Ethnic Conflict in Ex-Soviet Region Keeps Riches out of Reach Fierce Rivalry over Nagorno-Karabakh Denies Armenians and Azeris the Wealth of Their Oil. Second in a Four-Part Series on the Caucusus Nations. Series: CAUCASUS NATIONS. Second in a Four-Part Series on the Caucusus Nations. Next: How New Nations in the Caucasus Survive in Russia's Shadow. Part 1 Ran May 30

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WHEN the Russian Army marched through Moscow last month to mark the 50th anniversary of victory over Nazi Germany, a miniature version of the same martial display strutted across the central square of this mountainous city.

But here, May 9 was more celebrated as the day Armenians captured the resort city of Shusha three years ago, driving their Azeri overlords out of their last stronghold in Nagorno-Karabakh -- a rocky region within Azerbaijan that is populated and now controlled largely by Armenians.

Nagorno-Karabakh has been the focus of a seven-year-long war between Armenians and Azeris over the status of the territory, and is the most serious ethnic conflict among the former Soviet states.

During the celebration, units of Armenians in the Karabakh army marched, kicking their legs stiffly, their Kalashnikov automatic rifles gripped to their chests. On a balcony stood Robert Kocharian, the newly elected "president" of the self-styled Republic of Nagorno-Karabakh.

Respite, but no progress

The guns are now silent, thanks to a year-long cease-fire. Since an agreement in Budapest last December, a joint Russian-Western mediation effort under the Organization for Security and Cooperation in Europe (OSCE) has held round after round of peace talks.

But the respite in killing has brought little sign of progress at the negotiating table: The position of the Armenians in Karabakh has stiffened as they further institutionalize their mini-state. At the same time, the government of Azerbaijan seems determined to gain a victory over Nagorno-Karabakh at the conference table that they have been denied on the battlefield.

"We had a marvelous opportunity that unfortunately remains an opportunity," laments a senior Western diplomat in Baku, the capital of Azerbajian. "We have not moved beyond where we were before Budapest."

The lack of progress over Karabakh is mirrored elsewhere in the Transcaucusus, a region bedeviled by the scourge of ethnic conflict. In Georgia, a civil war with a separatist movement in the region of Abkhazia has also been halted by a Russian and United Nations-mediated cease-fire. But as in the Karabakh case, the end of fighting has only frozen the military status quo.

Without ethnic wars, many observers feel the three nations of this region -- Armenia, Azerbaijan, and Georgia -- would be the most prosperous in the former Soviet Union. Rich deposits of oil in the Caspian Sea offer potential wealth to the entire region.

Some Western analysts and governments talk eagerly of a "peace pipeline," an $8 billion international oil deal signed last year that would bind the region in lucrative cooperation.

But the vision of wealth is not enough to allow for quick, neat solutions imposed from above.

"Many people ... think that Armenia is so interested in the pipeline passing through its territory that it is ready to make certain concessions on the Karabakh issue," Armenian President Levon Ter-Petrosyan told the Monitor. "It's a very simplistic {idea}."

15,000 lives

The Karabakh conflict began in 1988 with a mass movement of Armenians seeking to separate the Armenian-populated enclave of Nagorno-Karabakh from the control of Azerbaijan. The ensuing war claimed at least 15,000 lives and left more than a million refugees on both sides.

The Armenian republic insists that the conflict is between Azerbaijan and the Armenians of Nagorno-Karabakh, although the fighting has at times involved regular Armenian forces, and Armenia supports the Karabakh army and government.

Since 1993, the Karabakh forces have controlled almost all of Nagorno-Karabakh and have seized a large swath of territory to the west and south.

Mediation efforts over the past three years have been stymied by the divide between the West and Russia. …

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