PSA Peugeot Citroën will build a new plant in Kaluga, 180 kilometres southwest of Moscow.
Scheduled to be open for production from 2010, the new factory will produce vehicles in the midsize segment.
This segment accounts for nearly 60% of all vehicles sold in the rapidly-expanding Russian market.
Russia is considered a "priority growth market" by the French manufacturer alliance and the new facility is central to PSA Peugeot Citroën's development in the country.
The Group plans to sell 100 000 Peugeots and Citroën's in Russia by 2010, and hopes to eventually increase this to 300 000 a year.