Shamil Basayev was born in the village of Dyshne-Vedeno, near Vedeno, in south-eastern Chechnya, in 1965[8] to Chechen parents from the Benoy teip. According to Gennady Troshev, he has some distant Russian ancestry.[9] He was named after Imam Shamil, the third imam of Chechnya and Dagestan and one of the leaders of anti-Russian Chechen-Avar forces in the Caucasian War.
His family is said to have had a long history of involvement in Chechen resistance to Russian rule. His grandfather fought for the abortive attempt to create a breakaway North Caucasian Emirate after the Russian Revolution.The Basayevs, along with most of the rest of the Chechen population, had been deported to Kazakhstan during World War II on the orders of the NKVD leader Lavrenti Beria as a means of cutting off support to the 1940–44 insurgency in Chechnya. They were only allowed to return when the deportation order was lifted by Nikita Khrushchev in 1957.
Basayev, an avid football player, graduated from school in Dyshne-Vedeno in 1982, aged 17, and spent the next two years in the Soviet military serving as a firefighter. For the next four years, he worked at the Aksaiisky state farm in the Volgograd region of southern Russia before moving to Moscow.
He reportedly attempted to enroll in the law school of the Moscow State University but failed, and instead entered the Moscow Engineering Institute of Land Management in 1987. However, he was expelled for poor grades in 1988. He subsequently worked as a computer salesman in Moscow, in partnership with a local Chechen businessman, Supyan Taramov. Ironically, the two men ended up on opposite sides in the Chechen wars, during which Taramov sponsored a pro-Russian Chechen militia (Sobaka magazine's dossier on Basayev reported that Taramov apparently equipped or "outfitted" this group of pro-Russian Chechens; they were also known as "Shamil Hunters"). In later interviews, Taramov would claim he hired Basayev as a favor for a family friend, and that the latter was an ineffectual worker. When some hardline members of Soviet government attempted to stage a coup d'état in August 1991, Basayev allegedly joined supporters of Russian President Boris Yeltsin on the barricades around the Russian White House in central Moscow, armed with hand grenades.
A few months later, in November 1991, the Chechen nationalist leader Dzhokhar Dudayev unilaterally declared independence from the newly formed Russian Federation. In response, Yeltsin announced a state of emergency and dispatched troops to the border of Chechnya. It was then that Basayev began his long career as an insurgent—seeking to draw international attention to the crisis. Basayev, Lom-Ali Chachayev, and the group's leader, Said-Ali Satuyev, a former airline pilot suffering from schizophrenia,[citation needed] hijacked an Aeroflot Tu-154 plane, en route from Mineralnye Vody in Russia to Ankara on 9 November 1991, and threatened to blow up the aircraft unless the state of emergency was lifted. The hijacking was resolved peacefully in Turkey, with the plane and passengers being allowed to return safely and the hijackers given safe passage back to Chechnya.
The First Chechen War began when Russian forces invaded Chechnya on 11 December 1994, to depose the government of Dzhokhar Dudayev. With the outbreak of war, Dudayev made Basayev one of the front-line commanders. Basayev took an active role in the resistance, successfully commanding his "Abkhaz Battalion." The unit inflicted major losses on Russian forces in the Battle of Grozny, Chechnya's capital, which lasted from December 1994 to February 1995. Basayev's men were among the last fighters to abandon the city.

1995
After capturing Grozny, the momentum changed in favor of the Russian forces, and by April Chechen forces had been pushed into the mountains with most of their equipment destroyed. Basayev's "Abkhaz Battalion" suffered many casualties, particularly during battles around Vedeno in May and their ranks sank to as low as 200 men, critically low on supplies.

At this time, Basayev also suffered a personal tragedy. On 3 June 1995, during a Russian air raid on Basayev's hometown of Dyshne-Vedeno, two bombs landed on the home of Basayev's uncle, and six children, four women, and the uncle were killed. Basayev's wife and child were among the dead, as was his sister Zinaida. Twelve members of Basayev's family were injured in the attack.[27] One of his brothers was also killed in fighting near Vedeno.

In an attempt to force a stop to the Russian advance, some Chechen forces resorted to a series of terrorist attacks directed against civilian targets outside the area that they claimed. Basayev led the most infamous such attack, the Budyonnovsk hospital hostage crisis on 14 June 1995, less than two weeks after he lost his family in the air raids. Basayev's large band seized the Budyonnovsk hospital in southern Russia and the 1,600 people inside for a period of several days. At least 129 civilians died and 415 were wounded during the crisis as the Russian special forces repeatedly attempted to free the hostages by force. Although Basayev failed in his principal demand for the removal of Russian forces from Chechnya, he did successfully negotiate a stop to the Russian advance and an initiation of peace talks with the Russian government, saving the Chechen resistance by giving them time to regroup and recover. Basayev and his fighters then returned to Chechnya under cover of human shields.

On 23 November, Basayev announced on the Russian NTV television channel, that four cases of radioactive material had been hidden around Moscow. Russian emergency teams roamed the city with Geiger counters, and located several canisters of Caesium, which had been stolen from the Budennovsk hospital by the Chechen militants. The incident has been called "the most important sub-state use of radiological material."