"It is clear that a new arms race has been unleashed in the world," Putin said in a speech to the State Council, comprising ministers, governors and lawmakers.
"The developed countries...spend huge amounts of funds, many times as much as we spend, on developing weapons systems," the president said adding Russia should show restraint and not permit itself to be drawn into costly confrontation.
"We must not allow ourselves to be drawn into this," he said.
Putin also said the policy of 'containment' pursued by some countries toward Russia was driven by their desire to gain access to its natural resources.
"God did not begrudge us natural riches," he said. "Many conflicts, political decisions and diplomatic stunts have the smell of oil and natural gas about them."
Putin is to step down after the March 2 presidential election. He is widely expected to be succeeded by a current first deputy prime minister, Dmitry Medvedev, hand-picked by the Russian leader "to ensure policy continuity."
Putin blamed the West for unleashing the arms race. "We are not to blame, we did not instigate it," he said.
He said Russia had seen no real steps from its Western partners towards a compromise on the Conventional Forces in Europe Treaty.
The Cold War-era Conventional Forces in Europe treaty, which regulates the deployment of non-nuclear weapons between the Atlantic and the Urals, has become a source of tension between Russia and NATO, with the Western alliance refusing to ratify its updated version and Russia subsequently imposing a moratorium on the treaty.
Russia has also been unnerved by NATO's ongoing expansion and Washington's plans to deploy missile defense bases in Central Europe, which it says are needed to deter possible strikes from Iran and other "rogue states."
"NATO's military infrastructure is approaching our borders," the president said. "We closed down our bases in Cuba and Vietnam, and what did we get? New American bases in Romania, Bulgaria, and a new third missile defense region in Poland."
"They say these steps are not aimed against Russia, but out concerns are quite reasonable. ...our partners in NATO have demanded that we unilaterally fulfill obligations under treaties without honoring them themselves and without ratifying certain agreements."
"We are actually being forced to take retaliatory steps," he said, calling for a new security strategy by 2020 to address emerging threats.
The president also said Russia needs new types of weapons based on advanced technology, but should also try to keep spending down to reasonable limits. He also urged measures to raise the prestige of military service and a rise in salaries and allowances for the military.
Under Putin, Russia has used some of its windfall oil revenues to increase military spending and stepped up military exercises.
Russia restored in August long-distance strategic flights over the Pacific, Atlantic and Arctic oceans. The patrols, a common practice during the Cold War, were halted in 1992 amid the economic and political chaos that followed the collapse of the Soviet Union.
