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].''
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. Moscow has until recently largely pursued its own peace plan, which would place Russian peacekeepers on the ground. But Azerbaijan, which has ousted Russian forces from its soil, backs an international force organized by OSCE. At Budapest, with the Chechnya war looming and the United States pressing, the Kremlin acquiesced to a united effort under the OSCE auspices.
The OSCE negotiations, according to a Russian-drafted plan, were to proceed from the cease-fire to a political agreement that would include withdrawing Armenian forces from territory outside Karabakh and lifting Azerbaijan's economic blockade against Armenia.
But the talks have stalled since early this year over the ultimate status of Karabakh. Azerbaijan has refused to accept the Karabakh representatives as a full party to the talks.
Azeri officials, meanwhile, argue that the Russians are quietly trying to sabotage the Budapest agreement, which gives them less influence in the region. ''That is why they ordered Kocharian to elect himself as president [of Nagorno-Karabakh], to complicate the situation, and to complicate the achievment of peace,'' says Vafa Guluzade, the chief Azeri negotiator.
Western diplomats also say Russian mediators are in no hurry to see the talks move ahead. But they also fault the Azeris for digging in their heels at this point.
''They think anything you say means recognizing Nagorno-Karabakh as an independent state,'' comments the Western diplomat in Baku. ''It doesn't allow negotiations to move ahead.''
But the Armenians also show little desire to make concessions, including refusing to sit with a representative of the refugee Azeri community.
''They should solve the problem with us, not with mediators,'' says Arkady Ghukasian, the foreign minister of Nagorno-Karabakh. They accuse the Azeris of seeking to get the outside powers to deliver the return of Azeri territory and guarantee Azeri sovereignty. After Russia failed to deliver those goods, Azerbaijan now looks to the West, enticed by the lure of the massive deposits of Caspian oil, the Armenians say.
''[Azerbaijan President] Heidar Aliyev is always trying to put the responsibility on someone else,'' Karabakh leader Kocharian told the Monitor. ''When he joined the Commonwealth of Independent States, he believed Moscow would solve the problem for them. Now that he has signed the oil contract, Aliyev believes the Big Seven [oil companies] will solve the problem. When we talk directly, we have the feeling they understand the war is over and they lost. But when we are in a group, they say something else.''
In the Armenian capital of Yerevan, the cease-fire has brought some welcome signs of economic upturn after years of suffering. This seems to have encouraged the belief, one not shared by Western economic experts, that this improvement can be sustained for an extended period, without a permanent peace.
''Permanent or not permanent, still it is peace,'' says President Ter-Petrosyan. ''Naturally a permanent peace will multiply our prospects. It means full opening of communications, both with Azerbaijan and with Turkey.... But now I am such an optimist that I believe that if this temporary peace is preserved and military hostilities are not resumed, our development will be permanent.''
Armenian officials are confident as well that Azerbaijan is not capable of resuming the war, even while it resists the concessions that would come with direct talks.
But Western diplomatic sources worry that this deadlock will inevitably be broken by resumed fighting, even triggered by some uncontrolled incident. ''We could be back in the soup again,'' the Western diplomat worries.
* Next: How new nations in the Caucasus survive in Russia's shadow. Part 1 ran May 30.