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The Azerbaijani-Armenian conflict escalated steadily in the summer and fall of 1989. Both HHSh and the newly formed Azerbaijani Popular Front (AFP) called for abolition of the special administration, headed by Gorbachev's deputy Arkadi Volski. The Armenians held to their position that Karabakh must become part of the Armenian republic, and radical Azerbaijanis called for abolition of Karabakh autonomy altogether. As hundreds of thousands of Azerbaijanis demonstrated in Baku, the blockade of Karabakh and Armenia tightened. Karabakh Armenians responded by electing their own National Council, which on August 23 declared the secession of Karabakh from Azerbaijan and its merger with Armenia. The Armenian Supreme Soviet then declared the Karabakh National Council as the sole legitimate representative of the Karabakh people. The Azerbaijani Supreme Soviet responded by abrogating the autonomy of Karabakh and Nakhichevan. On November 28, in frustration at its inability to bring the parties together, the USSR Supreme Soviet voted to replace the Special Administration Committee in Karabakh with an administration subject largely to Azerbaijan. A republic organising committee on a parity basis was to be created, and the Nagorno-Karabakh provincial soviet and its executive committee (suspended by the January 12, 1989 decree) were to be restored. A Union Monitoring and Observation Commission, subordinate to the Supreme Soviet of the USSR, would supervise the socio-political situation, and special troops from the USSR Ministry of Internal Affairs would remain under conditions normalised. A new law was to be worked out within two months to guarantee the full development of Karabakh. No changes in the demographic situation were to be permitted.

Neither side was satisfied. Demonstrations were held both in Yerevan and Baku against the decision. In Stepanakert people burned copies of the resolution. The Armenian Supreme Soviet rejected Moscow's decision and on December 1 declared Karabakh a part of Armenia. Forty thousand demonstrators were mobilised on December 5 to surround the Supreme Soviet building and demand the end of colonialist practices; the abolition of article 6 of the Soviet Constitution, which gave the Communist Party a leading political role; and the renaming of the republic as "Republic of Armenia". By the late fall of 1989, the cooperative relationship between the Armenian Communist authorities and the HHSh had come to an end, and the open contest for power between the nationalists and the Communists accelerated.

By 1990 Gorbachev's strategy to reform the political structure while preserving a renewed Communist Party had led to a deep polarisation of Soviet politics. His policies had failed to revive the stagnating Soviet economy and instead threatened the unity of the Soviet Union. His extraordinary foreign policy successes were generally acknowledged, but inside the USSR he was faced by ever more frequent and ever more threatening crises. In Transcaucasia, as in the rest of the disintegrating Soviet Union, the cycle of economic decline and radicalised policies fed on each other. Both the incomplete political reform, in part democratic, in part preserving the old structure, and the national revolts had negative effects on the economy. In January, under HHSh pressure, the Armenian Supreme Soviet revised the republic's constitution and gave itself the power to validate USSR laws. Central state authority withered, and the writ of the Kremlin could be enforced by police and soldiers.

After more than two years of the Karabakh conflict, Armenians moved from being one of the most loyal Soviet nations to completely losing confidence in Moscow. They perceived a pro-Azerbaijani slant to official media coverage that threatened both sides as equally just in their claims and equally culpable for the cascading violence. Gorbachev's unwillingness to grant Karabakh to Armenia and his failure to end the blockade convinced people that the Kremlin calculated political advantages in backing the Muslims. In Armenia the Communist Party, under Suren Haroutunian, was torn between the Kremlin's refusal to allow the merger of Karabakh with Armenia and the growing popular movement that would be satisfied with nothing else.