The Volkswagen plant is expected to reach production volumes of 115,000 cars a year by 2009. Investment in the project will be $340 million at the first stage and another $130 million at the second.
"As of today, all decisions have been made, and we can call Volkswagen a Russian car as well," minister German Gref said.
Answering questions from journalists, he said that by 2010, VW cars in Russia will be sold at least 20% cheaper than now, and as localization of manufacturing is increasing, the price will fall even further.
"When localization [of manufacturing] is close to 100%, buyers will be able to save about 30%," he said.
A number of foreign companies, including giants such as America's Ford Motor Company, Germany's Volkswagen and Japan's Toyota, have either already opened or are planning to open plants in Russia in the last few years.
The ministry said earlier up to 900,000 foreign cars a year would be assembled in Russia by 2010 and investment would hit $2 billion.
With foreign automakers starting to produce moderately priced vehicles - the Renault Logan for example retails at around a no frills $8,000 - ordinary Russians are increasingly taking them out of the showroom in preference to similarly priced domestic models, which are not always seen as being wholly reliable.
According to the ministry's figures for the first half of the year, Russian cars still lead the market with a 42.9% share (48% a year ago), followed by new foreign cars with 33.8% (26%), Russian-made foreign cars with 12% (9%), and used foreign cars with 11.3% (17%).
Gref also said his ministry could sign agreements on industrial car assembly with another two big carmakers by the end of the year.
