In December 1994, the Russian federal authorities launched their first attempt to suppress Chechen separatism by military action. After fierce fighting, the Russian army brought practically the whole territory of the republic under its formal control. It was at this point, however, that a guerrilla war started, and the Russian forces began to suffer defeats and considerable losses. According to official figures (probably understated), the military action of 1994–6 cost the lives of more than 30,000 Chechens, and 5,300 Russian soldiers. This war, the economic cost of which is estimated at $5.5 billion (not including the cost of rebuilding the ruined Chechen economy and social sector), was among the main causes of the Russian economic crisis of August 1998, when the state found itself unable to honour its immense debts.

The two-year military operation ended with the signing of the so-called Khasavyurt agreement in August 1996, which allowed for presidential and parliamentary elections in Chechnya. The Russian authorities recognized the winner of the presidential elections, Aslan Maskhadov, as the legitimate head of a Chechen Republic as part of the Russian Federation; this was confirmed by a raft of legislation. In March 1997 Maskhadov went to Moscow and signed a treaty with the President of Russia, Boris Yeltsin, by which both sides committed themselves to seeking only peaceful solutions to disputes arising between the Russian Federation and the Chechen Republic.