The Russian automaker and the Canadian car parts manufacturer plan to build a plant in the Volga city of Togliatti, where AvtoVAZ is based, which will put out 450,000-480,000 cars annually, with investment totaling $1.6-1.7 billion.
The document was signed in the presence of Russian leader Vladimir Putin, who pledged support for the project.
"We know your company," he said referring to Magna. "It operates in many countries, and now also in Russia. This project has good prospects. I hope it will be carried out. The Russian government will, without a question, support these projects."
A formal agreement on the establishment of a joint venture is due to be signed in the fall of 2007.
AvtoVAZ said earlier that investment in the project would total 1.5 billion euros.
Magna designs and manufactures auto parts, and engineers and assembles complete vehicles, primarily for sale to major U.S. and European car manufacturers.