The idea that the Soviet Union tried to "sow unrest" between ethnic groups by forming states is not an accurate description of what happened. While this was an idea that gained prominence during the Cold War (most notably through the work of Richard Pipes), it has been largely discredited since the fall of the USSR, and historians have had access to the archival materials that show what happened. This includes Nagorno-Karabakh, which is far more of an administrative reason than anything else.

The background to the establishment of the republics goes back to the Bolshevik nationality policy, which was spearheaded by Stalin. On instruction of Lenin he wrote the 1912 essay "Marxism and the National Question", which largely directed Bolshevik policy towards national groups when they took power. Stalin assumed the post of People's Commissar of Nationalities at that time as well, though he was largely absent from the post until it was abolished in 1924.

Communist ideology held that national identity was not something to be encouraged, and that it was a ploy to keep the proletariat (working class) against each other rather than the bourgeois (wealthy class). However the Bolsheviks modified this policy to fit the specifics of the Russian Empire, which had over 100 national groups, many of them perceived as “backwards” and in need of cultural development, so encouraged a national identity so they could then move on and upwards towards socialism. This policy became known as “korenizatsiia” (roughly translated as “nativization”). This lasted throughout the 1920s, though by the mid-1930s it was largely abandoned in favor of “Russification”.

This mean that various groups were given autonomous regions to rule over, the size and type determined by their population and other factors. Some, like the Georgians, Armenians, and Kazakhs, were given union republics, the highest level autonomy, while smaller groups (Abkhaz, Chechen, etc) were given autonomous republics, and even smaller groups (South Ossetia) given autonomous oblast (roughly province). Eventually everything was supposed to be solidified into a unified state, with all the divisions removed.

Within these autonomous regions the titular groups was given preference for a variety of things like government and party posts, cultural developments, and language development. The historian Terry Martin, who has written the definitive work on this, has likened it to Affirmative Action, in that these groups were seen as disadvantaged within the Russian Empire and thus now would be helped to develop and meet the Russians as equals.

This also meant determining who belonged to what ethnic and national group, which was no easy task. Many of the non-Russian peoples did not have concepts of a national identity, or even a written language, so ethnographers were hired out to first figure out who belonged to what group, and then administrators would create borders for them. This caused problems in regions that were ethnically mixed, like Central Asia where Uzbeks, Turkmen, and Tajiks (to use contemporary terms) were all intermingled, and did not often differentiate among each other. Similar issues occurred in the Caucasus, which was, and remains, a very ethnically heterogeneous region. In the end the borders for the autonomous regions did try to match the determination of the ethnographers, but political considerations were also made, so cities like Bukhara and Samarkand, which were dominated by Tajiks (who are related to the Persians) ended up in Uzbekistan (a Turkic group). This is where Nagorno-Karabakh came in.

Karabakh is a rather mountainous region (Nagorno comes from the Russian word for highland, or mountainous), and while ethnic Armenians have lived there for centuries, the region is not easily accessible the modern state of Armenia. Even today (or until the most recent conflict finished) the road between Armenia proper and Stepanakert, the capital of Karabakh (or Artsakh as the de facto state renamed itself) was a winding one that crossed over a lot of mountains and rough terrain. I speak from experience: I was there in 2014, and it took as long to drive from Yerevan to Goris in Armenia as it took from Goris to Stepanakert (about 8 hours). And this is with a nice new road built with contributions from the Armenian diaspora (they have, or had(?) signs along the road stating this).

But in 1920 it was not so nice. There was no direct road, or rail link, between the two. It was thus really difficult to move between the two, and so while the initial plan was to join the Nagorno Karabakh region with Armenia, this was reversed shortly after and it was made an autonomous republic of Azerbaijan, which had easier access both to Karabakh and to Russia proper. As everything was within the USSR, it was not thought to be an issue, and the matter was largely settled. This all changed in the late 1980s with the advent of glasnost and perestroika, as the Soviet government relaxed regulations on discussing nationality issues, and in February 1988 the people of Karabakh requested to join Armenia; this was refused by the Soviet and Azerbaijani authorities, leading to demonstrations and ultimately the start of war.

For reading on this subject:

Terry Martin. The Affirmative Action Empire: Nations and Nationalism in the Soviet Union, 1923-1939. This discusses the Soviet policies towards korenizatsiia, namely how they decided to split up groups and develop their concepts of nationality, and how that policy ended.

Francine Hirsch. Empire of Nations: Ethnographic Knowledge and the Making of the Soviet Union. Hirsch looks at the ethnographers and how the Bolsheviks determined what nationalities existed, and how to classify them.

Arsene Saparov. From Conflict to Autonomy in the Caucasus: The Soviet Union and the Making of Abkhazia, South Ossetia and Nagorno Karabakh. Saparov looks at the autonomous regions in the South Caucasus, including a chapter on Nagorno-Karabakh. It was previously an academic article, “Why Autonomy The Making of Nagorno-Karabakh Autonomous Region 1918–1925” as well.

Adrienne Lynn Edgar. Tribal Nation: The Making of Soviet Turkmenistan. This is one case study of the creation of the Turkmen SSR, which combines the above information into one. There are some others that touch on the subject, but Edgar’s is one of the best out there.

Edit: Forgot to add: Richard Pipes. The Formation of the Soviet Union: Communism and Nationalism, 1917–1923. This was originally published in the 1960s, so is quite dated and Pipes looks at the Soviet Union as a state that tried to wipe out national identities, rather than promoted them. As noted it is quite dated now and his views are no longer considered mainstream by scholars, but it remains an influential book and was one of the leading works on the topic until recent years.