Figure 1. Armenia, Azerbaijan, and Georgia: Geographic Setting, 1994

Figure 2. Armenia, Azerbaijan, and Georgia: Topography and Drainage

Figure 3. Nagorno-Karabakh, 1994

THE THREE REPUBLICS of Transcaucasia--Armenia, Azerbaijan, and Georgia--were included in the Soviet Union in the early 1920s after their inhabitants had passed through long and varied periods as separate nations and as parts of neighboring empires, most recently the Russian Empire. By the time the Soviet Union dissolved at the end of 1991, the three republics had regained their independence, but their economic weakness and the turmoil surrounding them jeopardized that independence almost immediately. By 1994 Russia had regained substantial influence in the region by arbitrating disputes and by judiciously inserting peacekeeping troops. Geographically isolated, the three nations gained some Western economic support in the early 1990s, but in 1994 the leaders of all three asserted that national survival depended chiefly on diverting resources from military applications to restructuring economic and social institutions.

Location at the meeting point of southeastern Europe with the western border of Asia greatly influenced the histories of the three national groups forming the present-day Transcaucasian republics (see fig. 1 fig. 2). Especially between the twelfth and thÍÍÍÍÍÍe twentieth centuries, their peoples were subject to invasion and control by the Ottoman, Persian, and Russian empires. But, with the formation of the twentieth-century states named for them, the Armenian, Azerbaijani, and Georgian peoples as a whole underwent different degrees of displacement and played quite different roles. For example, the Republic of Azerbaijan that emerged from the Soviet Union in 1991 contains only 5.8 million of the world's estimated 19 million Azerbaijanis, with most of the balance living in Iran across a southern border fixed when Persia and Russia in the nineteenth century. At the same time, slightly more than half the world's 6.3 million Armenians are widely scattered outside the borders of the Republic of Armenia as a result of a centuries-long diaspora and step-by-step reduction of their national territory. In contrast, the great majority of the world's Georgian population lives in the Republic of Georgia (together with ethnic minorities constituting about 30 percent of the republic's population), after having experienced centuries of foreign domination but little forcible alteration of national boundaries.

The starting points and the outside influences that formed the three cultures also were quite different. In pre-Christian times, Georgia's location along the Black Sea opened it to cultural influence from Greece. During the sa 2me peme period, Armenia was settled by tribes from southeastern Europe, and Azerbaijan was settled by Asiatic Medes, Persians, and Scythians. In Azerbaijan, Persian cultural influence dominated in the formative period of the first millennium B.C. In the early fourth century, kings of Armenia and Georgia accepted Christianity after extensive contact with the proselytizing early Christians at the eastern end of the Mediterranean. Following their conversion, Georgians remained tied by religion to the Roman Empire and later the Byzantine Empire centered at Constantinople. Although Armenian Christianity broke with Byzantine Orthodoxy very early, Byzantine occupation of Armenian territory enhanced the influence of Greek culture on Armenians in the Middle Ages.

In Azerbaijan, the Zoroastrian religion, a legacy of the early Persian influence there, was supplanted in the seventh century by the Muslim faith introduced by conquering Arabs. Conquest and occupation by the Turks added centuries of Turkic influence, which remains a primary element of secular Azerbaijani culture, notably in language and the arts. In the twentieth century, Islam remains the prevalent religion of Azerbaijan, with about three-quarters of the population adhering to the Shia (see Glossary) branch.

Golden ages of peace and independence enabled the three civilizations to individualize their forms of art and literature before 1300, and all have retained unique characteristics that arose during those eras. The Armenian, Azerbaijani, and Georgian languages also grew in different directions: Armenian developed from a combination of Indo-European and non-Indo-European language stock, with an alphabet based on the Greek Azerbaijani, akin to Turkish and originating in Central Asia, now uses the Roman alphabet after periods of official usage of the Arabic and Cyrillic alphabets and Georgian, unrelated to any major world language, use a Greek-based alphabet quite different from the Armenian.

Beginning in the eighteenth century, the Russian Empire constantly probed the Caucasus region for possible expansion toward the Black Sea and the Caspian Sea. These efforts engaged Russia in a series of wars with the Persian and Ottoman empires, both of which by that time were decaying from within. By 1828 Russia had annexed or had been awarded by treaty all of present- day Azerbaijan and Georgia and most of present-day Armenia. (At that time, much of the Armenian population remained across the border in the Ottoman Empire.)

Except for about two years of unstable independence following World War I, the Transcaucasus countries remained under Russian, and later Soviet, control until 1991. As part of the Soviet Union from 1922 to 1991, they underwent approximately the same degree of economic and political regimentation as the other constituent republics of the union (until 1936 the Transcaucasian Soviet Federated Socialist Republic included all three countries). The Sovietization process included intensive industrialization, collectivization of agriculture, and large-scale shifts of the rural work force to industrial centers, as well as expanded and standardized systems for education, health care, and social welfare. Although industries came under uniform state direction, private farms in the three republics, especially in Georgia, remained important agriculturally because of the inefficiency of collective farms.

The achievement of independence in 1991 left the three republics with inefficient and often crumbling remains of the Soviet-era state systems. In the years that followed, political, military, and financial chaos prevented reforms from being implemented in most areas. Land redistribution proceeded rapidly in Armenia and Georgia, although agricultural inputs often remained under state control. In contrast, in 1994 Azerbaijan still depended mainly on collective farms. Education and health institutions remained substantially the same centralized suppliers as they had in the Soviet era, but availability of educational and medical materials and personnel dropped sharply after 1991. The military conflict in Azerbaijan's Nagorno- Karabakh Autonomous Region put enormous stress on the health and social welfare systems of combatants Armenia and Azerbaijan, and Azerbaijan's blockade of Armenia, which began in 1989, caused acute shortages of all types of materials (see fig. 3).

The relationship of Russia to the former Soviet republics in the Transcaucasus caused increasing international concern in the transition years. The presence of Russian peacekeeping troops between Georgian and Abkhazian separatist forces remained an irritation to Georgian nationalists and an indication that Russia intended to intervene in that part of the world when opportunities arose. Russian nationalists saw such intervention as an opportunity to recapture nearby parts of the old Russian, and later Soviet empire. In the fall of 1994, in spite of strong nationalist resistance in each of the Transcaucasus countries, Russia was poised to improve its economic and military influence in Armenia and Azerbaijan, as it had in Georgia, if its mediation activities in Nagorno-Karabakh bore fruit.

The countries of Transcaucasia each inherited large state- owned enterprises specializing in products assigned by the Soviet system: military electronics and chemicals in Armenia, petroleum- based and textile industries in Azerbaijan, and chemicals, machine tools, and metallurgy in Georgia. As in most of the nations in the former Soviet sphere, redistribution and revitalization of such enterprises proved a formidable obstacle to economic growth and foreign investment in Armenia, Azerbaijan, and Georgia. Efforts at enterprise privatization were hindered by the stresses of prolonged military engagements, the staying power of underground economies that had defied control under communist and governments, the lack of commercial expertise, and the lack of a legal infrastructure on which to base new business relationships. As a result, in 1994 the governments were left with oversized, inefficient, and often bankrupt heavy industries whose operation was vital to provide jobs and to revive the national economies. At the same time, small private enterprises were growing rapidly, especially in Armenia and Georgia.

In the early 1990s, the Caucasus took its place among the regions of the world having violent post-Cold War ethnic conflict. Several wars broke out in the region once Soviet authority ceased holding the lid on disagreements that had been fermenting for decades. (Joseph V. Stalin's forcible relocation of ethnic groups after the redrawing of the region's political map was a chief source of the friction of the 1990s.) Thus, the three republics devoted critical resources to military campaigns in a period when the need for internal restructuring was paramount.

In Georgia, minority separatist movements--primarily on the part of the Ossetians and the Abkhaz, both given intermittent encouragement by the Soviet regime over the years--demanded fuller recognition in the new order of the early 1990s. Asserting its newly gained national prerogatives, Georgia responded with military attempts to restrain separatism forcibly. A year-long battle in South Ossetia, initiated by Zviad Gamsakhurdia, post- Soviet Georgia's ultranationalist first president, reached an uneasy peace in mid-1992. Early in 1992, however, the violent eviction of Gamsakhurdia from the presidency added another opponent of Georgian unity as the exiled Gamsakhurdia gathered his forces across the border.

In mid-1992 Georgian paramilitary troops entered the Abkhazian Autonomous Republic of Georgia, beginning a new conflict that in 1993 threatened to break apart the country. When Georgian troops were driven from Abkhazia in September 1993, Georgia's President Eduard Shevardnadze was able to gain Russian military aid to prevent the collapse of the country. In mid-1994 an uneasy cease-fire was in force Abkhazian forces controlled their entire region, but no negotiated set 2tlemetlement had been reached. Life in Georgia had stabilized, but no permanent answers had been found to ethnic claims and counterclaims.

For Armenia and Azerbaijan, the center of nationalist self- expression in this period was the Nagorno-Karabakh Autonomous Region of Azerbaijan. After the Armenian majority there declared unification with Armenia in 1988, ethnic conflict broke out in both republics, leaving many Armenians and Azerbaijanis dead. For the next six years, battles raged between Armenian and Azerbaijani regular forces and between Armenian militias from Nagorno-Karabakh ("mountainous Karabakh" in Russian), and foreign mercenaries, killing thousands in and around Karabakh and causing massive refugee movements in both directions. Armenian military forces, better supplied and better organized, generally gained ground in the conflict, but the sides were evened as Armenia itself was devastated by six years of Azerbaijani blockades. In 1993 and early 1994, international mediation efforts were stymied by the intransigence of the two sides and by competition between Russia and the Conference on Security and Cooperation in Europe ( CSCE--see Glossary) for the role of chief peace negotiator.

ARMENIA

Armenia, in the twentieth century the smallest of the three republics in size and population, has undergone the greatest change in the location of its indigenous population. After occupying eastern Anatolia (now eastern Turkey) for nearly 2,000 years, the Armenian population of the Ottoman Empire was extinguished or driven out by 1915 adding to a diaspora that had begun centuries earlier. After 1915, only the eastern population, in and around Erevan, remained in its original location. In the Soviet era, Armenians preserved their cultural traditions, both in Armenia and abroad. The Armenian people's strong sense of unity has been reinforced by periodic threats to their existence. When Armenia, Azerbaijan, and Georgia gained their independence in 1991, Armenia possessed the fewest natural and man-made resources upon which to build a new state. Fertile agricultural areas are relatively small, transportation is limited by the country's landlocked position and mountainous terrain (and, beginning in 1989, by the Azerbaijani blockade), and the material base for industry is not broad. A high percentage of cropland requires irrigation, and disorganized land privatization has delayed the benefits that should result from reducing state agricultural control. Although harvests were bountiful in 1993, gaps in support systems for transport and food processing prevented urban populations from benefiting.

The intensive industrialization of Armenia between the world wars was accomplished within the controlled barter system of the Soviet republics, not within a separate economic unit. The specialized industrial roles assigned Armenia in the Soviet system offered little of value to the world markets from which the republic had been protected until 1991. Since 1991 Armenia has sought to reorient its Soviet-era scientific-research, military electronics, and chemicals infrastructures to satisfy new demands, and international financial assistance has been forthcoming. In the meantime, basic items of Armenian manufacturing, such as textiles, shoes, and carpets, have remained exportable. However, the extreme paucity of energy sources--little coal, natural gas, or petroleum is extracted in Armenia--always has been a severe limitation to industry. And about 30 percent of the existing industrial infrastructure was lost in the earthquake of 1988. Desperate crises arose throughout society when Azerbaijan strangled energy imports that had provided over 90 percent of Armenia's energy. Every winter of the early 1990s brought more difficult conditions, especially for urban Armenians.

In the early 1990s, the Armenian economy was also stressed by direct support of Karabakh self-determination Karabakh, which received massive shipments of food and other materials through the Lachin corridor that Karabakh Armenian forces had opened across southwestern Azerbaijan. Although Karabakh sent electricity to Armenia in return, the balance of trade was over two to one in favor of Karabakh, and Armenian credits covered most of Karabakh's budget deficits. Meanwhile, Armenia remained a command rather than a free-market economy to ensure that the military received adequate economic support.

In addition to the Karabakh conflict, wage, price, and social welfare conditions have caused substantial social unrest since independence. The dram (for value of the dram--see Glossary), the national currency introduced in 1992, underwent almost immediate devaluation as the national banking system tried to stabilize international exchange rates. Accordingly, in 1993 prices rose to an average of 130 percent of wages, which the government indexed through that year. The scarcity of many commodities, caused by the blockade, also pushed prices higher. In the first post-Soviet years, and especially in 1993, plant closings and the energy crisis caused unemployment to more than double. At the same time, the standard of living of the average Armenian deteriorated by 1993 an estimated 90 percent of the population were living below the official poverty line.

Armenia's first steps toward democracy were uneven. Upon declaring independence, Armenia adapted the political system, set forth in its Soviet-style 1978 constitution, to the short- term requirements of governance. The chief executive would be the chairman of Armenia's Supreme Soviet, which was the chief legislative body of the new republic--but in independent Armenia the legislature and the executive branch would no longer merely rubber-stamp policy decisions handed down from Moscow.

The inherited Soviet system was used in the expectation that a new constitution would prescribe Western-style institutions in the near future. However, between 1992 and 1994 consensus was not reached between factions backing a strong executive and those backing a strong legislature.

At the center of the dispute over the constitution was Levon Ter-Petrosian, president (through late 1994) of post-Soviet Armenia. Beginning in 1991, Ter-Petrosian responded to the twin threats of political chaos and military defeat at the hands of Azerbaijan by accumulating extraordinary executive powers. His chief opposition, a faction that was radically nationalist but held few seats in the fragmented Supreme Soviet, sought to build coalitions to cut the president's power, then to finalize such a move in a constitution calling for a strong legislature. As they had on other legislation, however, the chaotic deliberations of parliament yielded no decision. Ter-Petrosian was able to continue his pragmatic approach to domestic policy, privatizing the economy whenever possible, and to continue his moderate, sometimes conciliatory, tone on the Karabakh issue.

Beginning in 1991, Armenia's foreign policy also was dictated by the Karabakh conflict. After independence, Russian troops continued serving as border guards and in other capacities that Armenia's new national army could not fill. Armenia, a charter member of the Russian-sponsored Commonwealth of Independent States ( CIS--see Glossary), forged security agreements with CIS member states and took an active part in the organization. After 1991 Russia remained Armenia's foremost trading partner, supplying the country with fuel. As the Karabakh conflict evolved, Armenia took a more favorable position toward Russian leadership of peace negotiations than did Azerbaijan.

The dissolution of the Soviet Union made possible closer relations with Armenia's traditional enemy Turkey, whose membership in the North Atlantic Treaty Organization ( NATO--see Glossary) had put it on the opposite side in the Cold war. In the Karabakh conflict, Turkey sided with Islamic Azerbaijan, blocking pipeline deliveries 2to Arto Armenia through its territory. Most important, Turkey withheld acknowledgment of the 1915 massacre, without which no Armenian government could permit a rapprochement. Nevertheless, tentative contacts continued throughout the early 1990s.

In spite of pressure from nationalist factions, the Ter- Petrosian government held that Armenia should not unilaterally annex Karabakh and that the citizens of Karabakh had a right to self-determination (presumably meaning either independence or union with Armenia). Although Ter-Petrosian maintained contact with Azerbaijan's President Heydar Aliyev, and Armenia officially accepted the terms of several peace proposals, recriminations for the failure of peace talks flew from both sides in 1993.

The United States and the countries of the European Union (EU) have aided independent Armenia in several ways, although the West has criticized Armenian incursions into Azerbaijani territory. Humanitarian aid, most of it from the United States, played a large role between 1991 and 1994 in Armenia's survival through the winters of the blockade. Armenia successively pursued aid from the European Bank for Reconstruction and Development, the International Monetary Fund ( IMF--see Glossary), and the World Bank (see Glossary). Two categories of assistance, humanitarian and technical, were offered through those lenders. Included was aid for recovery from the 1988 earthquake, whose destructive effects were still being felt in Armenia's industry and transportation infrastructure as of late 1994.

After the Soviet Union collapsed, Armenia's national security continued to depend heavily on the Russian military. The officer corps of the new national army created in 1992 included many Armenian former officers of the Soviet army, and Russian institutes trained new Armenian officers. Two Russian divisions were transferred to Armenian control, but another division remained under full Russian control on Armenian soil.

Internal security was problematic in the transitional years. The Ministry of Internal Affairs, responsible for internal security agencies, remained outside regular government control, as it had been in the Soviet period. This arrangement led to corruption, abuses of power, and public cynicism, a state of affairs that was especially serious because the main internal security agency acted as the nation's regular police force. The distraction of the Karabakh crisis combined with security lapses to stimulate a rapid rise in crime in the early 1990s. The political situation was also complicated by charges of abuse of power exchanged by high government officials in relation to security problems.

By the spring of 1994, Armenians had survived a fourth winter of acute shortages, and Armenian forces in Karabakh had survived the large-scale winter offensive that Azerbaijan launched in December 1993. In May 1994, a flurry of diplomatic activity by Russia and the CIS, stimulated by the new round of fighting, produced a cease-fire that held, with some violations, through the summer. A lasting treaty was delayed, however, by persistent disagreement over the nationality of peacekeeping forces that would occupy Azerbaijan. Azerbaijan resisted the return of Russian troops to its territory, while the Russian plan called for at least half the forces to be Russian. On both diplomatic and economic fronts, new signs of stability caused guarded optimism in Armenia in the fall of 1994.

The failure of the CSCE peace plan, which Azerbaijan supported, had caused that country to mount an all-out, human- wave offensive in December 1993 and January 1994, which initially pushed back Armenian defensive lines in Karabakh and regained some lost territory. When the offensive stalled in February, Russia's minister of defense, Pavel Grachev, negotiated a cease- fire, which enabled Russia to supplant the CSCE as the primary peace negotiator. Intensive Russian-sponsored talks continued through the spring, although Azerbaijan mounted air strikes on Karabakh as late as April. In May 1994, Armenia, Azerbaijan, and Nagorno-Karabakh signed the CIS-sponsored Bishkek Protocol, calling for a cease-fire and the beginning of troop withdrawals. In July the defense ministers of the three jurisdictions officially extended the cease-fire, signaling that all parties were moving toward some combination of the Russian and the CSCE peace plans. In September the exchange of Armenian and Azerbaijani prisoners of war began.

Under these conditions, Russia was able to intensify its three-way diplomatic gambit in the Transcaucasus, steadily erasing Armenians' memory of airborne Soviet forces landing unannounced as a show of strength in 1991. In the first half of 1994, Armenia moved closer to Russia on several fronts. A February treaty established bilateral barter of vital resources. In March Russia agreed to joint operation of the Armenian Atomic Power Station at Metsamor, whose scheduled 1995 reopening is a vital element in easing the country's energy crisis. Also in March, Armenia replaced its mission in Moscow with a full embassy. In June the Armenian parliament approved the addition of airborne troops to the Russian garrison at Gyumri near the Turkish border. Then in July, Russia extended 100 billion rubles (about US$35 million at that time) for reactivation of the Metsamor station, and Armenia signed a US$250 million contract with Russia for Armenia to process precious metals and gems supplied by Russia. In addition, Armenia consistently favored the Russian peace plan for Nagorno-Karabakh, in opposition to Azerbaijan's insistence on reviving the CSCE plan that prescribed international monitors rather than combat troops (most of whom would be Russian) on Azerbaijani soil.

Armenia was active on other diplomatic fronts as well in 1994. President Ter-Petrosian made official visits to Britain's Prime Minister John Major in February (preceding Azerbaijan's Heydar Aliyev by a few weeks when the outcome of the last large- scale campaign in the Karabakh conflict remained in doubt) and to President William J. Clinton in the United States in August. Clinton promised more active United States support for peace negotiations, and an exchange of military attachés was set. While in Washington, Ter-Petrosian expressed interest in joining the NATO Partnership for Peace, in which Azerbaijan had gained membership three months earlier.

Relations with Turkey remained cool, however. In 1994 Turkey continued its blockade of Armenia in support of Azerbaijan and accused Armenia of fostering rebel activity by Kurdish groups in eastern Turkey it reiterated its denial of responsibility for the 1915 massacre of Armenians in the Ottoman Empire. In June these policies prompted Armenia to approve the security agreement with Russia that stationed Russian airborne troops in Armenia near the Turkish border. In July Armenia firmly refused Turkey's offer to send peacekeeping forces to Nagorno-Karabakh. Thus, Armenia became an important player in the continuing contest between Russia and Turkey for influence in the Black Sea and Caucasus regions. Armenians considered the official commemoration by Israel and Russia of the 1915 Armenian massacre a significant advancement in the country's international position.

Early in 1994, Armenia's relations with Georgia worsened after Azerbaijani terrorists in Georgia again sabotaged the natural gas pipeline supplying Armenia through Georgia. Delayed rail delivery to Armenia of goods arriving in Georgian ports also caused friction. Underlying these stresses were Georgia's unreliable transport system and its failure to prevent violent acts on Georgian territory. Pipeline and railroad sabotage incidents continued through mid-1994.

The domestic political front remained heated in 1994. As the parliamentary elections of 1995 approached, Ter-Petrosian's centrist Armenian Pannational Movement (APM), which dominated political life after 1991, had lost ground to the right and the left because Armenians were losing patience with econo 2mic hmic hardship. Opposition newspapers and citizens' groups, which Ter- Petrosian refused to outlaw, continued their accusations of official corruption and their calls for the resignation of the Ter-Petrosian government early in the year. Then, in mid-1994 the opposition accelerated its activity by mounting antigovernment street demonstrations of up to 50,000 protesters.

In the protracted struggle over a new constitution, the opposition intensified rhetoric supporting a document built around a strong legislature rather than the strong-executive version supported by Ter-Petrosian. By the fall of 1994, little progress had been made even on the method of deciding this critical issue. While opposition parties called for a constitutional assembly, the president offered to hold a national referendum, following which he would resign if defeated.

Economic conditions were also a primary issue for the opposition. The value of the dram, pegged at 14.5 to the United States dollar when it was established in November 1993, had plummeted to 390 to the dollar by May 1994. In September a major overhaul of Armenia's financial system was under way, aimed at establishing official interest rates and a national credit system, controlling inflation, opening a securities market, regulating currency exchange, and licensing lending institutions. In the overall plan, the Central Bank of Armenia and the Erevan Stock Exchange assumed central roles in redirecting the flow of resources toward production of consumer goods. And government budgeting began diverting funds from military to civilian production support, a step advertised as the beginning of the transition from a command to a market economy. This process included the resumption of privatization of state enterprises, which had ceased in mid-1992, including full privatization of small businesses and cautious partial privatization of larger ones. In mid-1994 the value of the dram stabilized, and industrial production increased somewhat. As another winter approached, however, the amount of goods and food available to the average consumer remained at or below subsistence level, and social unrest threatened to increase.

In September Armenia negotiated terms for the resumption of natural gas deliveries from its chief supplier, Turkmenistan, which had threatened a complete cutoff because of outstanding debts. Under the current agreement, all purchases of Turkmen gas were destined for electric power generation in Armenia. Also in September, the IMF offered favorable interest rates on a loan of US$800 million if Armenia raised consumer taxes and removed controls on bread prices. Armenian officials resisted those conditions because they would further erode living conditions.

Thus in mid-1994 Armenia, blessed with strong leadership and support from abroad but cursed with a poor geopolitical position and few natural resources, was desperate for peace after the Karabakh Armenians had virtually won their war for self- determination. With many elements of post-Soviet economic reform in place, a steady flow of assistance from the West, and an end to the Karabakh conflict in sight, Armenia looked forward to a new era of development.

AZERBAIJAN

Azerbaijan, the easternmost and largest of the Transcaucasus states in size and in population, has the richest combination of agricultural and industrial resources of the three states. But Azerbaijan's quest for reform has been hindered by the limited contact it had with Western institutions and cultures before the Soviet era began in 1922.

Although Azerbaijan normally is included in the three-part grouping of the Transcaucasus countries (and was so defined politically between 1922 and 1936), it has more in common culturally with the Central Asian republics east of the Caspian Sea than with Armenia and Georgia. The common link with the latter states is the Caucasus mountain range, which defines the topography of the northern and western parts of Azerbaijan. A unique aspect of Azerbaijan's political geography is the enclave of the Nakhichevan Autonomous Republic, created by the Soviet Union in 1924 in the area between Armenia and Iran and separated from the rest of Azerbaijan by Armenian territory. In 1924 the Soviet Union also created the Nagorno-Karabakh Autonomous Region within Azerbaijan, an enclave whose population was about 94 percent Armenian at that time and remained about 75 percent Armenian in the late 1980s.

Beginning in the last years of the Soviet Union and extending into the 1990s, the drive for independence by Nagorno-Karabakh's Armenian majority was an issue of conflict between Armenia, which insisted on self-determination for its fellow Armenians, and Azerbaijan, which cited historical acceptance of its sovereignty whatever the region's ethnic composition. By the 1991 independence struggle was an issue of de facto war between Azerbaijan and the Karabakh Armenians, who by 1993 controlled all of Karabakh and much of adjoining Azerbaijan.

The population of Azerbaijan, already 83 percent Azerbaijani before independence, became even more homogeneous as members of the two principal minorities, Armenians and Russians, emigrated in the early 1990s and as thousands of Azerbaijanis immigrated from neighboring Armenia. The heavily urbanized population of Azerbaijan is concentrated around the cities of Baku, Gyandzha, and Sumgait.

Like the other former Soviet republics, Azerbaijan began in 1991 to seek the right combination of indigenous and "borrowed" qualities to replace the awkwardly imposed economic and political imprint of the Soviet era. And, like Armenia and Georgia, Azerbaijan faced the complications of internal political disruption and military crisis in the first years of this process.

For more than 100 years, Azerbaijan's economy has been dominated by petroleum extraction and processing. In the Soviet system, Azerbaijan's delegated role had evolved from supplying crude oil to supplying oil-extraction equipment, as Siberian oil fields came to dominate the Soviet market and as Caspian oil fields were allowed to deteriorate. Although exploited oil deposits were greatly depleted in the Soviet period, the economy still depends heavily on industries linked to oil. The country also depends heavily on trade with Russia and other former Soviet republics. Azerbaijan's overall industrial production dropped in the early 1990s, although not as drastically as that of Armenia and Georgia. The end of Soviet-supported trade connections and the closing of inefficient factories caused unemployment to rise and industrial productivity to fall an estimated 26 percent in 1992 acute inflation caused a major economic crisis in 1993.

Azerbaijan did not restructure its agriculture as quickly as did Armenia and Georgia inefficient Soviet methods continued to hamper production, and the role of private initiative remained small. Agriculture in Azerbaijan also was hampered by the conflict in Nagorno-Karabakh, which was an important source of fruits, grain, grapes, and livestock. As much as 70 percent of Azerbaijan's arable land was occupied by military forces at some stage of the conflict.

In spite of these setbacks, Azerbaijan's economy remains the healthiest among the three republics, largely because unexploited oil and natural gas deposits are plentiful (although output declined in the early 1990s) and because ample electric-power generating plants are in operation. Azerbaijan has been able to attract Western investment in its oil industry in the post-Soviet years, although Russia remains a key oil customer and investor. In 1993 the former Soviet republics remained Azerbaijan's most important trading partners, and state bureaucracies still controlled most foreign trade. Political instability in Baku, however, continued to discourage Turkey, a natural trading partner, from expanding commercial relations.

The political situation of Azerbaijan was extremely volatile in the first years of independence. With performance in Nagorno- Karabakh rather than achievement of economic and political reform as their chief criterion, Azerbaija 2nis dnis deposed presidents in 1992 and 1993, then returned former communist party boss Heydar Aliyev to power. In 1992, in the country's first and only free election, the people had chosen Abulfaz Elchibey, leader of the Azerbaijani Popular Front (APF), as president. Meanwhile, the Azerbaijani Communist Party, formally disbanded in 1991, retained positions of political and economic power and was key in the coup that returned Aliyev to power in June 1993. Former communists dominated policy making in the government Aliyev formed after his rubber-stamp election as president the following October. However, the APF remained a formidable opposition force, especially critical of any sign of weakness on the Nagorno- Karabakh issue.

During the transition period, the only national legislative body was the Melli-Majlis (National Council), a fifty-member interim assembly that came under the domination of former communists and, by virtue of postponing parliamentary elections indefinitely, continued to retain its power in late 1994. Aliyev promised a new constitution and democratic rule, but he prolonged his dictatorial powers on the pretext of the continuing military emergency. Work on a new constitution was begun in 1992, but the Nagorno-Karabakh conflict and political turmoil delayed its completion meanwhile, elements of the 1978 constitution (based on the 1977 constitution of the Soviet Union) remain the highest law of the land, supplemented only by provisions of the 1991 Act of Independence.

Azerbaijan's post-Soviet foreign policy attempted to balance the interests of three stronger, often mutually hostile, neighbors--Iran, Russia, and Turkey--while using those nations' interests in regional peace to help resolve the Karabakh conflict. The Elchibey regime of 1992-93 leaned toward Turkey, which it saw as the best mediator in Karabakh. Armenia took advantage of this strategy, however, to form closer ties with Russia, whose economic assistance it needed desperately. Beginning in 1993, Aliyev sought to rekindle relations with Russia and Iran, believing that Russia could negotiate a positive settlement in Karabakh. Relations with Turkey were carefully maintained, however.

Beginning in 1991, Azerbaijan's external national security was breached by the incursion of the Armenian separatist forces of Karabakh militias and reinforcements from Armenia. Azerbaijan's main strategy in this early period was to blockade landlocked Armenia's supply lines and to rely for national defense on the Russian 4th Army, which remained in Azerbaijan in 1991. Clashes between Russian troops and Azerbaijani civilians in 1991 and the collapse of the Soviet Union, however, led Russia to a rapid commitment for withdrawal of troops and equipment, which was completed in mid-1993.

Under those circumstances, a new, limited national armed force was planned in 1992, and, as had been done in Armenia, the government appealed to Azerbaijani veterans of the Soviet army to defend their homeland. But the force took shape slowly, and outside assistance--mercenaries and foreign training officers-- were summoned to stem the Armenian advance that threatened all of southern Azerbaijan. In 1993 continued military failures brought reports of mass desertion and subsequent large-scale recruitment of teenage boys, as well as wholesale changes in the national defense establishment.

In the early 1990s, the domestic and international confusion bred by the Karabakh conflict increased customs violations, white-collar crime, and threats to the populace by criminal bands. The role of Azerbaijanis in the international drug market expanded noticeably. In 1993 the Aliyev government responded to these problems with a major reform of the Ministry of Internal Affairs, which had been plagued by corruption and incompetence, but experts agreed that positive results required a more stable overall atmosphere.

In December 1993, Azerbaijan launched a major surprise attack on all fronts in Karabakh, using newly drafted personnel in wave attacks, with air support. The attack initially overwhelmed Armenian positions in the north and south but ultimately was unsuccessful. An estimated 8,000 Azerbaijani troops died in the two-month campaign, which Armenian authorities described as Azerbaijan's best-planned offensive of the conflict.

When the winter offensive failed, Aliyev began using diplomatic channels to seek peace terms acceptable to his constituents, involving Russia as little as possible. Already in March, the chairman of the Azerbaijani parliament had initiated a private meeting with his opposite number from Armenia, an event hailed in the Azerbaijani press as a major Azerbaijani peace initiative. Official visits by Aliyev to Ankara and London early in 1994 yielded little additional support for Azerbaijan's position. (Turkey remained suspicious of Aliyev's communist background.)

At this point, Azerbaijan reasserted its support for the CSCE peace plan, which would use international monitors rather than military forces to enforce the cease-fire in Karabakh. Perhaps with the goal of avoiding further military losses, Aliyev approved in May the provisional cease-fire conditions of the Bishkek Protocol, sponsored by the CIS. That agreement, which softened Azerbaijan's position on recognizing the sovereignty of Nagorno-Karabakh, was subsequently the basis for terms of a true armistice.

Azerbaijan's official position on armistice conditions remained unchanged, however, during the negotiations of the summer and fall of 1994, in the face of Armenia's insistence that only an armed peacekeeping force (inevitably Russian) could prevent new outbreaks of fighting. During that period, sporadic Azerbaijani attacks tended to confirm Armenia's judgment. At the same time, Aliyev urged that his countrymen take a more conciliatory position toward Russia. Aliyev argued that the Soviet Union, not Russia, had sent the troops who had killed Azerbaijanis when they arrived to keep peace with Armenia in 1990 and that Azerbaijan could profit from exploiting rather than rejecting the remaining ties between the two countries.

In May Aliyev signed the NATO Partnership for Peace agreement, giving Azerbaijan the associate status that NATO had offered to East European nations and the former republics of the Soviet Union in late 1993. The same month, Aliyev received a mid- level United States delegation charged with discussing diplomatic support for the Nagorno-Karabakh peace process, Caspian Sea oil exploration by United States firms, and bilateral trade agreements.

In July Aliyev extended his diplomacy to the Muslim world, visiting Saudi Arabia and Iran in an effort to balance his diplomatic contacts with the West. Iran was especially important because of its proximity to Karabakh and its interest in ending the conflict on its border. Iran responded to offers of economic cooperation by insisting that any agreement must await a peace treaty between Azerbaijan and Armenia.

In the fall of 1994, a seventeen-point peace agreement was drafted, but major issues remained unresolved. Azerbaijani concerns centered on withdrawal of Armenian forces from Azerbaijani territory and conditions that would permit Azerbaijani refugees to return home. (An estimated 1 million Azerbaijanis had fled to other parts of Azerbaijan or Iran from occupied territory.) The top priorities for Armenia were ensuring security for Armenians in Karabakh and defining the status of the region prior to the withdrawal of forces.

A second result of the failed winter offensive of 1993-94 was a new crackdown by the Aliyev government on dissident activity. Early in 1994, censors in the Main Administration for Protecting State Secrets in the Press sharply increased censorship of material criticizing the regime, and the government cut the supply of paper and printing plates to opposition newspapers. In May a confrontation between Aliyev loyalists and opponents in the Melli-Majlis resulted in arrests of opposition leaders and reduction in the number of members required for a quorum to pass presidential proposals.

The issue behind the May dispute 2was Awas Aliyev's handling of the Karabakh peace process. A variety of opposition parties and organizations claimed that the Bishkek Protocol had betrayed Azerbaijan by recognizing the sovereignty of Nagorno-Karabakh. A new coalition, the National Resistance Movement, was formed immediately after the May confrontation in the Mellis-Majlis. The movement's two principles were opposition to reintroduction of Russian forces in Azerbaijan and opposition to Aliyev's "dictatorship." By the end of the summer, however, the movement had drawn closer to Aliyev's position on the first point, and the announcement of long-delayed parliamentary elections to be held in the summer of 1995 aimed to defuse charges of dictatorship. Draft election legislation called for replacing the "temporary" Melli-Majlis with a 150-seat legislature in 1995.

In October 1994, a military coup, supported by Prime Minister Suret Huseynov, failed to topple Aliyev. Aliyev responded by declaring a two-month state of emergency, banning demonstrations, and taking military control of key positions. Huseynov, who had signed the Bishkek Protocol as Azerbaijan's representative, was dismissed.

Price and wage levels continued to reduce the standard of living in Azerbaijan in 1994. Between mid-1993 and mid-1994, prices increased by an average of about sixteen times from November 1993 to July 1994, the state-established minimum wage more than doubled. To speed conversion to a market economy, the ministries of finance and economics submitted plans in July to combine state-run enterprises in forms more suitable for privatization. Land privatization has proceeded cautiously because of strong political support for maintaining the Soviet- era state-farm system. In mid-1994 about 1 percent of arable land was in private hands, the bureaucratic process for obtaining private land remained long and cumbersome, and state allocation of equipment to private farmers was meager.

Meanwhile, in 1994 currency-exchange activity increased dramatically in Azerbaijani banks, bringing more foreign currency into the country. The ruble remained the most widely used foreign unit in 1994. In June, at the insistence of the IMF and the World Bank, the National Bank of Azerbaijan stopped issuing credit that lacked monetary backing, a practice that had fueled inflation and destabilized the economy.

The main hope for Azerbaijan's economic recovery lies in reviving exploitation of offshore oil deposits in the Caspian Sea. By 1993 these deposits had attracted strong interest among British, Norwegian, Russian, Turkish, and United States firms. Within a consortium of such firms, Russia would likely have a 10 percent share and provide the pipeline and the main port (Novorossiysk on the Black Sea) for export of Azerbaijan's oil. An agreement signed in September 1994 included United, British, Turkish, Russian, and Azerbaijani oil companies.

In the early 1990s, the development of Azerbaijan's foreign trade was skewed by the refusal of eighteen nations, including the United States, Canada, Israel, India, and the Republic of Korea (South Korea), to import products from Azerbaijan as long as the blockade of Armenia continued. At the same time, many of those countries sold significant amounts of goods in Azerbaijan. Overall, in the first half of 1994 one-third of Azerbaijan's imports came from the "far abroad" (all non-CIS trading partners), and 46 percent of its exports went outside the CIS. In that period, total imports exceeded total exports by US$140 million. At the same time, the strongest long-term commercial ties within the CIS were with Kazakhstan, Russia, Turkmenistan, and Ukraine.

Like Armenia, Azerbaijan was able to improve internal conditions only marginally while awaiting the relief of a final peace settlement in Karabakh. Unlike either of its Transcaucasus neighbors, however, Azerbaijan had the prospect of major large- scale Western investment once investment conditions improved. Combined with potential oil earnings, diplomatic approaches by President Aliyev in 1994 to a number of foreign countries, including all of Azerbaijan's neighbors, seemed to offer it a much-improved postwar international position. A great deal depended, however, on the smooth surrender of wartime emergency powers by the Aliyev government and on accelerating the stalled development of a market economy.

GEORGIA

Georgia possesses the advantages of a subtropical Black Sea coastline and a rich mixture of Western and Eastern cultural elements. A combination of topographical and national idiosyncracies has preserved that cultural blend, whose chief impetus was the Georgian golden age of the twelfth and early thirteenth centuries, during long periods of occupation by foreign empires. Perhaps the most vivid result of this cultural independence is the Georgian language, unrelated to any other major tongue and largely unaffected by the languages of conquering peoples--at least until the massive influx of technical loanwords at the end of the twentieth century.

Since independence, Georgia has had difficulty establishing solid political institutions. This difficulty has been caused by the distractions of continuing military crises and by the chronic indecision of policy makers about the country's proper long-term goals and the strategy to reach them. Also, like the other Transcaucasus states, Georgia lacks experience with the democratic institutions that are now its political ideal rubber- stamp passage of Moscow's agenda is quite different from creation of a legislative program useful to an emerging nation.

As in Azerbaijan, Georgia's most pressing problem has been ethnic separatism within the country's borders. Despite Georgia's modest size, throughout history all manifestations of a Georgian nation have included ethnic minorities that have conflicted with, or simply ignored, central power. Even in the golden age, when a central ruling power commanded the most widespread loyalty, King David the Builder was called "King of the Abkhaz, the Kartvelians, the Ran, the Kakhetians, and the Armenians." In the twentieth century, arbitrary rearrangement of ethnic boundaries by the Soviet regime resulted in the sharpening of various nationalist claims after Soviet power finally disappeared. Thus, in 1991 the South Ossetians of Georgia demanded union with the Ossetians across the Russian border, and in 1992 the Abkhaz of Georgia demanded recognition as an independent nation, despite their minority status in the region of Georgia they inhabited.

As in Armenia and Azerbaijan, influential, intensely nationalist factions pushed hard for unqualified military success in the struggle for separatist territory. And, as in the other Transcaucasus nations, those factions were frustrated by military and geopolitical reality: in Georgia's case, an ineffective Georgian army required assistance from Russia, the imperialist neighbor against whom nationalists had sharpened their teeth only three years earlier, to save the nation from fragmentation. At the end of 1993, Russia seemingly had settled into a long-term role of peacekeeping and occupation between Georgian and Abkhazian forces.

The most unsettling internal crisis was the failed presidency of Zviad Gamsakhurdia, once a respected human rights advocate and the undisputed leader of Georgia's nationalist opposition as the collapse of the Soviet Union became imminent. In 1991 Gamsakhurdia's dictatorial and paranoid regime, followed by the bloody process of unseating him, gave Georgia a lasting reputation for instability that damaged prospects for foreign investment and for participation in international organizations.

The failure of the one-year Gamsakhurdia regime necessitated a new political beginning that coincided with the establishment of Eduard Shevardnadze as head of state in early 1992. Easily the most popular politician in Georgia and facing chronically fragmented opposition in parliament, Shevardnadze acquired substantial "temporary" executive powers as he maneuvered to maintain national unity. At the same time, his hesitation to imitate Gamsakhurdia's 2 grab grab for power often left a vacuum that was filled by quarreling splinter parties with widely varied agendas. Shevardnadze preserved parts of his reform program by forming temporary coalitions that dissolved when a contentious issue appeared. Despite numerous calls for his resignation, and despite rampant government corruption and frequent shifts in his cabinet between 1992 and 1994, there were no other serious contenders for Shevardnadze's position as of late 1994.

Shevardnadze also used familiarity with the world of diplomacy to reestablish international contacts, gain sympathy for Georgia's struggle to remain unified, and seek economic ties wherever they might be available. Unlike Armenia and Azerbaijan, Georgia did not arouse particular loyalty or hostility among any group of nations. In the first years of independence, Shevardnadze made special overtures to Russia, Turkey, and the United States and attempted to balance Georgia's approach to Armenia and Azerbaijan, its feuding neighbors in the Transcaucasus.

The collapse of the Soviet Union changed Georgia's economic position significantly, although industrial production already was declining in the last Soviet years. In the Soviet system, Georgia's assignment was mainly to supply the union with agricultural products, metal products, and the foreign currency collected by Georgian tourist attractions. This specialization made Georgia dependent on other Soviet republics for a wide range of products that were unavailable after 1991. Neither diversification nor meaningful privatization was possible, however, under the constant upheaval and energy shortages of the early 1990s. In addition, powerful organized criminal groups gained control of large segments of the national economy, including the export trade.

After the January 1992 fall of Gamsakhurdia's xenophobic regime, the maintenance of internal peace and unity was a critical national security issue. Although some progress was made in establishing a national armed force in 1994 the paramilitary organizations--the Mkhedrioni (horsemen) and the National Guard-- remained influential military forces in the fall of 1994. The small size and the poor organization of those groups had forced the request for Russian troop assistance in late 1993, which in turn renewed the national security dilemma of occupation by foreign troops. Meanwhile, civilian internal security forces, of which Shevardnadze took personal control in 1993, gained only partial victories over the crime wave that accompanied Georgia's post-Soviet upheavals. A series of reorganizations in security agencies failed to improve the protection of individuals against random crime or of the economic system against organized groups.

Through most of 1994, the Abkhazian conflict was more diplomatic than military. In spite of periodic hostilities, the uneasy truce line held along the Inguri River in far northwestern Georgia (in the campaign of October 1993, Georgian forces had been pushed out of all of Abkhazia except the far northern corner). The role of the 3,000 Russian peacekeepers on the border, and their relationship with United Nations (UN) observers, was recognized by a resolution of the UN Security Council in July. Throughout that period, the issue of the return of as many as 300,000 Georgian refugees to Abkhazia was the main sticking point of negotiations. The Abkhaz saw the influx of so many Georgians as a danger to their sovereignty, which Georgia did not recognize, and the refugees' plight as a bargaining chip to induce further Georgian withdrawal. No settlement was likely before the refugee issue was resolved. Meanwhile, supporting the refugees placed additional stress on Georgian society.

A legal basis for the presence of Russian troops in Georgia had been established in a status-of-forces treaty between the two nations in January 1994. The treaty prescribed the authority and operating conditions of the Group of Russian Troops in the Caucasus (GRTC), which was characterized as on Georgian territory for a "transitional period." In the summer of 1994, high-level bilateral talks covered Georgian-Russian military cooperation and further integration of CIS forces.

The Georgian economy continued to struggle in 1994, showing only isolated signs of progress. At the beginning of the year, state monopolies were reaffirmed in vital industries such as tea and food processing and electric power. By May, however, after prodding from the IMF, Shevardnadze began issuing decrees that eased privatization conditions. This policy spurred a noticeable acceleration of privatization in the summer of 1994. When the new stimulus began, about 23 percent of state enterprises had been privatized, and only thirty-nine joint-stock companies had formed out of the more than 900 large firms designated for that type of conversion. A voucher system for collecting private investment funds, delayed by a shortage of hard currency, finally began operating. But the state economic bureaucracy, entrenched since the Soviet era, was able to slow the privatization process when dispersal of economic power threatened its privileged position in 1994.

Between mid-1993 and mid-1994, prices rose by an average of 300 percent, and inflation severely eroded the government- guaranteed minimum wage. (In August the minimum wage, which was stipulated in coupons [for value of the coupon--see Glossary], equaled US$0.33 per month.) Often wages were withheld for months because of the currency shortage. In September the government raised price standards sharply for basic food items, transportation, fuel, and services. Lump-sum payments to all citizens, designed to offset this cost, failed to reach many, prompting new calls for Shevardnadze's resignation. Under those conditions, most Georgians were supported by a vast network of unofficial economic activities.

In mid-1994 unemployment was estimated unofficially at 1.5 million people, nearly 50 percent of Georgia's working-age population. The exchange rate of the Georgian coupon stabilized in early 1994 after many months of high inflation, but by that time the coupon had been virtually displaced in private transactions by the ruble and the dollar. The national financial system remained chaotic--especially in tax collection, customs, and import-export operations. The first major state bank was privatized in the summer of 1994. In August parliament approved a major reform program for social welfare, pricing, and the financial system.

In July 1994, a Georgian-Russian conference on economic cooperation discussed transnational corporations and concluded some contracts for joint economic activities, but most Russian investors demanded stronger legal guarantees for their risks. Numerous Western firms established small joint ventures in 1994, but the most critical investment project under discussion sought to exploit the substantial oil deposits that had been located by recent Australian, British, Georgian, and United States explorations in the Black Sea shelf near Batumi and Poti. A first step in foreign involvement, an oil refinery near Tbilisi, received funding in July, but the Western firms demanded major reform of commercial legislation before expanding their participation.

Georgia experienced a major energy crisis in the winter of 1993-94 following the crisis, in mid-1994 Turkmenistan drastically reduced natural gas supplies because of unpaid debts. Some fuel aid was expected for the winter of 1994-95 from Azerbaijan, the EU, Iran, and Turkey. The output of the domestic oil industry increased sharply in mid-1994. As winter approached, Georgia also offered Turkmenistan new assurances of payment in return for resumption of natural gas delivery.

Georgia's communications system, a chronically weak infrastructure link that also had discouraged foreign investment, began integration into world systems in early 1994 when the country joined international postal, satellite, and electronic communications organizations. Joint enterprises with Australian, French, German, Turkish, and United States com 2municmunications companies allowed the upgrading of the national telephone system and installation of fiber-optic cables.

In the first half of 1994, the most frequent topic of government debate was the role of Russian troops in Abkhazia. By that time, opposition nationalist parties had accepted the Russian presence but rejected Abkhazian delays in allowing the return of refugees and Shevardnadze's tolerance of those delays. In May Shevardnadze overcame parliament's objections to new concessions to the Abkhaz by threatening to resign. The new agreement passed, and opposition leaders muted their demands for Shevardnadze's ouster in the belief that Russia was seeking to replace him with someone more favorable to Russian intervention. Nevertheless, in the fall of 1994 few Georgian refugees had returned to Abkhazia.

Shevardnadze's exercise of extraordinary executive powers remained a hot issue in parliament. One faction called for reduced powers in the name of democracy, but another claimed that a still stronger executive was needed to enforce order. In a July poll, 48 percent of respondents said the government was obstructing the mass media. Although the 1992 state of emergency continued to restrict dissemination of information, the Georgian media consistently presented various opposition views. Likewise, the Zviadists, Gamsakhurdia's supporters, although banned from radio and television, continued to hold rallies under the leadership of a young radical, Irakli Tsereteli.

In 1994 the government took steps to improve the internal security situation. In the latest of a long series of organizational and leadership shuffles, Shevardnadze replaced the Emergency Committee, which had been headed by former Mkhedrioni leader Jaba Ioseliani, with the Emergency Coordinating Commission, headed by Shevardnadze, and gave the commission a vague mandate to coordinate economic, political, defense, and law-enforcement matters. Ioseliani, whose command of the Mkhedrioni still gave him great influence, became a deputy head of the commission.

Shevardnadze's attempt to form a new, one-battalion Georgian army was delayed throughout the first half of 1994. The Ministry of Defense continued drafting potential soldiers (a very high percentage of whom evaded recruitment) for the Georgian armed forces and streamlining its organization. In September the national budget had not yet allocated wages, and sources of rations and equipment had not been identified--mainly because parliament had not passed the necessary legislation. Ministry of Defense plans called for the country's remaining state farms to be designated for direct military supply, as was the practice in the Soviet era. The disposition of existing paramilitary forces remained undecided as of late 1994.

The intelligence service had been reorganized in late 1993 to include elite troops mandated to fight drug smuggling and organized crime. In the spring of 1994, new agencies were formed in the State Security Service to investigate fiscal crimes and to combat terrorism. And in August 1994, the Ministry of Internal Affairs announced a major new drive against organized crime and drug traffickers throughout Georgia. Parliament and local jurisdictions offered indifferent support, however.

In 1994 Georgia began solving some of its most critical problems--laying a political base for a market economy, solidifying to a degree Shevardnadze's position as head of state, stabilizing inflation, and avoiding large-scale military conflict. But long-term stability will depend on comprehensive reform of the entire economy, eradication of the corruption that has pervaded both government and economic institutions, redirection of resources from the Abkhazian conflict into a civilian infrastructure suitable for international trade (and for major loans from international lenders), and, ultimately, finding political leaders besides Shevardnadze who are capable of focusing Georgians' attention on building a nation, rather than on advancing local interests. All those factors will influence the other major imponderable: Russia's long-term economic and political influence in Georgia, which increased greatly in late 1993 and in the first half of 1994. October 18, 1994

*          *          *

In the months following preparation of this manuscript, a number of significant events occurred in the three countries of the Transcaucasus. Cease-fires in two major conflicts, between Abkhazia and Georgia and between Armenia and Nagorno-Karabakh on one side and Azerbaijan on the other, remained in effect despite periodic hostilities. Although the two sets of peace talks continued to encounter fundamental differences, signs of compromise emerged from both in the first months of 1995, with the assistance of international mediators. All three countries continued efforts to stabilize their economies, reduce crime, and normalize political systems distorted by lengthy states of emergency.

At the beginning of 1995, Armenia had made the most progress toward economic recovery and political stability, although its population suffered another winter of privation because of Azerbaijan's fuel blockade. In December a summit of the Organisation on Security and Cooperation in Europe (OSCE, formerly the CSCE) had succeeded in merging OSCE and Russian peace efforts on Nagorno-Karabakh for the first time in an accord signed in Budapest. Russia was expected to become the head of the OSCE Minsk Group, which had been negotiating on behalf of Western Europe for the previous two years. In return, Russia accepted OSCE oversight of peacekeeping in the conflict zone. Armenia's President Ter-Petrosian reported the opening of three defense plants and full staffing of the Armenian Army in 1994, improving Armenia's national security position.

In November 1994, the World Bank announced loans to Armenia of US$265 million for infrastructural, agricultural, and energy applications. The bank cited Armenia's new reform program to control inflation and expand the private sector, together with the first increase in Armenia's gross national product ( GNP--see Glossary) since independence, as the reasons for this investment. In December the reform package went into effect. Expected to improve the standing of President Ter-Petrosian's embattled government, the reform included substantial reduction of the government's budget deficit, which had caused many workers to go unpaid and others, including teachers, to accept barely subsistence wages. The second major reform measure was ending government subsidies for basic staples, including bread and utilities--a stringency measure highly unpopular in the short term but calculated to attract more international assistance. The price of bread rose by ten times as soon as the new law went into effect. In late 1994 and early 1995, Armenia also continued reestablishing commercial ties with Iran by signing a series of three economic treaties covering taxation, free trade, and capital investments. Beginning in 1992, commercial activity between the two countries had doubled annually, and the pace was expected to accelerate markedly in 1995.

Although the Armenian government had made more extensive preparations for another winter of hardship under the Azerbaijani blockade, conditions for the average Armenian were barely better than the year before. In the winter of 1994-95, Armenia's chronic fuel shortage, and the rising social unrest caused by it, were relieved somewhat by a new fuel agreement with Georgia and Turkmenistan. The pact provided for substantial increases in delivery of Turkmen natural gas through the Georgian pipeline. Although this measure increased the daily electricity ration from one hour to two hours, long-term fuel increases depended on additional negotiations and of the payment of Armenia's substantial debt to Turkmenistan. In January the State Duma, the lower house of Russia's legislative body, was considering a major grant of credit to Armenia, which would be used in reopening the Armenian Atomic Power Station at Metsamor. The a 2rrangrrangement would be a major step in solidifying economic ties with Russia, which has also given technical assistance for the plant.

According to Armenian Ministry of Industry figures, 40 percent of the country's industrial 1994 output, worth a total of US$147 million, was sold for hard currency. Among the main customers were Iran, Syria, the United Arab Emirates, Cyprus, Belgium, and several North African countries. Although machinebuilding industries did not work at full capacity in 1994 because of a reduced market in Russia, industry was buoyed by the resumption of full production at the Nairit Chemical Plant after several years of shutdown. Nairit was expected to produce goods worth US$60 million per month in 1995.

Armenia's state commission for privatization vouchers began voucher distribution to the public in October 1994. At that point, vouchers for ten enterprises were available, with another fifty due for consideration in February 1995. High profitability was the chief criterion for listing enterprises for privatization. The Nairit plant and the Armenian Electrical Machine Plant, Armenia's largest and most profitable industrial facilities, were converted to private joint-stock enterprises in January 1995.

In Azerbaijan, hopes for economic improvement depended most on foreign investment in offshore oil deposits in the Caspian Sea. Those hopes were subdued somewhat by disagreements over the September 1994 agreement of Western, Russian, and Iranian oil interests to aid Socar, Azerbaijan's state oil company, to develop offshore deposits in the Caspian Sea.

Throughout the last months of 1994, Russia insisted that its 10 percent share of the new deal was unfair on the grounds that all Caspian countries should have equal access to Caspian resources. Russia also continued strong opposition to a new pipeline through Iran to Turkey, which the Western partners favored. The Western firms were dismayed by Azerbaijan's offer of 25 percent of its oil deal to Iran, by the political uncertainty that seemed to escalate in Azerbaijan after the oil deal was signed, and by the rapid deterioration of existing Caspian fields, many of which were deserted in early 1995. Experts agreed an important determinant of Azerbaijan's profit from the agreement would be the maintenance of world oil prices.

In December 1994, Russia's military occupation of its separatist Chechen Autonomous Republic closed the main rail line from Russia, the chief trade route to other CIS republics and elsewhere. Replacement trade routes were sought through Iran, Turkey, and the United Arab Emirates. At the same time, hyperinflation continued (the value of the manat had dropped to 4,300 per US$1 at the end of 1994, down from 120 manats per US$1 in October 1993), spurred by full liberalization of prices to conform with IMF credit requirements. The 1995 budget deficit equaled 20 percent of the gross domestic product ( GDP--see Glossary). Foreign credit, especially loans from Turkey, was being used to provide food and social services--needs exacerbated by the continuing influx of Karabakh refugees. Economic reform, meanwhile, was delayed by more immediate concerns. Most industries were operating at about 25 percent of capacity in the winter of 1994-95.

In the last months of 1994, Russia struggled to maintain influence in Azerbaijan. Its position was threatened by approval of the multinational Caspian oil deal in September and by the Azerbaijani perception that the West was restraining Armenian aggression in Karabakh. In November President Aliyev met with Russia's President Yeltsin, who offered 300,000 tons of Russian grain and the reopening of Russian railroad lines in an apparent effort to optimize Russia's influence throughout the Transcaucasus. Azerbaijani opposition parties, led by the Azerbaijani Popular Front (APF), continued to predict that Aliyev's overtures to Russia would return Russia to a dominant position in Azerbaijani political and economic affairs. Experts predicted, however, that Russia would continue to play a vital economic role at the end of 1994, about 60 percent of Azerbaijan's trade turnover involved Russia.

In early 1995, the issue of Nagorno-Karabakh's status continued to stymie the peace talks jointly sponsored in Moscow by the OSCE and Russia under the Budapest agreement of November 1994. Although Azerbaijan had signed several agreements with Nagorno-Karabakh as a full participant, the extent of the region's autonomy remained a key issue, as did the terms of the liberation of Azerbaijan's Lachin and Shusha regions from Armenian occupation. The Azerbaijani position was that the principals of the negotiations were Armenia and Azerbaijan, with the respective Armenian and Azerbaijani communities in Nagorno- Karabakh as "interested parties." (At the end of 1994, an estimated 126,000 Armenians and 37,000 Azerbaijanis remained in the region.) Azerbaijan lodged an official protest against Russian insistence that the Karabakh Armenians constituted a third principal. In February presidents Aliyev and Ter-Petrosian met with presidents Nursultan Nazarbayev of Kazakhstan and Shevardnadze of Georgia in Moscow and expressed optimism that the nine-month cease-fire would hold until complete settlement could be reached. Nazarbayev and the presidents of Russia and Ukraine offered to be guarantors of stability in Nagorno-Karabakh if Azerbaijan would guarantee the region's borders.

After the unsuccessful coup against him by Prime Minister Suret Huseynov in October 1994, Azerbaijan's President Heydar Aliyev maintained his position. Despite loud opposition from the APF and other parties, Aliyev appeared to occupy a strong position at the beginning of 1995. In early 1995, friction developed between Aliyev and Rusul Guliyev, speaker of the Melli- Majlis (National Council), each accusing the other of responsibility for worsening socioeconomic conditions. Former president Abulfaz Elchibey of the APF remained a vocal critic of Aliyev and had a substantial following.

In Georgia, the unresolved conflict with the Abkhazian Autonomous Republic remained the most important issue. The repatriation of Georgian refugees to Abkhazia, a process conducted very slowly by Abkhazian authorities in the early autumn of 1994, ended completely between November 1994 and January 1995. Opposition parties in Georgia, especially the National Liberation Front led by former Prime Minister Tengiz Sigua, increased their pressure on the government to take action, likening Abkhazia to Russia's secessionist Chechen Autonomous Republic, which Russia invaded in December 1994. (In fact, the official position of the Shevardnadze government supported the Russian move, both because of the parallel with Abkhazia and because of the need for continued Russian military monitoring of the cease-fire.) In January an attempted march of 1,400 armed Georgian refugees into Abkhazia was halted by Georgian government troops, and organizer Tengiz Kitovani, former minister of defense, was arrested for having organized the group. Although the UN adopted resolutions in January condemning the Abkhazian refugee policy, UN officials saw little hope of a rapid change in the situation in 1995.

The issue of human rights continued to dog the Shevardnadze administration in late 1994 and early 1995. In February 1995, the Free Media Association of Georgia, which included most of the country's largest independent newspapers, officially protested police oppression and confiscation of newspapers. Newspaper production had already been restricted since the beginning of winter because of Georgia's acute energy shortage.

The Georgian political world was shocked by the assassination in December 1994 of Gia Chanturia, leader of the moderate opposition National Democratic Party and one of the country's most popular politicians. Responsibility for the act was not established. Chanturia's death escalated calls for resignation of the Cabinet of Ministers, an outcome made more likely by the parliament's failure to pass Shevardnadze's proposed 1995 budget and by continue dd factfactionalism within the cabinet.

An important emerging figure was Minister of Defense Vardiko Nadibaidze, an army general entrusted in 1994 with finally developing a professional Georgian military force that would reduce reliance on outside forces (such as Russia's) to protect national security. At the end of 1994, Georgian forces were estimated at 15,000 ground troops, 3,000 air and air defense personnel, and 1,500 to 2,000 in the coastal defense force.

Economic reform continued unevenly under the direction of Vice Premier for Economics Temur Basilia. By design, inflation and prices continued to rise in the last months of 1994, and rubles and dollars remained the chief currency instead of the Georgian coupon. In a November 1994 poll, one-third of respondents said they spent their entire income on food. Distribution of privatization vouchers among the population was scheduled to begin in mid-1995. In November 1994, more than 1,500 enterprises had been privatized, most of them classified as commercial or service establishments. A group of Western and Japanese donors pledged a minimum of US$274 million in credits to Georgia in 1995, with another US$162 million available pending "visible success" in economic reform.

In Geneva, peace talks between the Georgian government and the Abkhazian Autonomous Republic reached the eighteen-month mark the major points of disagreement continued to be the political status of Abkhazia and the repatriation of Georgian refugees. The Abkhazian delegation insisted on equal status with Georgia in a new confederation. The Russian and UN mediators proposed a federal legislature and joint agencies for foreign policy, foreign trade, taxation, energy, communications, and human rights, providing Abkhazia substantially more autonomy than it had had when Georgia became independent but leaving open the question of relative power within such a system. In early February 1995, preliminary accord was reached on several points of the mediators' proposal.

As 1995 began, prospects for stability in the Transcaucasus were marginally better than they had been since the three countries achieved independence in 1991. Much depended on continued strong leadership from presidents Aliyev, Shevardnadze, and Ter-Petrosian, on a peaceful environment across the borders in Russia and Iran, and on free access to the natural resources needed to restart the national economies.

February 28, 1995
Glenn E. Curtis

Data as of March 1994