The wannabe nation of Nagorno-Karabakh

Anoushavan Danielyan's office is resplendent with the signs of his high post. A red, blue, and orange flag adorns a corner. A large seal depicts a regal bird, above whose head floats a crown. Plastic flowers sit in a vase.

Outside, in a grim corridor that has seen better days, a sign indicates this is the office of the prime minister of the Nagorno-Karabakh republic.

Never heard of it? Don't worry. That's because it doesn't officially exist.

It's after 9 p.m., but the prime minister is still receiving visitors. Most of the staff have gone home, and his are the only windows in the blocky, Soviet-era structure that still twinkle with light.

It's a long journey from the outside world to this putative nation. There's only one way to Nagorno-Karabakh: a long, winding road from Armenia, six hours from that country's capital, Yerevan. High-ranking government officials sometimes travel by military helicopter, but for ordinary people there's just the road, built with money from the Armenian diaspora after the 1988 to 1994 war between ethnic Armenians and Azerbaijan.

The war won the ethnic Armenian Karabakh de facto independence and purged the region – which lies wholly within the borders of Azerbaijan – of its Azeri overlords. But it also laid waste to the land and infrastructure. More than a million refugees – 800,000 Azerbaijanis and 300,000 Armenians – still live in exile.

As the head of government, Mr. Danielyan is rebuilding the region, which is about the size of Utah's Great Salt Lake with a population of 100,000. Though the guns have largely fallen silent, the war isn't really over. Azerbaijan still claims Nagorno-Karabakh, and, for now, the international community agrees. So the legions of aid workers and international investment that normally flood postwar zones have largely stayed away. That has left the prime minister – a serious, professorial man with a glossy bald head and bushy moustache – with all the responsibility of running a country and few of the perks.

He's comfortable with the arcane world of budgetary mandates and foreign direct investment: His shelves are piled with manuals from international organizations and statistical compilations. He pulls out a series of heavy books, covered in Armenian script and containing government statistics on Karabakh (example: The region grows wheat, grapes, potatoes, and garbanzo beans, yet must import 55 to 60 percent of its food). "We observe all international standards," he says patting the books with pride.

But Karabakhi officials are the only people who ever see them. The UN, World Bank, and other international organizations that usually collect such statistics and distribute them to the world won't use them, no matter how good, because – Nagorno-Karabakh doesn't officially exist.

A Soviet-trained economist, Danielyan is well versed in Communist centralized planning. But it's to Reaganesque, trickle-down economics that he's turned for salvation. Low taxes and private investment are now his mantra: "Within one year we decreased the income tax from 30 percent to 5 percent. The tax on business revenue has fallen from 28 to 5 percent. Property tax is now only 6 percent," he says, with growing enthusiasm, as the list grows longer. "For imports, there were six different types of taxes. Now there is one standard tax of not more than 2.5 percent!" A veritable business paradise, except for glitches such as sporadic lack of running water and the hostile Azeri military massed on the border.

The next morning, it's time for a tour of the capital, Stepanakert, to see the fruits of the government's low taxation plan. The first stop, though, is of a historic nature: a red sandstone monument depicting the faces of an old woman and old man, called Tatik Paptik (grandmother and grandfather, in Armenian). This symbol of Karabakh, explains a young adviser to the president, looks toward the motherland, Armenia.

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.

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."