VIENNA – Russian car-assembler Avtotor and supplier Magna International Europe sign a cooperation agreement to establish an automotive manufacturing cluster in the Kaliningrad region.

For Avtotor, the deal marks the beginning of establishing a full-cycle car-production cluster.

Once complete, the project will total 21 plants, including six car factories and 15 parts facilities. Each plant will be established as a separate joint venture with an auto maker or supplier. The share distribution will be different depending on the partner.

The first phase is expected to be launched in 2016, with the second phase to start in 2018.

Plans call for total annual capacity of 250,000 cars in 2016 and 350,000 in 2018. The volumes are calculated on a 2-shift basis. The cluster will be able to assemble up to 500,000 cars in three shifts in the future.

In addition to production facilities, the project involves the construction of a container harbor as well as the establishment of a new town close to Kaliningrad for 50,000 residents.

The total amount of investment in the cluster project has been put at RR118 billion ($3.8 billion). This includes RR21 billion ($677 million) to be funded by Avtotor and another RR21 billion to come from Avtotor’s partners. The remainder will be provided in form of loans and state money.

Avtotor, which launched vehicle assembly in 1997, currently benefits from the Kaliningrad special-economic-zone rules. Because it mainly assembles cars from semi-knocked-down kits, the company does not have to pay import duties on parts.

In contrast, other foreign auto makers have to commit to certain volumes, the installation of welding and paint shops, the localization of parts production and other commitments in order to profit from customs-duty reductions.

Last year, Avtotor assembled about 222,000 BMW, Cadillac, Chevrolet, Kia and Opel cars mainly from SKD kits. Only a small portion was built from complete-knocked-down kits.

However, Avtotor’s special position in terms of import duties will expire in the middle of this decade, and it will have to switch to so-called full-cycle production, which means CKD kits, in order to stay in business.

Therefore, the assembler is starting its ambitious project with Magna’s help. In addition to the brands that it currently assembles, sources say Avtotor is in negotiations with Subaru and Jaguar Land Rover. It also is setting up a JV with one of its existing partners, BMW.

Magna primarily is expected to be involved with the engineering side of the project. The component plants will manufacture parts for Avtotor’s needs and also may supply other Russian auto makers with export parts.

“Avtotor regards this model as a new effective model for cooperation between the participating international companies and automotive suppliers,” Avtotor Chairman Vladimir Scherbakov says in a prepared statement.

“Russia is an important automotive market, with the potential to become the largest market in Europe,” says Guenther Apfalter, president of both Magna Europe and Magna Steyr.

Magna will support Avtotor in the conceptual design and technical preparation of the cluster. Additionally, the supplier may serve as a partner for the localization of components production in the Kaliningrad region.

Avtotor’s project is expected to create about 20,000 new jobs in the region.

Nikolay Zukanov, the governor of the Kaliningrad region, supports Avtotor’s project and plans to declare the Avtotor cluster one of the district’s high-priority projects.

The governor has intervened on behalf of the Avtotor project a number of times with Russian President Vladimir Putin and Prime Minister Dmitry Medvedev. Avtotor President Vladimir Draganov says the governor's decision was “an important signal to the investors.”

Scherbakov expects to finalize contracts with its foreign partners by the end of the first-quarter 2013.