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The wannabe nation of Nagorno-Karabakh

With a flag, parliament, and prime minister, this 'country' is all dressed up but has nowhere to go.

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Nagorno-Karabakh's relationship to Armenia is, to say the least, complicated. Officially, even Armenia doesn't recognize Karabakh's independence. In practice, it veers between treating it as a sovereign nation and a constituent part of itself.

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But the relationship between the leaders of Armenia and Karabakh is cozy: Armenian President Robert Kocharian was formerly the president of Nagorno-Karabakh. Armenian prime minister and long-time defense minister, Serzh Sarkisian, is Karabakh-born and headed the enclave's military effort during the war with Azerbaijan. And Karabaki officials carry Armenian passports because any issued by their own government would be of little use crossing any international border.

Officially, Mr. Sargsyan says, no Armenian troops serve in Karabakh or the occupied territories of Azerbaijan, also taken during the war. But on the streets of Yerevan, stop a young Armenian man on the street and the odds are that he's recently done military service in Nagorno-Karabakh. Indeed, Nagorno-Karabakh boasts a standing army of 25,000 – astounding, if true, because that's nearly a quarter of its population.

In Stepanakert signs of war have been largely erased. Streets and sidewalks are smooth and undamaged. Laundry flutters from the windows of nearly every building. In the gray morning light, it isn't exactly cheery, but it looks no worse than any other post-Communist metropolis.

"Almost every building had traces of war," insists presidential adviser, Edik Atanesian. "Back then, almost no buildings had glass in their windows. All the windows were just covered in plastic."

Even just a few years ago, Stepanakert suffered from massive water and electricity shortages. But in the capital, at least, those problems have been largely solved. The only ruins visible now are those of a silk-production factory, bombed during the war, which Mr. Atanesian says is being rebuilt as a cultural center.

It's in the government district though, near the president's office, that a true building boom is under way. One new private bank already does a bustling business; a Swiss-Armenian banking venture is rising nearby. Two new hotels are also sprouting, one being built by Russian Armenians, the other by ethnically Armenian investors from Switzerland and the US. Who will fill the hotels is a point of extreme optimism here because there's no airport (international flights can't land in the unrecognized state). Last year was Karabakh's most successful as a budding tourist destination: a grand total of 4,000 visitors came, an average of 11 a day.

The most impressive new structure is the new parliament. The dome looks like a bird cage under construction (it's actually complete) and workers are installing the seats where Karabakh's 33 legislators will soon sit.

Karabakh's officials are all desperate to point out how they've built the trappings of a legitimate democratic state, even in the absence of international recognition. There's the parliament. The flag. A national anthem. Government ministries. On July 19, there will be presidential elections.

But still, there is no peace and no international recognition, and the young see little future. In a dim coffee house with a hefty, Russian-speaking waitress, 16-year-old Levon Grigoryian and his friends found themselves short of cash – a chronic situation, he says.

"The problem is they all want to stay here," he says of his friends, as they debate with the cafe owner. "But there are no possibilities, no jobs."

Back in Yerevan, Karabakh's president, Arkady Ghoukassian, is visiting as a guest of the Armenian government, staying in an ornate former KGB guesthouse. He says Karabakh wants peace and recognition, but not at any price.

"Of course we want to end this no war/no peace situation. The sooner we get a legal end to the war the better," he says. "But we understand [that] for the time being, this is a long road. We will not compromise on our principles, even if it lasts for one or 200 years.

"We paid too big a price for this independence."