Volkswagen and GAZ Group are planning a joint venture to produce 300,000 cars a year in Russia.

Industry sources told Reuters the JV will make the VW Jetta, Skoda Octavia and Yeti.

Neither company would comment on the report though VW said last October it was in advanced talks on manufacturing vehicles with GAZ. Forming partnerships with local companies to increase production, allows foreign carmakers to take advantage of government incentives and meet growing demand as the Russian market revives.

Last week Ford and former Fiat partner Sollers announced they would jointly produce cars and vans for the local market.

Analysts say that Russia will become the sixthlargest global auto market by 2020, with annual sales of 4m units, up from its current 10th position and overtake Germany by 2018 as the largest producer of passenger cars and light commercial vehicles in Europe.

Ford, VW, GM, Nissan and Toyota are among the foreign companies already producing cars in Russia, but a local partner helps firms to reach a 300,000 unit annual minimum required to qualify for a range of incentives.

The government reduces customs duties on parts for firms that meet this minimum annual output level and also localise a larger portion of the manufacturing process.

GAZ, controlled by industrial tycoon Oleg Deripaska, will use its plant in Nizhny Novgorod for the joint venture project. It has an annual capacity of 120,000 units per year. VW has a 150,000 a year production facility in Kaluga.