By Thomas Grove

MOSCOW (Reuters) - Two decades after the collapse of the Soviet Union, Russia's failure to cultivate power on the global stage using trade and diplomacy is forcing it back into its costly Cold War addiction to missiles and guns.

While Western countries cut military spending to deal with the global financial crisis, Russia plans to spend 20 trillion roubles ($611 billion) on defense through 2020 -- a figure even Vladimir Putin said he was "frightened" to speak aloud.

The boost in military spending will add 3 percent of gross domestic product to government spending over the next three years and could be a tough task at a time of financial fragility when investment is needed across Russia's oil-dependent economy.

The aim is to revive its rusting armed forces and rebuild political muscle in the band of ex-Soviet states to its south, an energy-rich and strategically important region where China and the West also vie for influence.

"The Russian authorities understand the country is doomed to be the kind of power that needs military might," said Ruslan Pukhov, director of Moscow-based military think tank CAST.

"'Soft power' doesn't work for us. We need people to be afraid of us and we seem to be unable to find a proper substitute for military power," he said.

Although Russia has sought to burnish its image abroad by quintupling its annual foreign aid budget to $500 million in the past four years, it still trails far behind others in the Group of Eight industrial powers on that score and is struggling to find the softer bargaining chips of Western diplomacy.

The United States had the biggest amount of aid spending in 2009 in dollar terms, some $28 billion.

The call for military reform, which Russia has repeated for more than a decade, stems from problems in conflicts stretching from failure in Afghanistan in the 1980s to the embarrassments suffered in a five-day war with Georgia in 2008.

Reflecting lessons learned from the difficulties Western militaries have faced from Afghanistan to Libya, Russia's modernization is forcing it away from the 'unthinkable' nuclear exchange that dominated Cold War thinking.

Instead Moscow now wants to replace 70 percent of its weapons by the end of the decade and create a nearly fully contract army made of lighter and more mobile units that can defend against and attack smaller, more elusive enemies.

AT THE EXPENSE OF MODERNISATION

New focus on the military may come at the expense of President Dmitry Medvedev's campaign to invest in new sectors and diversify the country's oil-reliant economy, a plan which critics say is failing to gain traction in the halls of power.

"Modernization, as a plan, failed to sell," said Pavel Baev, a Russian analyst with the Peace Research Institute Oslo. "It's not going anywhere so we have chosen hard power once again."

Medvedev and Putin have warned the West it will have a new arms race on its hands if the United States and NATO build a missile shield in Europe without addressing Moscow's oft-repeated concerns the system could threaten Russia's security.

In reality, the spending is aimed more at renewing Russia's defense industry, the world's second largest arms exporter, and reviving a once-proud army whose weaknesses were laid bare in a war with much smaller neighbor Georgia.

"When you have such a painful and ambitious transformation to an almost fully professional army it will cost a huge amount of money," said Pukhov. "We should always remember that for 15 years we were not buying new weapons and not updating the army we inherited from the Soviet Union."

The reforms' success also may hinge on progress in Russia's uphill battle against corruption, which military prosecutors say siphons one-fifth of the military budget into the pockets of contractors and venal officers.

WAR GAMES

Russia sees martial might as a key factor in boosting its influence in oil and gas-producing Central Asia, wedged in between China, Afghanistan, Iran and the Caspian Sea.

"They would like to have more influence in that region. They have interests there and they are pursuing those interests," said Dmitry Gorenburg, a senior analyst at military and public sector think tank CNA.

Late last month Russia led several former Soviet Central Asian states through training exercises on Russian territory which culminated in the mock liberation of a town from rebels.

Eyeing the possibility of Arab Spring-like uprisings there or the kind of ethnic violence that rocked Kyrgyzstan last year, Moscow believes military might will give regional leaders reason to strengthen alliances with Russia.

Moscow in turn could play power broker with the option of helping its allies in the case of domestic turmoil.

"(Future intervention) would depend on what state it was," Gorenburg said.

Last year Russia failed to answer calls for help from Kyrgyzstan, on China's mountainous western border, after clashes erupted between ethnic Uzbeks and Kyrgyz in the city of Osh.

Military analysts say Moscow refused to stop the violence because it was unwilling and unable, given the state of its military. But Russia hopes a stronger and better trained army would be capable of such action in the future.

Russia is looking ahead to what it says it fears will be a rise in regional instability when all NATO combat troops leave Afghanistan by end-2014.

With porous borders between former Soviet republics such as Kazakhstan, Tajikistan and Russia, Moscow fears a potential power vacuum in Afghanistan and is concerned that the Taliban's consolidation of power there could spell trouble in Russia.

Moscow is already fighting its own Islamist insurgency in the North Caucasus region which is underpinned by two separatist wars in Chechnya since 1994.

CAUCASIAN KNOT

In the short term, however, Russia is focusing on the Caucasus Mountain region and enemy Georgia, which it accuses of being one of Russia's biggest security threats.

Earlier this year Moscow held its largest annual air force exercises in the region just north of Georgian airspace in the province of Kabardino-Balkaria.

The North Caucasus region, already unsettled by an Islamist insurgency, has been given the status of a new military district, armed with new weapons and troops.

"Judging from the formation of the group of forces and Russian military resources during the reforms, the Kremlin is looking at the Caucasus as the fundamental direction from which any potential conflicts could occur," said Mikhail Barabanov, editor in chief of the Moscow Defense Journal.

Enmity remains between Russia and Georgia after their five-day war in 2008 after the Georgian army's incursion into the breakaway region of South Ossetia. Russia accuses Tbilisi of aiding Islamist militants. Georgia denies the charges and experts argue the validity of the claims.

(Editing by Michael Roddy)