The rebellion had a sobering effect on the Communists. Moscow replaced the militant Heghkom with a new government headed by Alexandr Miasnikian (1886-1925), a man trained in the law but with a long period of service fighting on the Western front during the Russian civil war. He was commissioned by Lenin, the chairman of the Russian government in Moscow, to carry out a more moderate policy toward Caucasus. In an often-reproduced letter to his Caucasian comrades, Lenin pointed out that the Soviet republics in Transcaucasia were more backward, "more peasant than Russia", and that socialist policies had to be implemented very slowly. He called on the party to exercise "greater gentleness, caution, concessions in dealing with the petty bourgeoisie, the intelligentsia, and especially the peasantry". Lenin was suspicious that many Communists were not sensitive to local and ethnic peculiarities, that their "internationalism" and calls for unity with Soviet Russia were really disguised firms of Russian nationalism. "Scratch a Communist", he once said, "and you will find a Great Russian chauvinist!" A degree of autonomy for the smaller nationalities was necessary, he believed, in order to win them over to the Soviet cause
The second Soviet Armenian government came to Yerevan far more willing to compromise the more extreme goals that had marked the period of the civil war. By now Russia had adopted the moderate economic policy known as the New Economic Policy (NEP), which denationalised much of the economy and gave the peasants the right to control their own grain surpluses. Lenin called this new policy a tactical retreat to "state capitalism". Rather than fully nationalising the economy and eliminating the market, NEP decreed that only the "commanding heights" of the economy, large-scale enterprises, railroads, and banks, were to be nationalised. Much smaller scale production was to remain in private hands. Most important, the grain requisitioning by the state was ended, and peasants were left free to run their own farms after paying a set tax to the government. The years of NEP, roughly 1921 to 1928, were a period of relative economic "liberalism", and the Armenian republic gradually recovered from the war and the revolution under the limited market system of NEP. In early 1920 about 90 percent of Armenians lived on the land, and the government's first priority was to restore agriculture. Canals, such as that in Shirak, were built; desert areas, notably the Sardarabad desert, were irrigated; and hydroelectric plants were constructed to being electricity to the farms. Peasant life improved steadily. By 1926 agricultural production had reached 71.5 percent of its prewar level. And as result of improving conditions and economic outlook, a certain degree of reconciliation was achieved between the state and the peasant population.
In the towns and cities of Armenia, progress was slow but steady. Even at the end of the 1920s, only about 20 percent of Armenians in Armenia lived in towns. Yerevan, which had had a population of about 30,000 in 1913, reached nearly 65,000 in1926. but many were refugees from Turkey and other parts of the Middle East, and nearly one-half of urban workers were out of work. Industry barely recovered its pre-war level by 1928, and it remained basically small scale, little mechanized, and based on artisanal labour. Less than 12 percent of Armenia's population could be considered "proletarian", even by the most generous definition of that term. In 1928 there were only 6,000 factory workers and 8,000 artisans in Armenia. The Communist Party, which in its own self-image was the vanguard of the urban working class, was in fact an isolated elite governing an overwhelming peasant population. Instead of building a socialism based on pre-existing capitalist industrial system, as had been envisioned by their founding theorist, Karl Marx, the Soviet Communists were faced with daunting prospect of creating an industrial economy from the limited resources of an impoverished agrarian society.
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