Two immediate tasks facing independent Armenia were rebuilding its devastated economy and strengthening its fledgling democratic institutions. But the escalating war in NagornoKarabakh and the effective blockade of the republic by the Azerbaijanis led to a total collapse of the economy. By early 1993, the government seemed helpless before mounting economic and political problems. The last remaining oil and gas pipelines through neighboring Georgia, which itself was being torn by civil and interethnic war, were blown up by saboteurs. To survive the cold, Armenians in Erevan cut down the city's trees, and plans were made to start up the nuclear power plant at Metsamor. In February 1993, demonstrations called for the resignation of the government, but Ter-Petrosian responded by naming a new cabinet headed by Hrant Bagratian.
While economic and political conditions deteriorated within Armenia, the military position of the Armenians in the Karabakh struggle improved dramatically. Various peace negotiations sponsored by Iran, Russia, Turkey, and a nine-nation group from the Conference on Security and Cooperation in Europe had begun in 1991 and sporadically had yielded cease-fires that were violated almost immediately. In the spring of 1992, while the Azerbaijani communists and the nationalist Azerbaijani Popular Front fought for control in Baku, Karabakh Armenian forces occupied most of Nagorno-Karabakh, took the old capital, Shusha, and drove a corridor through the Kurdish area around Lachin to link Nagorno-Karabakh with Armenia. But the immediate result of this victory was the collapse of Russian-sponsored peace negotiations with Azerbaijan and the continuation of the war.
Beginning a counteroffensive in early summer, the Azerbaijanis recaptured some territory and created thousands of new refugees by expelling Armenians from the villages they took. In midsummer this new phase of the conflict stimulated a CSCEsponsored peace conference, but Armenia stymied progress by demanding for the first time that Nagorno-Karabakh be entirely separate from Azerbaijan.
By the end of 1992, the sides were bogged down in a bloody stalemate. After clearing Azerbaijani forces from NagornoKarabakh and the territory between Karabakh and Armenia, Armenian troops also advanced deep into Azerbaijan proper--a move that brought condemnation from the United Nations (UN) Security Council and panic in Iran, on whose borders Armenian troops had arrived. In the first half of 1993, the Karabakh Armenians gained more Azerbaijani territory, against disorganized opposition. Azerbaijani resistance was weakened by the confusion surrounding a military coup that toppled the APF government in Baku and returned former communist party boss Heydar Aliyev to power.
The coup reinvigorated Russian efforts to negotiate a peace under the complex terms of the three parties to the conflict: the governments of Armenia and Azerbaijan, and the increasingly independent and assertive Karabakh Armenians. CSCE peace proposals were uniformly rejected during this period. Although Russia seemed poised for a triumph of crisis diplomacy on its borders, constant negotiations in the second half of 1993 produced only intermittent cease-fires. At the end of 1993, the Karabakh Armenians were able to negotiate with the presidents of Azerbaijan and Russia from a position of power: they retained full control of Nagorno-Karabakh and substantial parts of Azerbaijan proper.
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