Kocharyan has called for a strong security system with an efficient and disciplined army as the best way to maintain peace in the region. His cabinet was initially composed of many professional economists as well as holdovers such as Defense Minister Vazgen Sarkisyan and National Security Minister Serzh Sarkisyan (later named head of the presidential staff). His government, however, has been roiled by several changes in the prime ministership. Kocharyan's appeals to the diaspora were reflected in his appointment of Varden Oskanyan, a former U.S. citizen, as foreign minister. He rewarded the ARF for its support by naming an ARF leader (who pledged nonpartisanship) as minister of education and culture. Kocharyan also called for the development of civil service standards to prevent nepotism in acquiring government posts. He pledged that the activities of government officials would be public and open to oversight, and that they would declare the sources and amount of their incomes to foster both democratic and noncorrupt governance. After legislative elections in May 1999, the strong showing of the Unity bloc of parties led Kocharyan to accept the bloc's co-head, former Defense Minister Sarkisyan, as the new prime minister. Sarkisyan's assassination in October 1999 (see below) led to the appointment of Aram Sarkisyan, who was, in turn, ousted by Kocharyan in May 2000.
Kocharyan has expressed his determination to turn Armenia into the leading economic power in the region. Kocharyan placed partial blame for Armenia's current economic slump on the previous government's lassitude regarding economic reforms. He has called for the development of small and medium-sized enterprises in such sectors as mining, chemicals, machine tools, and electronics. The Armenian Statistics Department reported in February 2000 that economic growth in 1999 exceeded 3%, with the best performance in industry. Inflation was about 2%. Minister of Privatization Pavel Kaltakhchan stated that the government budget had received more than expected amounts from privatization during 1999. He also reported that Armenia had privatized 1,500 large-scale enterprises and about 7,000 small enterprises over the past six years, that it planned to transfer another 500 enterprises to private ownership in 2000, including large plants and factories, and that 75% of Armenia's GDP is being produced in the private sector. Negative economic trends in 2000 flowed from policy paralysis, and a lack of investor confidence following the October 1999 government assassinations. The government, in early 2000, was forced to reduce its planned budget spending by US $32 million, and further cuts were anticipated. Kocharyan increasingly criticized Prime Minister Aram Sarkisyan as unable to exercise the budgetary and tax discipline necessary to pay government wages and pensions.
Illustrating the ongoing challenges faced by Kocharyan, on 27 October 1999, gunmen entered the legislature and opened fire on deputies and officials, killing Sarkisyan and Demirchyan, two deputy speakers, the minister and former president of Nagorno-Karabakh, Leonard Petrosyan, and three others. The purported leader of the gunmen claimed they were targeting Sarkisyan and were launching a coup to "restore democracy" and end poverty, and took dozens hostage. President Kocharyan rushed to the legislature and helped negotiate the release of the hostages, promising the gunmen a fair trial. The killings appeared to be the product of personal and clan grievances. Abiding by the constitution, the legislature met on 2 November and appointed Armen Khachatryan as speaker (a member of the majority Unity bloc), and Kocharyan named Sarkisyan's brother Aram the new prime minister the next day, seeking to preserve political balances. Political infighting intensified. Appearing to implicate Kocharyan in the assassinations and hence force him from office, the military prosecutor investigating the assassinations (and linked to the Unity bloc) detained a presidential aide, who was released by court order in April. The Unity and Stability factions in the legislature also threatened to impeach Kocharyan in April 2000. Seeking to combat these challenges to his power, Kocharyan in May 2000 fired his prime minister and defense minister. In a national address on 3 May 2000, Kocharyan explained the firing by stating that the "constitution demands close work between the government and the president....Political games have become a way of life within the executive while at the same time the economic problems are snowballing."
Continuing his efforts to build a stable and united Armenia, Kocharyan emphasized that the central and regional governments must work together in 2002. He reinforced the central government's intentions to provide funding and services to the regions, but asked the regions for assurances that they will meet their financial obligations to the state treasury.