BAKU, Azerbaijan -- The streets are bustling, the cafes and restaurants are busy and the stores are filled with goods. But make no mistake, Baku is the capital of a country on the verge of a comprehensive military defeat.For the last year the Azeri army has been dealt one defeat after another in its six-year war over the disputed enclave of Nagorno-Karabakh, a chunk of land it technically controls but which is mostly populated by ethnic Armenians.Armenian forces have broken out of the enclave to swallow up huge tracts of land in Azerbaijan proper. Nearly 1 million Azeris -- one in seven of the country's population -- are now refugees.One might think that the magnitude of such problems would engulf the country in a wave of nationalist sentiment. But the mood is one of apathy and a somber acceptance that the enclave may have been lost forever.During the first years of the war, thousands of angry demonstrators would gather on the city's main square in heady shows of patriotism, punching the air with their fists and crying, "Karabakh Is Ours." Now the only reminder that the conflict goes on is the endless parade of government war propaganda directed against Armenia.In Armenia, which is the spiritual patron of the Karabakh Armenians who have driven the Azeris out of the mountainous territory, a fierce anti-Azerbaijan campaign is waged daily in the press.But the similarities end there.In Yerevan, the war has brought a crippling energy crisis that reduces power supplies to homes to a couple of hours a day, but government officials boast that they have militarized the entire economy and will spare nothing to regain Karabakh.Baku, built on the Caspian Sea shoreline, bustles with life and -- rare for the Trancaucasus -- restaurants are open after dark. The private sector is booming and shops are crammed with imported and domestic goods. The country is on the verge of signing huge deals with foreign oil companies which will develop its offshore fields and almost certainly usher in a period of economic boom.Government officials openly admit that they are fighting not only a crisis on the battlefield, but a crisis in spirit.Technically all 18- to 40-year-old Azeri males are subject to military conscription. In reality few serve, due to a mix of draft evasion and official corruption. Baku's cafes, street vendor stalls and food markets are teeming with men falling into the military age category.When asked why they are not at the front, they produce small spravki, or documents, that excuse them from service, mainly for medical reasons.Surkhai Mamedov stood selling imported foods on one of the city's main thoroughfares. Asked why he wasn't fighting, in spite of frequent roundups by authorities, he produced a sheet of white paper with official stamps. "I have a contusion," he said. Within about 20 meters of him there were three other men who gave the same reason."Seventy percent of the population will tell you privately that they would give up Karabakh if the Armenians would pull out of the other territories in Azerbaijan which they have occupied," said one local journalist.The Armenians now control 20 percent of Azerbaijan, including Karabakh, and are slowly creeping deeper into Azeri territory.It is hard to imagine how the Azeris could give up much more ground and still not be forced to sign some sort of conciliatory peace deal.