Volkswagen AG will sign contracts with the Russian government May 29, committing the auto maker to building an assembly plant in Kaluga.

VW says its management board has approved construction of the plant, which will have an initial production capacity of 20,000 vehicles annually.

Its first product will be the Skoda Octavia, which will be assembled from a semi knocked-down kit. Production will begin in the second half of 2007.

A body and paint shop will be added in 2009, boosting the plant’s capacity to 115,000 units.

The plant “ensures we will be able to substantially increase our share of the rapidly growing Russian automotive market over the coming years,” Bernd Pischetsrieder, VW management board chairman, says.

Kaluga, located 100 miles (160 km) southwest of Moscow, was chosen from among 70 prospective sites in Russia.

Volkswagen has been contemplating production in Russia since the mid-1990s. At one time, a site near Smolensk, just east of the border with Belarus, was the front-runner.

There also was a project to cooperate with the car maker OAO IzhAvto in Izhevsk, but it failed.