By Michael Stott and Oleg Shchedrov
Laying out his legacy three months before he is to step down, Putin said Russia had to wean itself off energy exports, compete in the world economy and stand up to the West.
"It's not our fault, we didn't start it. ... funnelling multibillions of dollars into developing weapons systems.
"It's already clear that a new arms race is being unleashed in the world ... We must not allow ourselves to be drawn into this."
It was also widely regarded as a manifesto for Dmitry Medvedev, the man he has endorsed to succeed him.
Putin, 55, opened his speech by emphasising how far Russia had come in the eight years he had been in power.
"Wealthy Russia had turned into a country of impoverished people. In these conditions, we started to implement our programme to take the country out of crisis," he said.
BOOMING ECONOMY
But Putin also said Russia needed to develop its human capital if it was to compete in the global economy and reduce its dependence on oil exports.
Putin also touched on Russian democracy, which has come under close international scrutiny three weeks before the presidential election.
Putin said democracy was a cornerstone of Russian society but that political parties who took money from foreign governments were guilty of "immoral" behaviour and "demeaning the Russian people."
