One of Russia’s main economic zones, the Kaluga region, plans to attract $500 million of foreign investment this year, less than a third of its 2008 total, as the key carmaking industry slows.

Capital inflows are falling because foreign car makers – the main investors in the region – expect the Russian market to shrink by about 40% from last year’s 2.7 million new cars. The region south west of Moscow has become one of the main clusters for automotive production in the country, attracting investors with infrastructure and tax incentives.

Peugeot Citroen, Mitsubishi and other foreign manufacturers last year spent one and a half billion dollars on projects in Kaluga. But what was the largest car market in Europe just a year ago is shrinking dramatically now, according to Didier Aleton, Head of PSA Peugot Citroen Russia.

“We think that the Russian market will be in the year 2009 and 2010 something like 2 million and 200 thousand cars, that is to say 40 percent less than the market in 2008”

Peugeot Citroen that laid the first stone of its joint plant with Mitsubishi a year ago won’t postpone investments. It expects the market to recover by the time the first car rolls off the production line in 2011.

Volkwagen is already making vehicles in Russia and says much will depend on credit conditions, according to Dietmar Korzekwa, Volkswagen Group’s Representative in Russia.

“The biggest problem is the high interest rates on loans. They are falling around the world and only in Russia do they remain high. If they fall here, too, we can get a total market for about 2 million cars. If not, it could fall to 1.5 million. A year ago we were expecting this year to see over 3 million new car sales.”

Now car makers are trying to attract spare parts producers to Kaluga region saying it’s too expensive to buy from local manufacturers. They say that could make vehicles cheaper and support demand.