In a speech covering issues ranging from the conflict over South Ossetia to the global financial crisis, Medvedev's harsh tone confirmed the continuity of his predecessor Vladimir Putin's policies in his presidency.

NATIONAL SECURITY

In the 85-minute speech broadcast live on television, Medvedev said Russia faces such threats and challenges as "the construction of a global missile defense system, the surrounding of Russia with military bases, unrestrained NATO expansion and other gifts."

Medvedev's hawkish tone delivered a clear message that Russia would respond to challenges from the West not just through diplomatic means.

In his view, the conflict in the Caucasus in August was used as a pretext to send NATO warships to the Black Sea and then to deploy the US anti-missile system in central Europe.

He said Russia will deploy a short-range missile system in its Baltic enclave of Kaliningrad bordering Poland and Lithuania, in response to US plans to set up a missile shield in the area.

"The Iskander missile system will be deployed in the Kaliningrad region to neutralize, when necessary, the (US) missile shield," he said.

Russia will also deploy equipment in its western region to electronically jam the US missile defense system, said Medvedev, adding that resources of the Russian Navy will naturally be used to counter the missile shield.

He said Russia had cancelled its previous plans to take three missile regiments out of service in the central part of the country.

Medvedev added that Russia would not be drawn into an arms race, but would continue to ensure the security of its citizens.

"We will definitely not allow ourselves to be drawn into an arms race, but we are forced to take this into account."

Sending troops to South Ossetia was the first time Russia flexed its military muscles since the collapse of the Soviet Union in the early 1990s.

However, the Russian leadership will give priority to economic development instead of taking on a heavy burden of national defense, analysts believe.

FINANCIAL CRISIS

In contrast, the president's tone for the domestic policy section of the address was softer.

Referring to the brief conflict with Georgia and the ongoing financial meltdown, Medvedev blamed the United States for both crises.

Medvedev stressed his government's action plan to minimize the consequences of the financial crisis, revive the banking sector and support individual sectors of the economy, saying Russia will fulfill its obligations to protect individual savings, pensions and social security.

However, he noted that the global financial crisis is far from over and called on the government and businesses to take this factor into consideration in their plans.

He said "each ruble should be spent effectively" and repeated earlier calls for it to become an international reserve currency and be used in pricing for commodities such as oil and gas.

The international political and economic system requires a dramatic overhaul, added Medvedev.

"The lessons of the mistakes and crises of 2008 have proved to all responsible nations that the time has come to act, and it is necessary to radically reform the political and economic system," he said.

"We will not give up our role in the Caucasus. We will overcome the global financial crisis and emerge from it stronger."

CONTINUITY OF PUTIN'S LEGACY

Medvedev's annual address also included proposals to extend the terms of the president and parliament to six and five years respectively, from their current four-year terms.

"We are not talking about a constitutional reform, but about amendments to the constitution. Really important, but still specifying amendments, which do not affect the political and legal essence of the existing institutions," explained Medvedev.

Speaking to an audience of about 1,000 lawmakers and government officials, Medvedev said the extension was necessary to enable the government to implement reforms more effectively.

To counterbalance an extension of the presidential term, Medvedev also proposed expanding the constitutional rights of the Federal Assembly, saying that control functions over the executive bodies should be given to the State Duma.

"A constitutional norm should be established, which would make it incumbent upon the government to report annually to the State Duma on the results of its work and on questions raised by the parliament," he said.

The proposals are certain to be approved by the legislators, because the Kremlin-friendly United Russia party, headed by Prime Minister Putin, holds two-thirds of the seats in the State Duma, analysts said.

With a longer presidential term, "pre-election squabbles will happen less frequently," Finance Minister Alexei Kudrin told reporters after Medvedev's speech.

It would be a "good period for any president to prove himself both in the economic and political fields," he added.

It remains unclear whether Putin will return to power as president in future. But even if he does not, there seems to be no other choice for Medvedev's successor than continue to follow Putin's policies, analysts said.