There is a slowdown in the Russian data center market that should be only viewed as temporary.

Despite economic conditions, demand for colocation and cloud services is growing in the country and this is likely to lead to a new round of investment-fuelled growth as early as this year, according to conclusions of research conducted by DCD Intelligence (DCDi) during the 2013 DatacenterDynamics (DCD) Converged event in Moscow.

The main features of the Russian colocation sector include a steady rise in demand for new white space, a growing interest among Russian enterprises in outsourced data center strategies and an increasing number of international service providers looking to establish a commercial presence in Russia.

Throughout much of the last year Russia’s economy experienced a sharp slowdown, prompting concerns that the country was at risk of recession.

Initial indications suggest that increased economic uncertainty contributed to more cautious investment among data center owners and operators.

A notable slowdown occurred in the year to mid-2013 in the amount being invested in Russia’s data center industry and in the amount of new white space being deployed according to DCDi, the research division of DatacenterDynamics.

Total investment grew by 9% in the 12 months to June 2013; this contrasted with growth of 32% in the previous year.

Similarly, Russia’s data center white space expanded by 8% in the 12 months to June; this increase was down from 15% in the previous year.

Despite the apparent slowdown, these growth rates continue to look impressive when compared alongside those of Western Europe, where growth rates average at 1.5% for white space and 5% for investment.

In addition, most of the data center operators and owners questioned at the 2013 DCD Converged event in Moscow said they believe the current slowdown in the sector and the wider economy will be short-lived, with market fundamentals pointing to an uptick in growth as early as this year.

Those fundamentals include the rising demand for high quality data center capacity and the continued expansion of Russia’s internet economy; as of mid-2013, Russia had 63.5m internet users, making it Europe’s largest internet market.

According to Russian research firm IKS Consulting, Moscow’s colocation market is currently just one tenth the size of London’s and one sixth that of Frankfurt.

Compared with both markets, the proportion of available commercial data center space is also much lower.

Figures published by DCDi testify to the relatively small size of Russia’s colocation sector, with just 10% of the country’s total data center footprint being outsourced to a third-party provider.

This contrasts with 17% in Germany and 23% in the UK.

Representing around 76% of Russia’s colocation market, Moscow is emerging as a competitive and vibrant hub for commercial data center services both for Russia and the surrounding region.

The Moscow colocation market is broadly comprised of traditional telecoms network operators such as Rostelecom, VimpelCom, Synterra and MegaFon, as well as Russian-owned providers of commercial data center services such as Croc, Safe Data and the Stack Group.

There are a growing number of foreign-owned and international data center service providers.

This latter group of companies includes Amsterdam-based LinxDatacenter, which entered the Russian market in 2006 through the acquisition of Cable&Wireless’s data center operations. (In late 2011, LinxDataxcenter opened a second 9,000 sq m data center in Saint Petersburg.)

International providers also include Telehouse, which launched a commercial colocation offering in late 2012 via a partnership with DataSpace.

DataSpace owns a 6,200 sq m Tier-III-certified facility in central Moscow close to the Kremlin.

Telehouse entered the market initially to serve existing international clients that include financial institutions and media firms.

The London-based service provider has ambitions to develop a stronger managed service offering leveraging the relationship with its owner KDDI, to assist customers without a regional presence.


 

White space in Russia from 2011 to 2013 Source: DCDi

Data center investment in Russia from 2011 to 2013 (US$m) Source: DCDi


Another foreign-owned service provider IXcellerate has a relatively small colocation footprint in Moscow but a high rate of availability.

Since launching commercial operations in 2012, IXcellerate has established a strong business based on its carrier-neutral credentials, with the company having attracted communications service providers such as Orange Business Services, NTT Communications and TeliaSonera International Carrier (TSIC) to its Moscow facility.

IXcellerate currently has 580 sq m of operational commercial space and has the potential to increase the colocation floor space to over 5,000 sq m in subsequent expansion phases.

Despite talk about the current supply limitations in Russia’s colocation sector, operators are quick to point out the opportunities that are available to service providers that get their strategies right.

These opportunities include the potential to serve enterprises that generate large volumes of web traffic, as well as the emergence of new regulations in the financial services sector.

They also include the need for enterprises to make use of disaster recovery services for mission-critical applications and centralized processing and storage for data-rich applications.

The proliferation of web-based content, services and applications is an important contributor to rising bandwidth consumption and the need for large internet companies to have extensive data center architectures.

Russian social network VKontakte, as well as search engine Yandex and video streaming service RuTube, have all recently expanded their data center facilities.

In future, as traffic volumes grow, these companies may look to extend their data center presence to locations that are closer to end users as a way of reducing data transfer costs.

This creates opportunities for commercial data center operators with a dispersed regional footprint.

Furthermore, as Russian and international banks face tougher regulations to govern their activities there exists the potential to strengthen the appeal of outsourcing service providers with high levels of SLA-backed security and reliability.

Commercial data centers can also benefit from the trends witnessed in other markets, whereby enterprises use in-house facilities for core applications but outsource non-core applications to third-party providers.

One of the biggest future growth opportunities for both Russian enterprises and data center service providers is the growing use of virtualization and cloud computing.

The benefits of both include reduced cost and the potential to simplify IT architectures.

 DCDi research shows a growing interest among Russian enterprises in the benefits of cloud services.

As demand for Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS) become more widespread new opportunities for Russian service providers that can address wider market concerns about data security and service reliability will emerge.

In November 2013 LinxDatacenter announced the launch of its LinxCloud IaaS solution, which is designed to help Russian enterprises expand their businesses while simultaneously simplifying their IT infrastructure.

LinxDatacenter, whose customers include NetApp, Cisco, CommVault and Play (Yota), has built its business in Russia by emphasizing the higher standards of service it is able to offer to both international and Russian enterprise customers compared with those of local providers.

Telehouse has also emphasized its service quality and reliability as a way of differentiating its colocation offering from those of some local rivals.

And whilst Moscow is likely to maintain and even increase its importance as a regional hub for data center services, there is also potential for other cities to raise their status as key data center markets.

Several commercial providers including LinxDatacenter and Selectel already have facilities in Saint Petersburg, the country’s second largest colocation market (accounting for around 10% of total supply).

Some, including MegaFon, have a presence in multiple Russian regions, including Tartarstan, Murmansk and Siberia.

One city with potential to become an important hub for data center services in eastern Russia is Novosibersk.

The third-largest Russian city with a population of over 1.5m, it offers lower land and labor costs than Moscow and Saint Petersburg and a strategic geographical location in Eastern Russia.

Russia’s data center market is expected to see some exciting developments over the next few years as the sector expands and embraces new technologies.

More coverage on Russia’s data center market can be found in the Emerging EMEA Data Center Market Trends report, which will be published in January this year. You can read more on the DCDi page here.

This article first appeared in FOCUS33. To read the digital edition click here.