As expected, acting President Vladimir Putin was elected Sunday the next president of Russia, and after a strong open, the Russian equity market closed down 1.7%, suggesting that Putin's election was already priced into equities.

With increased political stability in Russia now a

de facto

reality -- awaiting only the May 5 inauguration to make it official -- investors in the Russian equity market are anxiously awaiting indications of what type of president Putin will be. If he begins to implement some of the measures he's referred to (albeit in maddeningly vague form), expect the Russian equity market to continue to rally; but the present ramp-up in prices may have set the markets up for a fall if Putin doesn't deliver down the road.

With the Russian equity market already up 67% since former

President Boris Yeltsin

stepped down in Putin's favor, high expectations about how Putin will change Russia are already factored in. Hopes are that he will make headway in the desperately difficult, long-delayed restructuring of Russia.

Although there is little in the former spymaster's background to suggest that he is a raging reformist at heart, he has sounded the right notes about implementing tax and land reform, ending the reign of criminality and graft, revamping the legal and regulatory infrastructure and improving Russia's investment environment. Whether he makes good on these promises over the next few months will determine whether investors will continue to return to the Russian equity market.

That the presidential race was a bit closer than expected -- Putin won about 53% of the vote, compared with

Zyuganov's

30% -- doesn't really matter much. What matters most is that Putin received his mandate -- although what, exactly, he intends to do with it is open to debate.

Putin rode to power on the back of the popularity of the war in the breakaway republic Chechnya, but he has managed to say precious little about the specifics of what he intends to do once in office. Investors will be watching his first steps carefully, with measures expected to be taken early in his administration including:

Changes in government:

Putin likely will sweep out the remaining overhang of the Yeltsin administration, as part of a broader program of installing a technocratic government. A batch of fresh faces, which it is hoped will be less focused on politics and more intent on implementing real policy, would be a very positive development.

Streamlining the bureaucracy:

As part of a broader program of doing away with the old, Putin may begin to hack away at the jungle of government bureaucracy. Putin recently commented that he intends to reduce the number of government ministries from an unmanageable 68 to a more reasonable 25.

Consolidating power:

Putin already had indicated that he wants to tighten the Kremlin's grip on some of Russia's more independent-minded regional leaders, in part to make forthcoming centrally mandated reforms more effective. Many Yeltsin-era reforms fell flat because regional leaders were able to ignore the Kremlin's directives. Similarly, Putin likely will soon begin the delicate process of pushing Russia's existing oligarchs

out of power.

A first stab at reforms:

Preliminary reforms of the Byzantine tax code and the antiquated land code are winding their way through the

Duma

, the lower house of parliament, and Putin is likely to drive that process forward. Early progress in either or both would strongly suggest that Putin means business.

Concrete progress on these fronts over the next several months could draw in more of the large international investors who have largely ignored Russia over the past year and a half. Much of the 560% run-up in the Russian equity market since the all-time lows of October 1998 has been on light volume. Until just weeks ago, daily market volumes consistently failed to top $30 million, suggesting that Russia had not yet returned to many investors' radar screens.

But with the latest rally, volumes have more than doubled, and some of the large global investors that had been avoiding Russia have begun to return to the market. Slight increases in allocations to Russia from large funds would be sufficient to continue the present rally, which would, in turn, draw more benchmark-chasing investors back to the market. And if Putin makes good on his promises and begins to take steps to bring about true reform in Russia, asset prices could continue to increase as discounts with international comparables are closed.

One of the best ways to ride the potential for real reform in Russia on the back of Putin's election is in

LUKoil

(LUKOY)

, Russia's largest oil producer, which has a shot at -- in time -- of joining the ranks of the global oil majors. Large investors who haven't looked at Russia in months will tend to focus on the market's most liquid blue-chip names, with LUKoil at the top of that list.

Unified Energy System

( USERY), Russia's national power monopoly, is perceived as a highly leveraged play on reform, with the power sector well-positioned to benefit from reform in Russia. Although they are both overvalued on a fundamental basis, cellular provider

Vimpel Communications

(VIP)

and national long-distance provider

Rostelecom

( ROS) may continue to benefit from increased fund flows, thanks to their relatively high levels of transparency and liquidity and the perception that they represent plays on the Internet in Russia.

For investors interested in broader diversification, funds focused on Russia include the closed-end

Templeton Russia Fund

(TRF)

or the open-end

(LETRX) - Get Report

Lexington Troika Dialog fund. A number of regional funds, such as the

Morgan Stanley Dean Witter Russia and New Europe Fund

(RNE)

, the

(VEEEX)

Vontobel Eastern European Equity fund and the

U.S. Global Regent East Europe

fund, also may have Russian exposure, although they are diluted by holdings in Eastern Europe.

Kim Iskyan is an equity strategist at Moscow-based brokerage firm and investment bank Renaissance Capital. The following are the firm's analyst recommendations and underwriting relationships for the companies mentioned in this column: LUKoil - Buy; Unified Energy System- Buy; VimpelCom - Hold; Rostelecom - Buy. Renaissance Capital has done no underwriting for any of the companies mentioned. Iskyan began his career at the emerging markets trading desk of Oppenheimer & Co. At the time of publication, he held no positions in any of the securities mentioned in this column, though positions can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

kiskyan@rencap.com.