The latest agreement follows the signing of a memorandum of understanding regarding joint automobile production in Russia in February 2011.

Under the new deal, Gaz will manufacture the VW Jetta and Skoda Octavia/Yeti at its plant in Nizhny Novgorod, with a planned output of 110,000 vehicles per year. 

The two firms will invest around €200m in production, including the modernisation of the existing paint shop and assembly facilities as well as setting up a new body shop.

The first model, the Skoda Yeti, will start production at the end of 2012 and the agreement runs until 2019.

Dr Martin Winterkorn, CEO of VW, said: 'The Russian market is a growth engine for the automobile industry and an important pillar of our Strategy 2018. The quick expansion of production capacity in cooperation with GAZ will significantly strengthen the Volkswagen Group’s position on this key market.'

VW said that it will also be expanding capacity at its plant in Kaluga to capitalise in the growth in the Russian market.