His silver bullet to recast Russia's investment climate is to allow foreigners to invest in what is now the world's largest energy company - natural gas giant Gazprom. With this expected to happen soon, investor interest might have been overestimated.

Over the past 18 months, Putin has met with international business leaders four times to attract investment. Over the weekend, he met with U.S. and German executives. However, for all the charm and optimism he exerts, foreign investors are skeptical and want concrete actions to back up Putin's words.

The Kremlin's silver bullet to convince investors that it means business is to finally permit foreigners unlimited access to gain minority exposure in Gazprom.

Russian legislation now limits foreign ownership in Gazprom to 20 percent - what the investment community calls the "ring fence."

The Kremlin first announced plans to lift the ring fence during the onslaught against oil giant Yukos in 2003. Widely interpreted then as a sweetener to counter-balance Russia's souring investment environment, investor interest in Gazprom now appears to have lost much of its luster.

Last week, Dmitry Medvedev, head of the Presidential Administration and Gazprom chairman, announced the ring fence would be removed by the end of the year. Gazprom's share price remained largely unchanged, however.

As little as a year ago, such an announcement would have been greeted with great excitement and interest. Investors now accept Gazprom's shares will be eventually liberalized, but question the level of demand, whether Medvedev's deadline is realistic, and if the company's shares are attractive.

There is a universal consensus among international portfolio investors that Gazprom share liberalization will have an enormous impact on the company's position in the emerging market stock universe. According to some estimates, Gazprom would transform from its current status of an investment backwater to the second-most liquid emerging-market stock behind Samsung.

With a current market capitalization of approximately $70 billion, Gazprom should be poised to see its market capitalization increase significantly after its shares are freely traded. Not all investors are convinced.

According to these skeptics, demand for Gazprom shares is over-estimated and those interested already hold shares in anticipation of liberalization. If this is the case, once Gazprom's shares are liberalized, the company's market capitalization could increase another $5 billion. While certainly not pocket change, the company and the Kremlin have higher expectations.

Given the controversy, false starts, and mixed signals surrounding Gazprom as the Kremlin forcibly broke up Yukos and took majority control of the gas giant, questions remain if share liberalization is possible by the end of the year.

Last week, the Kremlin took the single-most important and simple step toward share liberalization when it increased its stake in the company to 50 percent. However, there are many laws restricting foreign ownership of Gazprom shares to be taken off the books.

Also, Putin has declared foreign investment in Russia is welcomed, but not in strategic sectors of the economy. Parliament is expected to pass legislation in November defining what a strategic asset is and to what degree foreign investors can participate.

There is little doubt the Kremlin will have the relevant legislation passed, but could expect a fuss from nationalists against foreign ownership in the patently strategic Gazprom. Also, there are members within Putin's inner circle who prefer to keep the country's crown jewels out of foreign hands.

The third investor worry is whether Gazprom is a good investment. As an asset, many fund managers are expected to fill out their portfolios with an exposure to Gazprom. However, as a company, Gazprom has a long way to go to become an effective operation.

Despite an increase in domestic gas prices, high international gas prices, and increased exports, Gazprom is astonishingly unable to generate an attractive bottom line. The optimists claim Gazprom has enormous potential to improve its operations; the pessimists worry that state ownership will not motivate management to undertake sorely need restructuring.

Gazprom is a state within a state and like never before at the center of Russia's economy. To empower Gazprom (and very directly the state), the Kremlin has reordered Russia's energy sector by eliminating Yukos as a competitor, and also ensuring the interests of the state and Gazprom are identical.

Lost in the shuffle are foreign investors. The Kremlin's plan has essentially been to transfer foreign interest in such companies as Yukos to state-owned Gazprom. Few doubt investors will take an interest in Gazprom after share liberalization, but many will remain dubious of investing in Russia.

Gazprom is the Kremlin's more powerful tool - both at home and abroad. However, it is hardly the most attractive opportunity for those interested in investing in Russia.

Peter Lavelle is United Press International's Moscow correspondent.

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