updated 5/29/2006 3:19:38 PM ET 2006-05-29T19:19:38

Russia signed an agreement with Volkswagen for a car production plant Monday and edged closer to a deal with General Motors as foreign auto makers continued to boost their operations in a nation whose emerging middle class is shunning domestically designed models.

Volkswagen AG’s chairman Bernd Pischetsrieder signed an agreement with Trade and Economic Development Minister German Gref to build a nearly 400 million euro ($510 million), 115,000-vehicle plant in the city of Kaluga, southwest of Moscow.

“The decision took a long time ... this was not a fast path and our competitors have overtaken us to an extent — we’ll have to be all the more active,” Pischetsrieder said. VW had announced its deal to build a plant in Kaluga on Friday, after also considering four other locations.

“I’m very glad that such a major, respected concern as Volkswagen is coming into the Russian economy,” President Vladimir Putin told Pischetsrieder during a Kremlin meeting after the signing, in a televised comment.

According to the Trade and Economic Development Ministry, the German carmaker will initially spend 270 million euros ($345 million) on the plant, with a further 100 million euros ($128 million) to be invested to launch full-scale production.

A spokeswoman for Gref’s ministry said the facility would be commissioned in September 2008, and would initially assemble the Skoda Octavia but would eventually roll out VW’s Polo, Passat and Touareg brands, which are popular in Russia. Construction is to begin in August, she said.

Gref said VW was planning a “gift” for Russian drivers. “The company has plans to roll out a special car for the Russian market,” he said in televised comments.

Gref’s ministry also said that he and General Motors Corp. Vice President Carl-Peter Forster signed an agreement on a project for a car production facility in Russia, but a GM spokesman said the document was one of several that would be needed to reach a deal and that discussions were continuing.

“It’s a good step forward, but it’s one stage,” Marc Kempe, a spokesman for GM in Europe, told The Associated Press. He said GM is considering setting up an assembly plant that would be in the St. Petersburg area.

The trade ministry played up the agreement, inviting journalists to a signing ceremony that was later canceled. Gref told Putin plans call for GM to invest $115 million (90 million euros) in the first stage of the project and that construction would begin in June, the state-run RIA-Novosti news agency reported.

General Motors was an early major foreign investor in Russia’s automobile industry, launching a landmark $340 million (285 million euros) joint venture with Soviet-era manufacturer AvtoVaz in the city of Togliatti in 2001.

In recent months, however, production temporarily halted due to a parts dispute, leading to speculation that the venture would be broken up and that GM would follow other major international car manufacturers and build its own plant.

The two sides were also unable to agree on the joint construction of an engine plant in the city of Samara last year, with AvtoVaz saying it feared it would be unable to recoup its investment.

Russian media reports have said GM already plans to use a 70-hectare (170-acre) site outside St. Petersburg for the plant, which will produce the Chevrolet Aveo and Lucetti models.
AvtoVaz last year was effectively taken over by Rosoboronexport, the state arms export agency.

Major international auto makers have steadily increased their investment and production in Russia, seeking to tap the nation’s growing middle class and a lack of quality Russian-designed and built vehicles.

Toyota broke ground on a $140 million (115 million euros) facility outside of St. Petersburg last year, as did France’s Renault SA, which opened a $250 million (206 million euros) assembly plant for its Logan model in Moscow and South Korea’s Kia Motors Corp., which launched an assembly line for its Spectra model in the central city of Izhevsk.

Volkswagen hopes to increase its annual sales in Russia from the current 30,000 to 150,000 by the end of 2010.

According to the European Bank for Reconstruction and Development, Russia has about 157 cars per 1,000 people — on par with Argentina but far below the Polish figure of 250.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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