VIENNA –Volkswagen AG begins construction of its assembly plant on the outskirts of Kaluga, near Moscow, that will have an annual capacity of 115,000 vehicles.

“This investment in Kaluga is of great strategic importance," VW CEO Bernd Pischetsrieder says in a statement. "By producing in Russia, (VW) has the chance to profit from dynamic growth in the Russian automobile market."

In the first phase, plans call for the assembly of Skoda Auto a.s. and VW cars from semi-knocked-down kits. The first model to be assembled will be the Skoda Octavia in late 2007.

VW will construct body and paint shops and launch production of a car for Russia and other markets in 2009.

“We are planning that our Russian cars will have 60%-70% local content,” Pischetsrieder says, adding the plant will bring as many as 3,500 direct new jobs to the area.

“Furthermore, numerous components will be delivered from other plants in the medium term. That will stabilize jobs at other plants in the (VW) Group,” he says.

In the final construction phase, the plant will have its own railway line to ensure the reliable delivery of parts and components. One section of land also has been earmarked for on-site suppliers.

“We will be expanding the network of dealerships and service companies for the Volkswagen and Skoda brands in Russia to keep pace with growing production capacity,” Skoda Chairman Detlef Wittig says.

Russian-made Skoda and VW cars also could be exported to other Commonwealth of Independent States countries.

“We could, for instance, export duty free to Ukraine if we reach certain local content,” says Horst Muehl, Skoda's member of the board responsible for production and logistics.