ItalyÔÇÖs Fiat and RussiaÔÇÖs Sollers have entered into a Ôé¼2.4 billion joint venture that will produce as many as 500,000 cars per year.
The joint venture, to be based in Naberezhnye Chelny, which lies east of Moscow, will make nine different models, with at least 50 per cent of the parts, including engines and transmission, being produced in Russia.
Between them, the two companies will invest Ôé¼2.4 billion in the enterprise, which plans to export 10 per cent of its output.
The joint venture represents the first major foreign investment in the Russian car market since demand collapsed following the onset of the global financial crisis.
Car sales in the country dropped by 49 per cent last year compared to 2008.
Fiat and Sollers have long been partners in Russia, having signed a memorandum of understanding in 2008 to form a 50-50 joint venture in Tatarstan, which will start producing the Fiat Linea sedan later this year.
Sollers already makes FiatÔÇÖs Albea and Doblo Panorama models at its Naberezhnye Chelny plant, which has a capacity of 75,000 cars a year.
The plant will now stop making jeeps for the beleaguered South Korean car maker SsongYang.
FiatÔÇÖs involvement in RussiaÔÇÖs auto industry can also be traced back to the 1970s, when it designed the Avtovaz factory in Tolyatti. The Russian companyÔÇÖs Lada and Niva models, once icons of the Soviet auto industry, were modelled on FiatÔÇÖs models of the 1960s.
Prime Minister Vladimir Putin will travel to Naberezhnye Chelny on Thursday to oversee a signing ceremony between Fiat and Sollers.
RussiaÔÇÖs industry and trade minister Viktor Khristenko said back in January that the Russian government would rely on global alliances in its strategy for the auto industry. He hinted then that another alliance would be forged in addition to the Renault and AvtoVAZ alliance which already existed at the time.
Western car makers are increasingly seeking to form alliances with peers as they struggle against falling sales. Tax breaks in many countries including Italy, which have assisted manufacturers until now, have drawn to a close which could mean a sharp drop-off in demand in 2010.
FiatÔÇÖs CEO Sergio Marchionne said that car makers will sell 350,000 fewer cars in Italy this year as the industry is hit by a drop in sales.
However, Russia sees a revival of its struggling auto industry as crucial in its return to economic growth and has thus so far kept incentive schemes in place, with no current plans to abolish them.
Sollers has in recent years developed into one of Russia's leading car makers, selling 62,000 cars in 2009, a time when Russia's total car sales halved.
Fiat has a market share in its home country of 32 per cent.
