In a ceremony in an ornate Kremlin hall, Mr Putin said improving Russia’s economy following a recession partly linked to international sanctions would be a primary goal of his next six-year term.
“We must use all existing possibilities, first of all for resolving internal urgent tasks of development, for economic and technological breakthroughs, for raising competitiveness in those spheres that determine the future,” he said in his speech to thousands of guests standing in the elaborate Andreevsky Hall of the Grand Kremlin Palace and two adjacent halls.
“A new quality of life, well-being, security and people’s health – that’s what’s primary today,” he said.
Although Mr Putin has restored Russia’s prominence on the world stage through military action, he has been criticised for inadequate efforts to diversify Russia’s economy away from its dependence on oil and gas exports and to develop the manufacturing sector.
The 65-year-old held on to the presidency in March’s election when he won 77 per cent of the vote.
Mr Putin has effectively been the leader of Russia for all of the 21st century. He stepped down from the presidency in 2008 because of term limits, but was named prime minister and continued to steer the country until he returned as president in 2012.
“Russia should be modern and dynamic, it should be ready to accept the call of the times,” he said.
He made only brief reference to Russia’s international role, saying: “Russia is a strong, active, influential participant in international life.
“The security and defence capability of the country is reliably ensured.
“We will give these matters the necessary constant attention.”
He acknowledged the challenges facing Russia were formidable, “but we all remember well that, for more than a thousand years of history, Russia has often faced epochs of turmoil and trials, and has always revived as a phoenix, reached heights that others could not”.
The ceremony was covered in detail on state television, the cameras showing Mr Putin working at his desk in his shirt sleeves, then donning a suit jacket to begin a long walk through the corridors of the Kremlin’s Senate building, then boarding a limousine for a short drive to the Grand Kremlin Palace.
Thousands of guests stood in the three halls for the inauguration.
One of the most prominent was former German chancellor Gerhard Schroeder, who is now chairman of Russia’s state oil company Rosneft and one of the most prominent Western voices arguing for an end to sanctions against Russia.
Mr Schroeder stood with prime minister Dmitry Medvedev and Mr Putin prominently shook hands with him after the speech.
Soon after the ceremony, Mr Putin issued an order formally dissolving the cabinet but nominated Mr Medvedev to serve again as prime minister.
The lower house of parliament is to vote on whether to approve him tomorrow.