According to one legend, the name "Azerbaijan" descends from the Atropathena state which appeared in the 5th century B.C. in the southern part of Azerbaijan after the collapse of Alexander the Great's empire. Atropates, a Persian general in Alexander's command, whose name means "protected by fire," lent his name to the region when Alexander made him its governor. Another legend explains that Azerbaijan's name derives from the Persian words meaning "the land of fire," a reference either to the natural burning of surface oil deposits or to the oil-fueled fires in temples of the once-dominant Zoroastrian religion.

Azerbaijan is a country of ancient history and culture, which is witnessed by numerous relics of the past. The first data about the existence of mankind dates to the Neolithic Age. There are signs that very ancient human settlements were in this region, the more visible of them being the rocky region Gobustan. Photographs made of Gobustan rock drawings attract the attention of scientists from various countries. It is situated between the south-eastern slope -of the Greater Caucasian Range and the Caspian Sea.

These prehistoric art monuments reflect culture, economy, world outlook, customs and traditions of ancient Azerbaijan people. The stages of development of tile rock carvings of Gobustan can be distinctly traced based on the diversity of subjects, style, structure and techniques of the drawings, as well as from the fact that since the oldest times up to the recent centuries they were depicted one upon another. The themes and the appearance of these art specimens are closely associated with the people's life.

The carvings depicting male and female figures are characteristic of Gobustan. Men in the drawings are shown wearing the hunter's outfit with a bow and arrows.The men are tall with slim bodies girdled with belts, with developed musicles. Women in the drawings emphasize busts and thighs. A woman is depicted as the symbol of good and prosperity, as the continuer of human race.The rock carvings of Gobustan also show animals, which inhabited this place during the last 10 millenia, i.e. djeirans, wild buffaloes, goats, deer, wild pigs, horses, lions, etc. The carvings of birds, fish, snakes, lizards and various insects can also be seen here. The drawings with animals are carved mainly by rising contour line with the view from aside. There are also pictures made by friction, scraping with paint application. The oldest are the drawings representing real animals. They are shown as the hunter's quarry, totems of ancient tribes and other life sources.

Along with versatile subject-matter, the ancient rock carvings abound in compositional scenes depicting a host of life spheres of human activities. In them, one can see Azerbaijan people's round dance "Yally", the collective labour process, hunting scenes with various kinds of weapons, sailing on the "Tigris" type boats, harvest-time, animal fights, the attacks of the beasts of prey upon the herbivorous animals, etc.It can be assumed, that the collective dances, of many peoples of the world which are still being performed now have been originated from the round dance "Yally" of the prehistoric hunters. "Yally" was performed to the accompaniment of the oldest musical instrument "Gaval dashem".

As a crossroads of tribal migration and military campaigns, Azerbaijan underwent a series of invasions and was part of several larger jurisdictions before the beginning of the Christian era. In the ninth century B.C., the seminomadic Scythians settled in areas of what is now Azerbaijan. A century later, the Medes, an ancient Indo-European people, ancestors of the modern Kurds, established an empire that included southernmost Azerbaijan. In the sixth century B.C., the Archaemenid Persians, under Cyrus the Great, took over the western part of Azerbaijan when they subdued the Assyrian Empire to the west.

The roots of present day Azerbaijan trace back to the fourth century B.C., with the emergence of the two kingdoms of Caucasian Albania in the north, and the Atropatan in the south. In 330 B.C., Alexander the Great absorbed the entire Archaemenid Empire into his holdings defeated Darius III at Isso, Granic and Erbil, and later reached the heart of the Persian empire, destroying Persepolis itself. The king of minor Media, Atropat, seized this moment to proclaim his country's independence. The lands north of the Araz river were called Atropatene, after him.

Between the first and third centuries A.D., the Romans conquered the Scythians and Seleucids, who were among the successor groups to the fragmented empire of Alexander. The Romans annexed the region of present-day Azerbaijan and called the area Albania and Kabala was the capital of Caucasian Albania. As Roman control weakened, the Sasanid Dynasty reestablished Persian control. In mid 600 A.D. Albanian prince Jevanshir led the apprising against Persian rule in Azerbaijan(Albania). In 656 A.D. Khazar Khaganate was formed but in 660 A.D. Albanian prince Jevanshir defeats Khazars in Albania(Azerbaijan).

In 661 A. D. this region was conquered by Arabian forces who introduced Islam. In 816 A.D. people in western Azerbaijan, headed by Babek, rose in arms against conquerors. This revolt was cruelly suppressed in 837. In early X century witnessed the formation of feudal states in Azerbaijan due to the fragmentation of Arab Caliphate. After the collapse of the Arabian empire in the 11th century (Abbasides dynasty) tribes of the Turks-Seldjuks took control over the region. in 1136 A.D the Atabek state of Azerbaijan was created under Seljuk Shams ad-din Ildeniz(with capital in Barda). This period was marked by mass migrations of Turks to Azerbaijan. The Seljuks brought with them the Turkish language and Turkish customs.

By the thirteenth century, the basic characteristics of the Azerbaijani nation had been established. Several masterpieces of Azerbaijani architecture and literature were created during the cultural golden age that spanned the eleventh through the thirteenth centuries. Among the most notable cultural monuments of this period are the writings of Nezami Ganjavi and the mausoleum of Momine-Khatun in Nakhichevan.

Under the leadership of Hulegu Khan, Mongols invaded Azerbaijan in the early thirteenth century; Hulegu ruled Azerbaijan and Persia from his capital in the Persian city of Tabriz. At the end of the fourteenth century, another Mongol, Timur (also known as Tamarlane), invaded Azerbaijan, at about the same time that Azerbaijani rule was reviving under the Shirvan Dynasty. Shirvan shah Ibrahim I ibn Sultan Muhammad briefly accepted Timur as his overlord. (In earlier times, the Shirvan shahs had accepted the suzerainty of Seljuk overlords.) Another architectural treasure, the Shirvan shahs' palace in Baku, dates from this period.

In the Middle Ages Azerbaijan was divided into separate khanates. There were the following khanates: Yerevan, Karabagh, Nakhichevan, Ganja, Shemakha, Sheki, Baku, Guba, Derbent, Salian sultanate, Javad khanate, Talysh. In the southern Azerbaijan: Tebriz, Urmiye, Ardebil Khoi, Karadagh, Serab, Maraga and Maku khanates. Several attempts were made to unite them. In 1410 A.D. Southern Azerbaijan becomes part of Kara-Goyunlu state with capital in Tabriz, under Kara-Yusuf. While Shirvanshahs controlled the Northern Azerbaijan Kara-Goynlu controlled the Southern Azerbaijan, Iraq, Fars and part of Eastern Iran. In 1468 A.D. Kara-Goynly state collapsed under Jahanshah and Ak-Goyunlu state was formed with capital in Tabriz, under the rule of Uzun Hasan. Its boundaries included Azerbaijan south of Kura, Armenia, Iraq, Luristan, Fars, Kerman. The most successful was Shah Ismail, founder of Safevid dynasty, statesman, general and poet who lived in the 15th - beginning of 16th century. His Empire strethched from Syria and Eastern Anatolia in the West to India and Afganistan in the East. From Derbent in the North to Arabian Gulf in the south. It included entire Caucausus except Western Georgia. He established Azeri Turkish as a state language of the Safavid Empire and was respected by European Powers of that time. Beginning from 16th century, Azerbaijan, due to its advantageous territorial position, again became the cause of cruel fighting between Persian, Ottoman and Russian empires. In 1736 Safavid dynasty ended and reign of Nadir -Shah and Qajars state started. In 1747 Shah Nadir was killed in a coup. His empire fell into chaos, effectively ending Persia's direct control over Azerbaijan. Quba's ruler, Fatali Khan, tried to create a unified Azeri state by annexing the neighbouring Khanates, but Russia ended his dreams. In 1795 Russian troops took Shemakha and vast territories in northern Azerbaijan

Beginning in the early eighteenth century, Russia slowly asserted political domination over the northern part of Azerbaijan, while Persia retained control of southern Azerbaijan. In the nineteenth century, the division between Russian and Persian Azerbaijan was largely determined by two treaties concluded after wars between the two countries. The Treaty of Gulistan (1813) established the Russo-Persian border roughly along the Aras River, and the Treaty of Turkmanchay (1828) awarded Russia the Nakhichevan khanates (along the present-day border between Armenia and Turkey) in the region of the Talysh Mountains. The land that is now Azerbaijan was split among three Russian administrative areas--Baku and Elizavetpol provinces and part of Yerevan Province, which also extended into present-day Armenia. In 1830 khanates were abolished in Yerevan and the Armenian Oblast was created in place of Yerevan khanate. Over a million Armenians were brought to former Yerevan khanate and Karabagh from Ottoman Empire and Iran by the mid XIX century.

Beginning of XXth century became an important turnpoint in the history of North Azerbaijan and the Azeri nation. Events, conflicts, wars, and disorders that took place in this region between 1900 and 1917 are of big importance, and allow us to understand the processes that eventually led to demise of Russian imperial power in Transcaucasia and proclamation of the independent Republic of Azerbaijan in May 1918.

Political life practically did not exist in Azerbaijan from the time of Russian occupation in early 1800s until the beginning of XXth century. Over 80% of Azeris were peasants, about 5% were merchants. Russian Viceroy of the Caucasus expressed his satisfaction with the fact that there was no separatist movement among Muslim (Azeri) masses of Transcaucasia. However, the viceroy was also aware of national ideas growing in small Azeri educated class. As a tool to prevent these ideas from spreading into mostly religious masses, viceroy in his letters to the Russian Tsar proposed granting more freedom to exercise Islam among Azeris. This would increase already powerful influence of mullahs in the society, while keeping its backwardness. In Vorontsov's opinion, mullahs should be educated in Russian institutions, so that they could become the instruments of Russian imperialism in Caucasus.

The potential separatism of the Azerbaijanis was not the only source of trouble for Russian imperialism. In few years at the end of XIX century, the city of Baku suddenly became the world's greatest oil-producing center. Although many Azerbaijanis were peasants, few of them found employment in oil industry. Among the growing Azeri oil capitalists were H.Z. Tagiyev and Nagiyev family. The industrial boost of Baku in the beginning of XXth century also created a small but well-educated Azerbaijani middle class.

In the nineteenth century, Russian influence over daily life in Azerbaijan was less pervasive than that of indigenous religious and political elites and the cultural and intellectual influences of Persia and Turkey. During most of the nineteenth century, the Russian Empire extracted commodities from Azerbaijan and invested little in the economy. However, the exploitation of oil in Azerbaijan at the end of the nineteenth century brought an influx of Russians into Baku, increasing Russian influence and expanding the local economy.

Although ethnic Russians came to dominate the oil business and government administration in the late 1800s, many Azerbaijanis became prominent in particular sectors of oil production, such as oil transport on the Caspian Sea. Armenians also became important as merchants and local officials of the Russian monarchy. The population of Baku increased from about 13,000 in the 1860s to 112,000 in 1897 and 215,000 in 1913, making Baku the largest city in the Caucasus region. At this point, more than one-third of Baku's population consisted of ethnic Russians. In 1905 social tensions erupted in riots and other forms of death and destruction as Azerbaijanis and Armenians struggled for local control and Azerbaijanis resisted Russian sovereignty.

By 1905 revolution, Muslims (Azeris) of Transcaucasia began to awaken politically and to join and create various parties and societies. In 1904, few young Azerbaijani intellectuals, including Nariman Narimanov, organized a Marxist Muslim Party called Hummat (Endeavour). The party was connected to Russian Social-Democratic Party and dominated by Bolsheviks. At first, the influence of Hummat among Azeris was minuscule. A prominent Azerbaijani Bolshevik Efendiyev, mentions Stalin, Japaridze and Shaumian - that is, two Georgians and one Armenian - as the outstanding leaders of a Muslim party. However, by 1906 Hummat became an important organization in Transcaucasia and even participated in the Iranian revolution of 1906. Later in 1907, under the oppressive measures of Russian Viceroy Vorontsov-Dashkov, and due to the fact that Hummat's objectives did not address the major concerns of Azerbaijani society, the party lost most of its influence in the region. Himmat's Marxist coloration involved it in wider ideological squabbles in the period leading up to the 1917 Bolshevik Revolution in Russia. After several further splits, the remainder of Himmat was absorbed into the Russian Communist Party (Bolshevik) shortly before Azerbaijan was occupied by the Red Army in 1920. A small Social Democratic Party (which later split into Bolshevik and Menshevik factions) also existed, but that party was largely dominated by Russians and Armenians.

Few years after the supression of Hummat, in 1911, a group of Azerbaijani intellectuals, previously associated with Russian Social-Democratic Workers' Party, established Turkic Democratic Federalist Party "Musavat" (Equality). The party addressed the issues of concern with the position of the Muslims (Azeris) in Russia. As opposed to Hummat, Musavat's program was more appealing to the Azerbaijani masses: the peasants, the landowners, the capitalists, and the intelligencia.

Despite the vague program that unified all classes of Azeri society around a common idea of nationalism, Musavat lacked the well defined ideology. Eclectism, the lack of a systematic political philosophy, and the divesified membership of the party, permitted its critics to say that it was nothing but "two or three hundred adventurers and businessmen on top, and at the bottom the conglomeration of Tartar (ed. - Azeri) masses who have been accustomed from the beginning to carry out the orders of Khan, Bek, governor, chief, etc.". These particular words were said by Russian rightist radical, who could not possibly be sympathetic of Azerbaijani national movement. Nevertheless, it is a fact that Musavat that was established under the socialist slogans, later moved in nationalist-burgeouis direction under major financial influence from wealthy landowners. But it also was Musavat that became the party of fundamental changes in Azerbaijani society and eventually succeded in achieving the independence of Azerbaijan.

After the Bolshevik Revolution, a mainly Russian and Armenian grouping of Baku Bolsheviks declared a Marxist republic in Azerbaijan. Muslim nationalists under the leadership of Mehmet Emin Rasulzade separately declared the establishment of the Azerbaijan People's Democratic Republic in May 1918 and formed the "Army of Islam," with substantial help from the Ottoman Turkish army, to defeat the Bolsheviks in Baku. The Army of Islam marched into the capital meeting little resistance from the Bolshevik forces. After some violence against Armenians still residing in the city, the new Azerbaijani government, dominated by the Musavat, moved into its capital. On the 28th of May, 1918 independence of Azebaijan was declared. The parliament of the young republic included Azerbaijani as well as Russian, Armenian, Jewish and Georgian parties. At the first meeting of the National Council, the cat of independence was accepted; according to this act Azerbaijan became a completely sovereign state, and democratic republic would be the form of state system.The international community was quick to recognize the new country, including the United States. Newly independent Azerbaijan was the first nation in the region to adopt a secular, democratic form of government. United States president Woodrow Wilson is said to have remarked during the Paris Peace Conference, "There came in a very dignified and interesting group of gentleman from Azerbaijan - I was talking to men who talked the same language that I did in respect of ideals, in respect of conceptions of liberty, in conceptions of right and justice". However, Azerbaijan was occupied by Ottoman Turkish troops until the end of World War I and British forces then replaced the defeated Turks and remained in Azerbaijan for most of that country's brief period of independence.

External forces which would not reconcile with the independence of Azerbaijan tried to suppress it. Russian communists tried to impose their regime throughout the territory of the former Russian empire. Pressure from outside together with inner disagreements (5 governments replaced no another in less than two years) gradually led to a collapse in the government. Facing imminent subjugation by the Red Army, Azerbaijan attempted to negotiate a union with Persia, but this effort was mooted when the Red Army invaded Azerbaijan in April 1920. Russian leader Vladimir I. Lenin justified the invasion because of the importance of the Baku region's oil to the Bolsheviks, who were still embroiled in a civil war. The Red Army met little resistance from Azerbaijani forces because the Azerbaijanis were heavily involved in suppressing separatism among the Armenians that formed a majority in the Nagorno-Karabakh area of southcentral Azerbaijan. In September 1920, Azerbaijan signed a treaty with Russia unifying its military forces, economy, and foreign trade with those of Russia, although the fiction of Azerbaijani political independence was maintained

The invasion of 1920 began a seventy-one-year period under total political and economic control of the state that became the Soviet Union in 1922. In late 1921, the Russian leadership dictated the creation of a Transcaucasian federated republic, composed of Armenia, Azerbaijan, and Georgia, which in 1922 became part of the newly proclaimed Soviet Union as the Transcaucasian Soviet Federated Socialist Republic (TSFSR). In this large new republic, the three subunits ceded their nominal powers over foreign policy, finances, trade, transportation, and other areas to the unwieldy and artificial authority of the TSFSR. In 1936 the new "Stalin Constitution" abolished the TSFSR, and the three constituent parts were proclaimed separate Soviet republics.

In mid-1920 the Red Army occupied Nakhichevan, an Azerbaijani enclave between Armenia and northwestern Iran. The Red Army declared Nakhichevan a Soviet socialist republic with close ties to Azerbaijan. In early 1921, a referendum confirmed that most of the population of the enclave wanted to be included in Azerbaijan. Turkey also supported this solution. Nakhichevan's close ties to Azerbaijan were confirmed by the Russo-Turkish Treaty of Moscow and the Treaty of Kars among the three Transcaucasian states and Turkey, both signed in 1921.

Lenin and his successor, Joseph V. Stalin, assigned pacification of Transcaucasia and delineation of borders in the region to the Caucasian Bureau of the Russian Communist Party (Bolshevik). In 1924, despite opposition from many Azerbaijani officials, the bureau formally designated Nakhichevan an autonomous republic of Azerbaijan with wide local powers, a status it retains today.

The existence of an Azerbaijani majority population in northern Iran became a pretext for Soviet expansion. In 1938 Soviet authorities expelled Azerbaijanis holding Iranian passports from the republic. During World War II, Soviet forces occupied the northern part of Iran. The occupiers stirred an irredentist movement fronted by the Democratic Party of Azerbaijan, which proclaimed the communist Autonomous Government of Azerbaijan at Tabriz at the end of 1945. The Western powers forced the Soviet Union to withdraw from Iran in 1946. Upon the subsequent collapse of the autonomous government, the Iranian government began harsh suppression of the Azerbaijani culture. From that time until the late 1980s, contacts between Azerbaijanis north and south of the Iranian-Soviet border were severely limited.

During Stalin's dictatorship in the Soviet Union (1926-53), Azerbaijan suffered, as did other Soviet republics, from forced collectivization and far-reaching purges. Yet during the same period, Azerbaijan also achieved significant gains in industrialization and literacy levels that were impressive in comparison with those of other Muslim states of the Middle East at that time.

After Stalin Moscow's intrusions were less sweeping but nonetheless authoritarian. In 1959 Nikita S. Khrushchev, first secretary of the Communist Party of the Soviet Union (CPSU), moved to purge leaders of the Azerbaijani Communist Party (ACP) because of corruption and nationalist tendencies. Leonid I. Brezhnev, Khrushchev's successor, also removed ACP leaders for nationalist leanings, naming Heydar Aliyev in 1969 as the new ACP leader. In turn, Mikhail S. Gorbachev removed Aliyev in 1987, ostensibly for health reasons, although later Aliyev was accused of corruption.

Azerbaijan was strongly affected by the autonomy that spread to most parts of the Soviet Union under Gorbachev's liberalized regime in the late 1980s. After independence was achieved in 1991, conflict with Armenia became chronic, and political stability eluded Azerbaijan in the early years of the 1990s.

In the fall of 1989, the nationalist opposition Azerbaijani Popular Front (APF) led a wave of protest strikes expressing growing political opposition to ACP rule. Under this pressure, the ACP authorities bowed to opposition calls to legalize the APF and proclaim Azerbaijani sovereignty. In September 1989, the Azerbaijani Supreme Court passed a resolution of sovereignty, among the first such resolutions in the Soviet republics. The resolution proclaimed Azerbaijan's sovereignty over its land, water, and natural resources and its right to secede from the Soviet Union following a popular referendum. The Presidium of the Supreme Soviet, the legislative body of the Soviet Union, declared this resolution invalid in November 1989. Another manifestation of nationalist ferment occurred at the end of 1989, when Azerbaijanis rioted along the Iranian border, destroying border checkpoints and crossing into Iranian provinces that had Azerbaijani majorities. Azerbaijani intellectuals also appealed to the CPSU Politburo for relaxation of border controls between Soviet and Iranian Azerbaijan, comparing the "tragic" separation of the Azerbaijani nation to the divisions of Korea or Vietnam.

Meanwhile, Azerbaijanis unleashed a wave of violence against Armenian residents of Baku and other population centers, causing turmoil that seemed to jeopardize ACP rule. In response, in January 1990 Moscow deployed forces of its Ministry of Internal Affairs (MVD), Committee for State Security (KGB), and the military in a brutal suppression of these riots. Moscow also began a crackdown on the APF and other opposition forces in Baku and other cities, and Soviet forces cooperated with Iranian authorities to secure the Azerbaijani-Iranian border. These actions further alienated the population from Moscow's rule. Ironically, the Soviet crackdown targeted the large and increasingly vocal Azerbaijani working class. In this process, martial law was declared, and the ACP leader was replaced by Ayaz Mutalibov, a former chairman of the Azerbaijani Council of Ministers. In May 1990, while martial law remained in effect, Mutalibov was elected president by the Azerbaijani Supreme Soviet; elections to the Supreme Soviet were held four months later. The APF, although declared illegal, retained immense popular appeal and visibility.

Mutalibov initially supported the August 1991 coup attempted against the Gorbachev regime, drawing vehement objections from APF leaders and other political opponents. Once the coup failed, Mutalibov moved quickly to repair local damage and to insulate his rule from Moscow's retribution by announcing his resignation as first secretary of the ACP. These moves by Mutalibov and his supporters were in line with the pro-independence demands of the APF, even though the two groups remained political adversaries. In September 1991, Mutalibov was elected president without electoral opposition but under charges from the APF that the election process was corrupt.

Azerbaijan began the process of achieving formal independence October 18, when the Supreme Soviet passed a law on state independence, ratifying that body's August declaration of independence. Then in December, over 99 percent of voters cast ballots in favor of independence in a referendum on that issue. The constitution was duly amended to reflect the country's new status. Immediately after the law was passed, the Supreme Soviet appealed to the world's nations and the United Nations (UN) for recognition of Azerbaijan. In December Mutalibov signed accords on Azerbaijan's membership in the Commonwealth of Independent States (CIS), a move criticized by many Azerbaijani nationalists who opposed all links to Russia and Armenia. A year later, the Azerbaijani legislature repudiated the signature, rejecting membership in the CIS. Azerbaijan maintained observer status at CIS meetings, however, and it resumed full membership in late 1993.

The intractable conflict in Nagorno-Karabakh contributed to the fall of several governments in newly independent Azerbaijan. After a February 1992 armed attack by Armenians on Azerbaijani residents in Nagorno-Karabakh caused many civilian casualties, Mutalibov was forced by opposition parties to resign as president. The president of Azerbaijan's Supreme Soviet, Yakub Mamedov, became acting president. Mamedov held this position until May 1992, when he in turn was forced from power in the face of continuing military defeats in Nagorno-Karabakh. Mutalibov loyalists in the Supreme Soviet reinstated him as president, but two days later he was forced to flee the country when APF-led crowds stormed the government buildings in Baku. An interim APF government assumed power until previously scheduled presidential elections could be held one month later. APF leader and intellectual Abulfaz Elchibey, who won over 59 percent of the vote in a five-candidate electoral contest, then formed Azerbaijan's first postcommunist government. Elchibey served as president only one year, however, before being forced to flee Baku in mid-June 1993 in the face of an insurrection led by a disgruntled military officer. Taking advantage of the chaos, Aliyev returned to power, and an election in October 1993 confirmed him as president.

A worsening economic recession characterised by continued sharp decline in output and rising inflation has remained the principal concern of the Government of Azerbaijan during 1994. The deterioration of the economy is highlighted by economic indicators issued by the Government. They reveal that during 1994, Net Material Product (NMP) and national income fell by over 25% against the same period in 1993. GDP in 1994 contracted by 22.2% to approximately US$600 per capita compared to US$870 in 1992 and US$730 in 1993. According to official statistics, industrial output declined by 24.8% over the year period. The largest contractions occurred in the construction sector (-48%) and in heavy industry (-36%). The volume of agricultural production declined by 11.5% compared to 1993. A Government comparative economic index indicates that economic productivity stands at less than half the pre-independence levels in 1989. Oil production currently represents only half its 1989 level.

The Azeri currency, the Manat, experienced a propitious beginning at the time of its official introduction in January 1994 as one of the more stable of the new Commonwealth of Independent States (CIS) currencies. By the end of December 1994, however, the Manat had fallen against the US Dollar from its original value of 260 Manat per US$ 1 to approximately 4,500 Manat per US$ 1. The Manat's depreciation has partially been attributed to investor anxiety over the economic repercussions of the closure of the North Caucasus Railway in September due to political disturbances in Chechnya. Consequently, the main supply route for the most economical source of grain has been cut off, transport costs have increased and basic food prices have been affected accordingly. This development led to export decline and an ancillary increase in demand for the US Dollar.

"Hyper-inflation" became a reality in Azerbaijan for the first time in November 1994 when the monthly inflation rate reached 50.2%. It peaked at 75% in December. The annual cumulative inflation rate is estimated between 1,900 and 2,700% compared to 1993, and the IMF estimates the budget deficit to have increased from 7% in 1993 to 13.2% of the GDP in 1994 (220.5 billion Manat or approximately US$ 49 million).

In 1994, on-going expenditures related to the conflict with Armenia and the mounting need to support refugees and IDPs resulted in Government outlays estimated at 194 billion Manat (US$43 million). Competing pressure for budgetary funding has resulted in deficits and major cut-backs in Government subsidies and other services to the general population. The health and education systems have suffered particularly badly, with qualified staff abandoning positions in search of more rewarding employment. The increase in the prices of most staples has negatively affected the purchasing power of the poorest segments of the population. In 1994, the Government introduced the phased freeing of fuel and bread price controls under agreements with the IMF on economic restructuring. Fuel and bread prices are scheduled to be fully liberalised during 1995.

On 18 January 1995, the President signed a decree increasing monthly pensions for the most disadvantaged sectors of the population (aged pensioners, the disabled and stipends for students) from 4,500 to 7,500 Manat (US$1 to $1.66). A later decree in mid-February 1995 raised minimum monthly salaries from 4,000 to 5,000 Manat (US$ 0.89 to $1.25). The decision to increase pensions was repeatedly delayed in 1994 due to budget constraints and the legitimate fear of fuelling uncontrolled inflation. At present, payment to the 1.2 million pensioners registered in the country accounts for 50% of all social expenditures. The amount of the pension, although seasonally adjusted for inflation, lags well behind the rise in prices of consumer goods. An agreement with the EU was concluded in 1994 whereby proceeds from the government sale of European-donated grain will be ploughed back into support for the Government of Azerbaijan social services.

The Ministry of Labour and Social Protection estimated that there were 200,000 officially registered unemployed in Azerbaijan at the end of 1994. Of this figure, only 60,000 receive unemployment benefits and only a small proportion of social expenditures have been allotted for unemployment. According to the Government of Azerbaijan, the real figure for unemployed persons is actually in the vicinity of 500,000-600,000. Other independent estimates put unemployment and under-employment at 50% of the labour force in the country.

Azerbaijan signed a contract for the exploration and exploitation of three major Caspian oil fields with an international consortium of oil companies on 20 September 1994. Under the agreement, Azerbaijan expects to receive oil revenues of US$38 billion over a thirty year period as soon as joint exploitation activities begin. A significant increase in income from production, however, is not expected in the short term. In addition, there has been some domestic opposition to the terms of the agreement, and difficulties arose with regard to the recognition by the Russian Federation of the exploitation contract. Meanwhile, oil production has been declining on a yearly basis. Contrary to expectations, the country is not self sufficient in energy, needing to import most of its natural gas requirements. Current revenues from the export of oil products are inadequate to cover the cost of essential energy imports, not least the arrears for gas deliveries incurred since independence in 1991.

Democracy remains an endangered species in Azerbaijan, with President Aliyev's ruling New Azerbaijan Party romping home in the November 1995 parliamentary elections, October 1998 presidential elections, December 1999 municipal elections and November 2000 parliamentary elections. Western powers interested in exploiting the country's usefulness as an alternative source of energy are keen to see increased stability in the region and an improved human rights record for Azerbaijan.

The Russian revolution of 1905 brought more disorders and strikes to already turbulent Caucasus. Riots and guerilla movements were widespread in different parts of the region, and were directed against Russian government and imperialism. But not all attacks were strictly anti-Russian in nature. The enmity between Turks and Armenians, which grew up to become almost genetic through the XXth century, fired another conflict between Armenians and Azeris, who had lived for ages in comparative peace. Although it's impossible to pin the blame on either side, Armenian Revolutionary Federation "Dashnaktsutiun", which became the major driver of Armenian national movement of the time, bears major portion of responsibility. Dashnaks organized bands similar to those in Turkey, which would attack Muslim (Azeri) settlements and often exterminate the populations of entire villages. On the other hand, the Azeris until 1911 did not have any national organization comparable to Dashnaktsutiun, so they fought without coordination or plan.

The Russian authorites played an infamous part in Armenian-Azerbaijani riots. While having the power to prevent bloodshed, imperial establishment abstained from interfering into local feud of two nations. Vorontsov-Dashkov himself admits that during the massacres of February 1905, Russian authorities remained completely inactive.

The Soviet Union created the Nagorno-Karabakh Autonomous Region within Azerbaijan in 1924, when over 94 percent of the region's population was Armenian. (The term Nagorno-Karabakh originates from the Russian for "mountainous Karabakh.") As the Azerbaijani population grew, the Karabakh Armenians chafed under discriminatory rule, and by 1960 hostilities had begun between the two populations of the region.

On February 20, 1988, Armenian deputies to the National Council of Nagorno-Karabakh voted to unify that region with Armenia. Although Armenia did not formally respond, this act triggered an Azerbaijani massacre of more than 100 Armenians in the city of Sumgait, just north of Baku. A similar attack on Azerbaijanis occurred in the Armenian town of Spitak. Large numbers of refugees left Armenia and Azerbaijan as pogroms began against the minority populations of the respective countries. In the fall of 1989, intensified interethnic conflict in and around Nagorno-Karabakh led Moscow to grant Azerbaijani authorities greater leeway in controlling that region. The Soviet policy backfired, however, when a joint session of the Armenian Supreme Soviet and the National Council, the legislative body of Nagorno-Karabakh, proclaimed the unification of Nagorno-Karabakh with Armenia. In mid-January 1990, Azerbaijani protesters in Baku went on a rampage against remaining Armenians and the ACP. Moscow intervened, sending police troops of the MVD, who violently suppressed the APF and installed Mutalibov as president. The troops reportedly killed 122 Azerbaijanis in quelling the uprising, and Gorbachev denounced the APF for striving to establish an Islamic republic. These events further alienated the Azerbaijani population from Moscow and ACP rule. In a December 1991 referendum boycotted by local Azerbaijanis, Armenians in Nagorno-Karabakh approved the creation of an independent state. A Supreme Soviet was elected, and Nagorno-Karabakh appealed for world recognition.

Meanwhile, the government of Armenia continued publicly to support the Armenian secessionists in Nagorno-Karabakh. By August 1993 Armenian forces in Nagorno-Karabakh, with reinforcements from Armenia, gained control of the enclave as well as some 20 percent of adjacent territory in western Azerbaijan, including a corridor linking the enclave with Armenia. Azerbaijanis fled the Armenian-controlled territory to other parts of Azerbaijan, resulting in 100,000 new refugees in the country. In December 1993 Azerbaijani forces began a renewed offensive in the region, recapturing some areas while suffering heavy casualties.

By the end of 1993, the conflict over Nagorno-Karabakh had caused thousands of casualties and created hundreds of thousands of refugees on both sides. In a national address in November 1993, Aliyev stated that 16,000 Azerbaijani troops had died and 22,000 had been injured in nearly six years of fighting. The UN estimated that nearly 1 million refugees and displaced persons were in Azerbaijan at the end of 1993. Mediation was attempted by officials from Russia, Kazakhstan, and Iran, among other countries, as well as by organizations including the UN and the Conference on Security and Cooperation in Europe ( CSCE ), which began sponsoring peace talks in mid-1992. All negotiations met with little success, and several cease-fires broke down. In mid-1993 Aliyev launched efforts to negotiate a solution directly with the Karabakh Armenians, a step Elchibey had refused to take. Aliyev's efforts achieved several relatively long cease-fires within Nagorno-Karabakh, but outside the region Armenians occupied large sections of southwestern Azerbaijan near the Iranian border during offensives in August and October 1993. Iran and Turkey warned the Nagorno-Karabakh Armenians to cease the offensive operations that threatened to spill over into foreign territory. The Armenians responded by claiming that they were driving back Azerbaijani forces to protect Nagorno-Karabakh from shelling.

In 1993 the UN Security Council called for Armenian forces to cease their attacks on and occupation of a number of Azerbaijani regions. In September 1993, Turkey strengthened its forces along its border with Armenia and issued a warning to Armenia to withdraw its troops from Azerbaijan immediately and unconditionally. At the same time, Iran was conducting military maneuvers near the Nakhichevan Autonomous Republic in a move widely regarded as a warning to Armenia. Iran proposed creation of a twenty-kilometer security zone along the Iranian-Azerbaijani border, where Azerbaijanis would be protected by Iranian firepower. Iran also contributed to the upkeep of camps in southwestern Azerbaijan to house and feed up to 200,000 Azerbaijanis fleeing the fighting.

Fighting continued into early 1994, with Azerbaijani forces reportedly winning some engagements and regaining some territory lost in previous months. In January 1994, Aliyev pledged that in the coming year occupied territory would be liberated and Azerbaijani refugees would return to their homes. At that point, Armenian forces held an estimated 20 percent of Azerbaijan outside Nagorno-Karabakh, including 160 kilometers along the Iranian border.

By early 1994 an estimated 18,000 people had been killed and 25,000 wounded since the conflict began in 1988. The massive relocation of population had produced an estimated 1 million refugees and displaced persons (primarily Azerbaijanis and Armenians) in Azerbaijan alone. Initial cease-fire agreements failed to hold, and fighting continued in Nagorno-Karabakh until May 1994, when both sides agreed again to cease hostilities. The cease-fire stemmed the worst of the blood-letting, but by 1999 the conflict was far from resolved. Nagorno-Karabakh declared itself a republic and showed little interest in giving back any territory to Azerbaijan, including the narrow strip of land connecting Karabakh with Armenia proper