Russian President Dmitry Medvedev has criticized the country's raw-material based economy and urged a speedy modernization of the 'whole' system.

Medvedev scolded the Soviet era economic and governance policies and pledged to overhaul the country's political and financial institutions which, he stated, have been built on a primitive infrastructure.

The Russian leader who was delivering his annual state of the union address before the country's economic and political elite at the presidential palace at the Kremlin on Thursday, pledged to fight corruption, deal with "unprincipled" officers in law enforcement.

Medvedev said 4,000 cases of corruption were uncovered in the first half of this year, a figure which is believed to be far less than the actual number.

Despite calling for a change in the country's foreign policy, he took a harsh tone towards the North Caucasus, singling it out as the country's biggest domestic problem and promising to "exterminate the bandits" there.

"The level of corruption, violence and clannishness is unprecedented," he said, adding that state funds were being almost openly stolen in the region.

"Clearly the economic backwardness and the lack of opportunities for a majority of the population is the source of many problems," he said.

He also urged a swift modernization and "disciplined democratization" of the system, promising to make electoral changes while at the same time warning the opposition against the use of democracy as a cover to "destabilize the state and split society."

"Instead of the archaic society, in which the leaders think and make decisions for everyone, we will be a country of intelligent, free and responsible people," he said.

In the long Thursday speech, Medvedev slammed the country's dependence on oil and natural gas revenues and branded the "primitive" economic model of raw material exports as "humiliating" for the nation.

"The nation's prestige and welfare can't depend forever on the achievements of the past," he said.

He also called for an increase in foreign investment and a complete overhaul of the socialist-era military and civilian programs and said that "we are interested in the flow of capital, new technologies and modern ideas."

Medvedev said the global economic downturn had hit Russia more severely than other countries, but pointed out that Moscow "shouldn't be looking for the guilty party abroad."

"We have to acknowledge that in past years we didn't do enough ourselves to resolve the problems we inherited."

Medvedev said that Russia needs to reduce the role of the state, which now controls up to 40 percent of the economy, stressing that giant state corporations have "no future in the long term."

Russia, the world's largest non-OPEC oil producer and the leading producer of natural gas, has suffered from the latest global economic downturn despite its early exit from the recession.

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