German automaker Daimler (DAIGn.DE
) will open a plant near Moscow to make Mercedes-Benz cars, it announced on Tuesday, the first new investment by a major Western automaker since sanctions were imposed on Russia three years ago.
The plant will be Daimler's first to produce passenger vehicles in Russia. The firm said it would invest more than 250 million euros ($260 million) in the facility, and the first cars will leave the assembly line in 2019.
Daimler's investment follows the emergence of tentative signs of a recovery in the Russian car market, with Ford (F.N
) the first major foreign carmaker to see sales in Russia grow following three lean years.
Russia's Trade and Industry Ministry said in a statement that the Daimler plant will produce more than 20,000 Mercedes-Benz passenger cars and SUVS per year under an agreement that will run for nine years.
"Russia is of strategic importance for Mercedes-Benz and an attractive growth market," Markus Schäfer, Member of the Divisional Board of Mercedes-Benz Cars, Production and Supply Chain Management, said in a statement.
Russia had long been seen by major global automakers as a growth prospect that was once tipped to overtake Germany as Europe's biggest auto market.
However, new projects were put on hold in 2014, when the conflict in Ukraine and resulting international sanctions coincided with a sharp slump in the Russian economy.
Sanctions did not forbid investments in the auto sector, but caused a general chill in investor sentiment, and also threw up practical complications because financial transactions had to be restructured to avoid banks subject to sanctions.
General Motors (GM.N
) pulled out of Russia two years ago. Auto sales overall have more than halved from a 2012 peak of almost 3 million a year. Mercedes last year sold 36,888 passenger vehicles, a drop of 11 percent year on year, according to the Association of European Business (AEB), a lobby group which tracks sales.
However, a slide in the value of Russia's rouble currency has also reduced automakers' local production costs, and in the past few months some producers have seen the decline in their sales slow as consumers start visiting showrooms again.
The Russian car market will finally stabilize this year and grow by 4%, AEB forecasts.
Daimler already builds trucks in central Russia in partnership with local manufacturer Kamaz, but until now has not had any passenger vehicle manufacturing in Russia.
The decision to build the new factory shows a global automaker has "faith in the Russian market, regardless of short-term circumstances", Alexander Morozov, Russia's deputy minister for trade and industry, was quoted as saying in a statement.
"It is a sign of the obvious attractiveness of Russia's auto industry to investors," Morozov said.