BP has signed a landmark £4bn deal with Russian oil firm TNK.
Mr Putin was guest of honour at a City banquet
The agreement is the biggest foreign investment in Russia to date and strengthens trade ties between the two countries.
The signing, at a special energy conference in London, was witnessed by Prime Minister Tony Blair and visiting Russian President Vladimir Putin.
For its 50% stake in TNK, BP is paying a total of £4.17bn ($6.75bn) in cash and shares over the next four years.
Completing the deal
The cash element of the purchase was reduced by £360m ($600m) to £1.44bn on previous estimates, to allow for extra debt recently taken on by TNK.
This reflects TNK's purchase of a 50% stake in another Russian firm, Slavneft.
BP and Shell are ready to invest $17bn and such a decision is a reflection of the positive trends in Russia's investment climate
BP said it hoped to complete the TNK deal by the end of the summer and discussions were underway on including Slavneft in the venture, it said.
The deal will create Russia's third largest oil producer, with about 1.2 million barrels a day of output.
It is a key part of BP's growth strategy, giving it access to vast new reserves.
The BP move and a $10bn investment by rival Royal Dutch/Shell mark growing western investor confidence in Russian economic reforms.
They also show a thirst for Moscow's oil and gas among industrialised nations nervous about security of Middle East supplies.
Britain and Russia also signed a memorandum of understanding to co-operate in the construction of a gas pipeline under the Baltic from Russia into Europe and connecting with Britain.
The $5.7bn pipeline will cover 1,200 kilometres and allow gas to flow through Germany and the Netherlands to eastern England.
Mr Putin said: "BP and Shell are ready to invest $17bn and such a decision is a reflection of the positive trends in Russia's investment climate."
Commenting on the oil industry's closer ties with Russia, Mr Blair said: "The things that bind us together in politics security and economics are very important.
"Together we can achieve our mutual goals of global stability, economic growth, and international development."
At a banquet in the City of London on Wednesday evening, President Putin described Russia as the land of opportunity.
He told an audience of business leaders he was pushing through reforms that would take his country's economy further along the "European vector".
But the UK's energy collaboration with Russia has come in for criticism from some quarters.
Former Energy Minister Brian Wilson has said he is concerned about the UK becoming over-reliant on one country for gas supplies.
Bill Thomas, chief executive of Urals Energy, the biggest independent oil company in Russia, said that with an election looming, the country was unlikely to see further deals on the scale of BP and TNK in the near future.
He said Mr Putin's visit to the UK was more about diplomacy than trade.
"I am not sure that it is a sales push as such.
"I think President Putin is coming here (to London) to seek confirmation that Russia is a player on the world stage rather than looking for money," he told BBC Radio Four's Today programme.
Mr Putin's tax reforms and his strengthening of the judiciary had made the country more attractive to investors, but "there was still a long way to go," he added.
Meanwhile, President Putin is expected to face calls from environmental campaigners to ratify the Kyoto climate change agreement.
Friends of the Earth climate campaigner Bryony Worthington said "Just four months ago, Tony Blair called for a concerted international effort to combat climate change.
"President Putin's visit to Britain is a great opportunity for Blair to urge him to set a date by which Russia will ratify the Kyoto Protocol.
"Without this international climate change agreement in place there should be no deals between the UK and Russia to exploit its fossil fuel reserves."