MOSCOW, Russia -- President Vladimir Putin says Russia must develop a free and democratic political system and restore business confidence to ensure the country's "place in the modern world."
In his state of the nation address, he stressed individual freedoms would not be compromised by the state's own strengthening.
"We are a free nation and our place in the modern world will be defined only by how successful and strong we are," Putin said.
"Russia .... will decide for itself the pace, terms and conditions of moving towards democracy."
The address -- Putin's sixth of his two-term presidency -- was to outline the main trends of Russia's domestic and foreign policy. It was Putin's second state of the nation speech since he was overwhelmingly re-elected to a second term in 2004.
Putin is constitutionally barred from seeking a third term, but many Russians assume that the Kremlin will ensure a Putin loyalist wins the balloting in 2008.
After an uninterrupted period of high public opinion ratings, Putin's own popularity has been dented over the past year by street protests over painful social reforms in Russia and his unsuccessful attempts to head off a popular uprising in the ex-Soviet republic of Ukraine.
Last week, U.S. Secretary of State Condoleezza Rice call the Kremlin's tight grip on power and the media "very worrying" and urged Putin not to cling on to power beyond his present term. (Full story)
Putin also has been accused of mixing politics and business.
The most high-profile case involves Yukos, once Russia's largest oil company. The government has imposed crippling tax demands on and attacked the politically ambitious Mikhail Khodorkovsky, the founder and former chief executive of Yukos whose sentencing in a fraud and tax evasion trial is due this week. (Full story)
The move against Yukos and Khodorkovsky, who has criticized Putin and funded opposition parties, has frightened off investors and triggered a sharp outflow of funds from Russia.
On Monday, Putin said the nation's main challenges now were to strengthen the state, boost the rule of law and judicial institutions and deepen respect for both individual liberties and the activities of non-governmental organizations.
Putin said that the threat of terrorism in Russia remained high, and he said that parliamentary elections scheduled for later this year in Chechnya should lay the basis for stability and democracy in the region.
He also stressed that the volatile, impoverished south Caucasus region in particular needed new jobs and infrastructure to boost stability.
A significant part of his 45-minute speech was devoted to economic issues, with Putin urging Russian companies to bring back the billions of dollars they have taken out of Russia, declare the money and pay a flat tax of 13 percent.
"That money must work in our country, in our economy and not sit in offshore zones," he said.
Putin, who in previous addresses has promoted key goals such as doubling Russia's GDP in 10 years, is facing increasing dissatisfaction over stalled economic reforms.
The president called for eliminating the inheritance tax and for reducing from 10 years to three the statue of limitations for challenging the results of controversial privatizations of state assets.
Many businesses acquired for bargain-basement prices in the early 1990s fear they will be targeted by the state just as Yukos has been.
In an obvious reference to the Yukos affair, Putin said tax officials should focus on checking current tax bills rather than chasing companies for years of back-taxes.
"Tax authorities have no rights to terrorize business," he said.
Yukos has been dismantled to pay off a $28 billion (21 billion euro) tax bill.