"We have never taken such a step to reduce tax before... the revenue will contribute to modernisation and investment," said Mr Kudrin.

The reduction in social tax paid by Russian companies will save them 280bn roubles ($9.8bn, £5.3bn) in 2005, he added.

World Bank warning

The government says the tax cuts will be recovered by increasing levies on the oil industry.

But Mr Putin says the regime for oil companies would be introduced cautiously so that "it doesn't undermine the energy sector's potential for growth".

He said reform was necessary to provide "an economic breakthrough".

The World Bank warned last month that Russia may be overly dependent on oil sales revenue.

Pension plan

Russia's GDP grew by 7.2% last year and high energy prices accounted for three quarters of that growth, Russia's economics minister German Gref said.

He said the government should reduce its reliance on oil and employ measures to stimulate the domestic economy.

Russia's economy needs to grow by 5% each year to reduce poverty and to be able to afford the reforms, he added.