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Russia in the cloud: What drives the market?

Дата публикации - 8 October 2020

A few years ago, clouds were one of the main drivers of growth in the data center market. What is happening to this demand today? How is it affecting data center capacity?

This article will answer these questions, taking a close look at the influence of cloud services on the growth and capacity of data centers in Russia. 

When you asked before the year 2000 what a data center was, people would probably answer something like “a building with hardware in it to keep data stored and accessible at any time”. It is fair to say that most people still think of it as a facility that provides space, infrastructure, power, and cooling systems to host the IT systems of other companies. This traditional market grew as one of the fastest sectors in the world economy. 

More recently, the birth of “cloud computing” – a term first used by Google CEO Eric Schmidt at an industry conference in 2006 – has had a major impact on the definition and evolution of data centers.  Because cloud computing made it possible to access data remotely through the cloud, data centers became faster, and more productive, efficient, and secure. In turn, they could deliver new services such as cloud connectivity, data storage, and software/ infrastructure/ platform as a service (SaaS/Iaas/PaaS).

So, jumping forward to 2020, Oxford Languages defines a data center as “a large group of networked computer servers typically used by organizations for the remote storage, processing, or distribution of large amounts of data”. That’s quite a change.

And we see an interesting trend. A recent study showed that the Russian cloud market has grown over the years. 

But surprisingly, the same study indicated that data center capacity has declined over the same period. While demand for cloud services continues to increase, data center growth is not keeping up. At first glance, this doesn’t seem to make sense, so let’s take a closer look at these two phenomena.

Drivers for growth of cloud services in Russia

First, the Russian cloud market has definitely expanded over the past several years. In my opinion, this is related to the rapid development of foreign business in Russia. Where Russia was previously seen as an isolated country, it now occupies the 28th place in the Doing Business 2020 ranking of the World Bank. This study ranked 190 countries by the ease of doing business in each one. (You may be surprised to learn that it places Russia above Japan and just below Austria.) 

Russia scored so high because of corporate transparency and the ease of paying taxes and getting electricity. In addition, the Russian government recently stated that it sees a future in the data center market. 

They backed up this statement with the plan to give Russian IT companies one of the lowest tax rates in the world, starting in 2021. Although this looks like a way to protect the Russian IT market from foreign competition, it says something about the confidence the government has in this section of the economy. 

Russia has also made progress in modernizing its governmental bodies. As mentioned, they made it easy to pay taxes through an online platform. Other examples include the ability to request almost all your official documents via the internet, apply for registration of your marriage, and even vote online. 

Not only is the government making efforts to digitalize its services, it has invested in building great IT universities. Look how Russian students keep winning global competitions for networking, hardware, software, and anything else related to information technology. 

It comes as no surprise that global companies want to work with Russian developers. 

One example is the American company ABBYY, specialized in helping enterprises gain valuable insights into their operations to support their digital transformation. Another is the Swiss company Veeam Software, where Russian engineers designed a platform to run backups, accelerate a hybrid cloud, and secure data. 

Numbers demonstrate this growth

Backing up the case with objective numbers,  a recent study by IKS-Consulting showed that the cloud market in Russia grew by 25% in 2018, reaching a total value of $1.1 billion.  

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Russian cloud market. iKS-Consulting

As you can see from the graph, growth is expected to continue until at least 2023, at an average rate of 23% per annum. 

Many businesses use the development of IT tools to create competitive advantage. This trend makes transition from hardware to software on the SaaS model inevitable. We also expect the IaaS segment to grow rapidly in the next few years, stimulated by competition from the PaaS and SaaS sectors, and by the general increase in the number of cloud services available. 

Data center capacity lags behind

Now let’s consider the second phenomenon: Russian data centers cannot keep up with the growing cloud computing market.  

The lack of sites that meet the technical and business requirements of data centers is one of the main reasons. For example, in the most sought-after locations, such as Moscow and the Northwest Federal District (including St. Petersburg and the Novgorod region), the density of operators is extremely high. 

Customers want their headquarters in these attractive regions and want to have physical access to their IT infrastructure. This means that providers must locate data centers around Moscow and the Northwest District, which are filling up quickly. 

Although data centers could be built in more remote regions, other problems would arise there. For example, long distances from engineering networks and communication channels heavily influence the cost of building a data center and make faraway regions less cost effective, therefore less attractive.  

To summarize, some requirements for new sites - including access to telecommunications hubs and engineering networks, and logistically attractive sites for data centers - are becoming more difficult to meet. This ultimately impedes the growth of data centers.  

Oddly, another reason for the slowdown of data center capacity growth in Russia is that cloud services not only stimulate the demand for racks, they also play a role in reducing it. As said before, cloud computing makes it possible for data centers to be faster, more productive and more efficient. It follows that cloud providers can extract more and more value from fewer resources. To some extent this plays a role in the decrease in demand for new racks in data centers.  

In conclusion

While the efficiency of cloud computing slows the growth of data center capacity, at the same time it encourages businesses to adopt cloud services. We see this in Russia, where dynamically growing sectors such as retail, finance, logistics, content provision and telecoms adopt more and more digital tools and actively undertake digitalization.  

Furthermore, large global IT companies are making the decision to transfer some or all of their data from their own data centers to public clouds such Amazon Web Services (AWS), Google Cloud, and Microsoft Azure. It is likely that other companies will follow their lead, putting an even greater demand on cloud service solutions.  The growing number of multinationals moving their data towards public clouds suggests that the move is justified and beneficial. 

This is the subject of a long-lasting debate in Russia, where companies have a limited access to global cloud platforms. The legal issues around connecting Russian businesses to global clouds impede progress, but companies can still take major steps in that direction with the help of commercial data centers.  

As businesses become global and process customer data all over the world, cross-border protection of that data becomes more and more important. Data center providers meet the need by creating a secure ecosystem that allows businesses to work with users legally, wherever they are in the world. 

The market in Russia is ready for dedicated access to global cloud services. It also wants advanced management systems for cloud services, as well as legal conformity and transparency in compliance with all the requirements of Russian law.  

This is exactly what commercial data centers can provide. 

Linxdatacenter’s practice in the field of cloud services fully reflects the trends in the cloud services market. The company’s revenue in the virtualization segment has grown steadily since 2017. This demonstrates an increase in the confidence of customers seeking cloud services, in particular access to global clouds (AWS, Google Cloud, etc.) and private cloud solutions.

Along with other co-location providers operating on the Russian market, Linxdatacenter continues to expand its business via optimization of current space and investment in construction of new data centers in the central Russian regions. This strategy corresponds with the current need for rack space and contributes to the data center and cloud market development in Russia.

Author: Olga Sokolova General Manager Linxdatacenter Russia

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