- The Washington Times - Monday, May 29, 2006

MOSCOW (AP) — Russia signed an agreement with Volkswagen for a car production plant yesterday and edged closer to a deal with General Motors as foreign automakers continued to boost their operations in a nation whose emerging middle class is shunning domestically designed models.

Volkswagen AG Chairman Bernd Pischetsrieder signed an agreement with Trade and Economic Development Minister German Gref to build a nearly $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,” Mr. Pischetsrieder said. VW had announced its deal to build a plant in Kaluga on Friday, after 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 Mr. Pischetsrieder during a Kremlin meeting after the signing, in a televised comment.

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

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

Mr. 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.

His 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,” said Marc Kempe, a spokesman for GM in Europe. He said GM is considering setting up an assembly plant in the St. Petersburg area.

The trade ministry played up the agreement, inviting journalists to a signing ceremony that was later canceled. Mr. Gref told Mr. Putin plans call for GM to invest $115 million 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, starting a landmark $340 million joint venture with Soviet-era manufacturer AvtoVaz in the city of Togliatti in 2001.

In recent months, however, production temporarily halted owing 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 also were 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 plans to use a 170-acre site outside St. Petersburg for the plant, which would produce the Chevrolet Aveo and Lucetti models.

AvtoVaz last year was effectively taken over by Rosoboronexport, the state arms-export agency.

Major international automakers 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 facility outside of St. Petersburg last year, as did France’s Renault SA, which opened a $250 million assembly plant for its Logan model in Moscow, and South Korea’s Kia Motors Corp., which started 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.

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