Daimler will open its first factory in Russia in the first new investment by a major Western automaker since sanctions were imposed on the country three years ago.
The company will invest more than 250 million euros ($260 million) in the 20,000-unit capacity factory to build SUVs and the E-class sedan.
The factory will be Daimler's first to produce passenger vehicles in Russia and will be located about 40 km northwest of Moscow, with the first cars due to leave the assembly line in 2019.
"Russia is of strategic importance for Mercedes-Benz and an attractive growth market," Markus Schaefer, Mercedes' production chief, said in a statement. "By establishing a local production we not only achieve greater proximity to our Russian customers but also strengthen the international competitiveness of Mercedes-Benz Cars," he said.
The new plant will be a full assembly plant with a paint shop to assembly. More than 1,000 jobs will be created at the site and further jobs at local service providers and suppliers, Daimler said.
Despite the country's economic downturn, Russia remains one of Mercedes' strongest European markets. Mercedes was the top-selling premium brand in Russia in 2016 for the fourth year in a row with vehicle sales of 36,888, down 11 percent, the same decrease as the overall market, according to data from the Association of European Business (AEB) in Russia.
Daimler's investment follows the emergence of tentative signs of a recovery in the Russian car market, with Ford the first major foreign automaker to see sales in Russia grow following three lean years.
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 pulled out of Russia two years ago.
Auto sales overall have more than halved from a 2012 peak of almost 3 million a year.
A slide in the value of Russia's ruble 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 percent, 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.