Italian carmaker Fiat SpA will invest $1.1 billion and build 120,000 cars a year in Russia to take advantage of state investment incentives and a recovering car industry, Russia's Economy Ministry said.

The company, which was left without a local Russian partner after a proposed deal with Sollers fell through earlier this year, has been drawing up plans to go it alone and may finalize a deal this week, the ministry's senior official in charge of car assembly negotiations Dmitry Levchenkov told reporters.

We have prepared the agreement. It will be signed later this week. The agreement is based on an old assembly regime, but Fiat is taking on additional obligations -- a new (higher) capacity of 120,000 cars per year, Levchenkov said.

His comments suggest Fiat may have been able to broker a more lenient deal than rivals who have the advantage of a local manufacturer to act as a springboard for production.

Based on a framework set earlier this year, overseas carmakers would have to build around 350,000 cars a year in Russia, up from an earlier barrier of 25,000, in return for a scrapping of import tariffs on parts.

The new scheme has raised eyebrows at the European Union and may hold back Russia's long-held plans to join the World Trade Organization.

GREATER EXPERTISE

Russia's car industry looked set to overtake Germany as the biggest in Europe before the global economic crisis halved annual sales in 2009 and plunged many manufacturers, including industry leader AvtoVAZ, into financial crisis.

The industry is on track to recover pre-crisis levels in 2012, while overseas makers are being lured to support the industry with greater expertise and technology in the event of any future crisis.

Levchenkov said four foreign carmakers and their partners had now agreed to invest $5 billion under new conditions on local manufacturing set by the government earlier this year.

He said Ford's partnership with Sollers would contribute $1.2 billion, while General Motors, which will assemble Chevrolets at Russia's GAZ plant, would invest $1 billion.

A spokesperson for Fiat declined to comment.

Levchenkov said the Italian firm was in late-stage talks with Russian state-controlled Sberbank about financing. Under the agreement the firm will build a factory in Nizhny Novgorod.

(Additional reporting by Stefano Rebaudo in Milan, Writing by John Bowker, Editing by David Holmes and Will Waterman)

Germany Russia Investment