By Timothy Heritage and Alexei Anishchuk
MOSCOW (Reuters) - President Vladimir Putin accused Russia's enemies on Thursday of seeking to carve it up and destroy its economy to punish it for becoming strong, but said his country would rise to any challenge.
In a fiercely patriotic state of the union speech, the Kremlin leader trumpeted his annexation of Ukraine's Crimea peninsula, praised the Russian people for their strength, accused the West of "pure cynicism" in Ukraine and said economic sanctions must drive Russians to develop their own economy.
"We are ready to meet any challenge of the times and win," he declared to applause from an audience of 1,000 dignitaries, almost all of them loyal supporters.
But the rouble fell as he delivered a speech that showed no sign of a retreat from policies that have brought his country to confrontation with the West unseen since the Cold War.
Disappointing the hopes of many investors, he produced no grand plan to pull the economy out of a crisis aggravated by falling oil prices and Western sanctions over his policies toward Ukraine.
Instead, he shifted blame for Russia's problems on the West, accusing "enemies of yesterday" of trying to bring a new Iron Curtain down around Russia. Foes, he said, wished on Russia the same fate as suffered by Yugoslavia in the 1990s.
"There is no doubt they would have loved to see the Yugoslavia scenario of collapse and dismemberment for us – with all the tragic consequences it would have for the peoples of Russia. This has not happened. We did not allow it," he said.
So determined was the West to destroy Russia, he said, that sanctions would have been imposed even without the crisis in Ukraine.
"I am certain that if all this did not take place... they would come up with another reason to contain Russia's growing capabilities," he said, flanked by a Russian flag on either side. "Whenever anyone thinks Russia has become strong, they resort to this instrument."
Even when he pledged to keep Russia open to the world, he adopted an aggressive posture: "We will never pursue the path of self-isolation, xenophobia, suspicion and search for enemies. All this is a manifestation of weakness, while we are strong and self-confident."
UNDER PRESSURE OVER THE ECONOMY
The former KGB spy, 62, ignored pressure to show he has an answer for Russia's worsening economy, even though officials acknowledged this week the country is headed for recession.
He promised an amnesty for capital repatriated to the country, saying Russians who chose to bring money back would face no questions over how they earned it. Money from a national wealth fund would be used to support domestic banks.
But this failed to satisfy markets or critics. Tim Ash, an analyst at Standard Bank, said in a note he saw no new big ideas to help the economy or ease market pressure on Russian assets: "This is old school, Cold War stuff."
Sergey Aleksashenko, a former deputy head of the central bank, vented frustration with Putin's failure to tackle the economy: "There is nothing to discuss and nothing to expect. Everything will continue as it is. And that suits him."
Another analyst, Dmitry Trenin of the Carnegie Moscow Centre, said Russia should now brace itself for a very difficult 4-5 years in which the "stakes are exceedingly high."
Political commentators say Putin is likely to continue whipping up nationalist sentiment and hostility to the West to mask Russia's economic problems.
Signalling no change of heart on Ukraine, Putin said Crimea, which his troops seized after a Moscow-backed president was toppled in Kiev, held sacred meaning for Russians, forever.
He said the conflict that has followed in east Ukraine, in which heavily armed Moscow-backed separatists have seized a region they call "New Russia", proved Moscow's policy was right.
Putin's popularity is still sky high and he has not faced any big protests over the economic decline. But the plunge in the rouble ends the currency stability that had hitherto been the crowning achievement of his 15 year rule.
He rose to power in the wake of a currency collapse and default, and owes much of his popularity to the comparison between the stability of his rule and the chaos of the 1990s, when the post-Soviet economy was eviscerated by hyperinflation.
The currency has already lost a third of its value this year, capital flight is soaring, the fall in oil prices has blown a hole in state finances, and Russian companies and banks are scrambling to find dollars to pay foreign debts.
(Aditional reporting by Lidia Kelly, Vladimir Soldatkin, Jason Bush, Darya Korsunskaya, Katya Golubkova and Gabriela Baczynska; Writing by Peter Graff and Timothy Heritage)