuinness, the Sinn Féin MP, secret IRA negotiator with MI5 in talks leading to the Provisionals' 1994 ceasefire and Northern Ireland's deputy first minister, has now taken a very public stand against some of his former comrades. In an interview with the Guardian just 24 hours after a young man turned up for an "appointment" to be shot, McGuinness called on his fellow Derry citizens to hand over information about RAAD to the police – a call in the past that could have cost a republican their life.

Behind the claims of popular demand for short-circuit, rough Taliban-style "justice" there is a wider political power-play going on in Derry between those republicans in Sinn Féin who support the power-sharing settlement in Northern Ireland, and those who oppose it and see the peace process as a "sell-out". The huge numbers of men being shot or expelled from the city where the Troubles began in 1969 is a direct challenge to the authority of the Police Service of Northern Ireland and the power-sharing executive at Stormont.

In response to the latest round of shootings Matt Baggott, the PSNI's chief constable, promised the body that scrutinises his force – the Northern Ireland Policing Board – that his officers would bring those behind the vigilante terror campaign to justice.

So far no one has been charged over the killing of Andrew Allen. So far no one has been jailed over a single "punishment" attack or beating that has taken place in Derry in the past 12 months.