Sooner or later you're going to have to confront the evil hag. On the night of the third day a jester will show up in town who's totally unable to tell a joke. If you visit him in his room you'll learn he was cursed by Baba Yaga to lose his sense of humor, and you can also get a rubber chicken from him. Learning about the curse is necessary if you plan on invading Baba Yaga's hut.
There are two ways to gain entrance to the area where Baba Yaga lives. Geographically the entrance is south, east, then south of Erana's Garden, however it's blocked by an enchanted bush. Magic Users can simply Trigger the bush, but other classes will need to learn the magic phrase. This can be done by solving the first of the Leshy's riddles and rescuing the bush, or talking to the gypsies enough times.
This will let you get to the area outside Baba Yaga's hut, but it's guarded by a group of magical skulls, including a talking one who should look familiar to you. Yep, he's the one you gave a magical gem to in the first game, and if you can similarly enhance his appearance he'll let you pass. To do this you'll need to help Nikolai and his wife Anna.