Dmitry Medvedev, the Russian president, said that the need for modernisation was demonstrated by last month's military conflict with Georgia.
"We must ensure superiority in the air, in carrying out precision strikes at land and sea targets and in the timely deployment of forces,'' Medvedev told military commanders after watching exercises in the southern Orenburg region.
He said Russia must have "a guaranteed nuclear deterrent system'' in place by 2020 and gave military commanders until December to come up with a plan.
"Just recently we have had to rebuff an aggression unleashed by the Georgian regime and, as we found, a war can flare up suddenly and can be absolutely real," Medvedev said.
Although Russia's huge military easily routed the Georgian forces after they had launched a massive bombardment of the breakaway region of South Ossetia, much of Moscow's military hardware is ageing.
Russia's military endured years of under-funding after the collapse of the Soviet Union, with many of its warships and aircraft sitting idle for long periods.
However, income from energy resources means Russia can now invest in the military and earlier this month Vladimir Putin, the prime minister, announced that about $95bn would be allocated for defence and security in 2009.
The move came amid a bitter disagreement between Washington and Moscow and Washington's decision to base a missile defence system in Poland and the Czech Republic, areas that Russia sees as being part of its sphere of influence.
Rice said that Washington was still interested in pursuing arms control with the Russians, including examining what should follow the Strategic Arms Reduction Treaty (Start), which reduced both nuclear warheads and delivery vehicles but is due to expire at the end of next year.
"We're discussing what follow-on there should be to the Start treaty, particularly in terms of verification measures and the like," she said.
Rice said that the US is considering what measures to take against Russia if it does not comply with a ceasefire agreed in Georgia, or tries to exploit the resources of South Ossetia and Abkhazia, another breakaway region.
"We're looking at questions of what the posture of the United States would be, should Russian companies ... choose to try to do business in, or certainly, involve themselves in extractive activities, in what is a zone of conflict, and is indeed a part of ... the internationally recognized boundaries of Georgia," she said.
Under the French-brokered ceasefire, Russia has until October 10 to withdraw troops from "security zones" around the two breakaway region, which have now been recognised as independent states by Moscow.
Russia has said it will keep 7,600 troops in the two regions indefinitely.