UPDATE 2-Kremlin aide sees Russia oligarchs loosening grip

* People will survive the crisis, oligarchs won't

* Recovery relies on state money injections, oil could fall

* Jobs could be lost again, but mass unrest unlikely

* Economy needs reform

(Recasts)

By Janet McBride

MOSCOW, Sept 12 (Reuters) - The global financial crisis will loosen the grip of a small business elite on Russia's economy and force the pace of modernisation and reform, a top Kremlin aide said on Saturday.

Kremlin economic adviser Arkady Dvorkovich cautioned that Russia's recovery - the economy has returned to month-on-month growth - cannot yet be considered sustainable.

"People will survive but not the oligarchs," Dvorkovich told the Valdai discussion group of Russia experts.

He forecast that in two to three years, the economic influence now wielded by a dozen or so oligarchs, who emerged in the rapid sell-off of state property in the post-Soviet 1990s, would be in the hands of hundreds of entrepreneurs.

The economic downturn has piled debts on Russia's most powerful businessmen, forcing asset sales and raising the possibility some of them may fall [ID:nLQ109843] [ID:nN0382975].

Analysts and academics at the briefing generally interpreted Dvorkovich's comments as illustrating Kremlin efforts to raise productivity and encourage investment, not a veiled threat.

President Dmitry Medvedev on Thursday gave a sobre assessment of Russia's economy and promised to modernise industry, fight corruption and reduce the state's role.

"An ineffective economy, semi-Soviet social sphere, weak demographic trends and unstable Caucasus. These are very big problems even for a state like Russia," he wrote on website Gazeta.ru (www.gazeta.ru/comments/2009/09/10_a_3258568.shtml.

Many Russians view his aspirations with cynicism.

Dvorkovich dismissed suggestions Russia runs a risk of widespread social unrest. Last month 1,500 AvtoVAZ (AVAZ.MM) (RENA.PA) car workers gathered in the city of Togliatti southeast of Moscow to protest over pay cuts and layoffs.

"I am doubtful about the likelihood of any massive social unrest. In most cases there are ways to keep current production going and ways to create new jobs."

ECONOMIC RECOVERY FRAGILE

Dvorkovich said economic recovery - much of it driven by a rebound in steel and oil prices - was fragile. Commodity prices may fall in the autumn and unemployment may rise.

"It is not a sustainable recovery yet in Russia or globally because it is based on massive government and central bank intervention."

Officials expect the economy to grow by 3.9-4.5 percent in the second half of 2009 from the first half, when Russia's GDP shrank by a tenth. That fall was in contrast with other emerging economies such as China, India or Brazil. [ID:nL7704724]

Lower commodities prices pushed Russia's budget into deficit territory for the first time in a decade in 2009 and next year the country wants to borrow as much as $20 billion to cover a budget gap of almost $100 billion.

However, the deficit forecast for 2010 was cut to 6.8 percent from an originally expected 7.5 percent on expectations of higher oil prices. [ID:nL859442]

Dvorkovich warned against excess optimism.

"We are still very cautious about projections over the next few months. A rise in unemployment and a drop in commodities and oil prices are possible in the fall," he said.

Russian jobless rates were unchanged at 6.3 million people or 8.3 percent in July after hitting a peak of almost 10 percent earlier this year, which prompted officials to disburse billions of roubles of aid to firms across the country.

Dvorkovich said Russia should do more to change the model of its economy. Much of its manufacturing sectors were producing outdated goods, he said. (Editing by Ralph Boulton) (additional reporting by Dmitry Zhdannikov)