With the war in Ukraine and related economic sanctions on Russia reverberating globally, long-term impacts will likely be felt by economies and supply chains well beyond Eastern Europe. While not necessarily top of mind in discussions of major global events, data centers are at the core of the world's digital infrastructure and will likely be affected as well.
Data centers are vital assets in the global IT supply chain, playing an essential part in ensuring a country's — and the world's — digital infrastructure runs smoothly. For data center providers, the events in Ukraine could present varying effects. Although there could be an increase in demand for leased data center space, the facilities themselves could be susceptible to a variety of threats, both online and physical. Rising costs for operators will likely be a major issue, and it is unclear how much providers will be able to pass on to their customers and how that will impact customer demand. Supply chain shortages will impact costs and may cause providers to postpone expansions, leading to data center supply shortages. There could be other impacts we are not aware of yet, but the data center industry will certainly feel the effects of the conflict: The only question is how much. All of this pales in comparison with the physical destruction and loss of life in Ukraine, so one can only hope that the conflict will end as soon as possible.
Immediate impacts on data centers in Ukraine
Before the war, there were over 50 data centers in Ukraine and about 40 data center/IT service providers, nearly all local businesses. The largest were BeMobile, De Novo, NetAssist and Ante Mediam. The majority of facilities were located in Kyiv, but there were some facilities around the country, for example, in Kharkiv, Odesa, Mykolayiv and Lviv.
Surprisingly, much cellular connectivity and internet access have remained operational in Ukraine, with evidence that some data centers have stayed up and running as well. There are reports of heroic efforts made by network engineers to repair downed lines in hard-hit areas, while data center operators and customers made arrangements to back up data and service customers from other parts of Ukraine — or even from nearby countries. Still, many data centers have gone offline, and the conflict has dramatically impacted internet traffic in the hardest-hit areas.
The war will impact data centers across the globe. There have been some impacts on the network already, with internet connectivity affected in Iran, for example, due to cuts in a cable that runs through Ukraine from Russia to Iran. Polish and Czech mobile providers are working to take over operations of the mobile networks in Ukraine if the main provider there goes down.
Meanwhile, Russia is increasingly cut off from the rest of the world, and there is a risk that the country could end up with an isolated internet network. Internet providers such as Comcast Corp. and Lumen Technologies Inc. stopped providing service to the country. Cloud providers are under pressure to stop servicing Russian clients, although Russia is mainly served by homegrown cloud providers. For Russian data centers, network connectivity could be a challenge, along with economic uncertainty — such as whether customers will be able to pay their bills — and inability to access capital.
For data centers in Europe, the most severe impacts will likely come in the form of higher power costs. The top operating expense for any data center is the cost of power, and Europeans — from consumers to data center providers — were already dealing with higher power costs before the conflict in Ukraine. Power costs already rose as much as 200% in 2021 throughout Europe and even more in the Nordic countries.
There was already a shortage of natural gas at the end of 2021, and the benchmark price in Europe rose from €20 ($22) per MWh in early 2021 to €180 per MWh by December. Gas supplies from Norway were low due to maintenance, China had boosted its gas purchases and supplies from Russia were lower than usual. Additionally, low-carbon power was impacted by nuclear power outages, planned repair periods and lower wind speeds. The use of fossil fuels instead of renewables also pushed carbon permit costs higher. The conflict in Ukraine will likely further disrupt natural gas and oil supplies, adding pressure on electricity prices. Oil supply disruptions could also impact data centers in the form of higher diesel costs for backup generators.
Additionally, data center construction costs will likely rise due to higher energy costs, higher inflation and supply disruptions for materials usually produced in Russia or Ukraine, such as iron ore, steel and aluminum, which will need to be sourced elsewhere. This could lead providers to postpone expansions with the hope that costs will eventually come down, impacting data center supply.
Another supply chain issue could arise from the lack of certain chemicals found only in Russia and Ukraine. Neon supplied by Ukraine, as well as palladium and C4F6 (hexafluorocyclobutene) supplied by Russia, are used in chip manufacturing, sensors and computer memory. The conflict will likely lead to higher prices for these materials — and potentially to supply disruptions that could cause chip shortages. All of this could lead to higher cloud prices in Europe and possibly worldwide, which may impact enterprise plans regarding how much to outsource to cloud.
The Russia-Ukraine conflict also brings additional security concerns for data centers. 451 Research recently published a report discussing what the conflict could imply for cybersecurity. At the data center level, this means data center operators will need to strengthen their defenses against ransomware, distributed denial-of-service attacks and other vulnerabilities. There may even be a need for more physical security — as we have seen Society for Worldwide Interbank Financial Telecommunication data centers employ, with additional police protection in Switzerland — although cybersecurity attacks likely will be more common than actual physical attacks.
Data center demand often surges in times of disruption
In general, during periods of disruption, we tend to see stronger demand for purpose-built leased data centers, as enterprises update disaster-recovery plans and look to move primary workloads to more secure, redundant facilities. Enterprises also tend to accelerate cloud use in uncertain times, since public cloud allows firms to flex resources as needed. Cloud providers, in turn, will often respond to a sudden increase in demand by leasing additional data center space. In this case, the impacts on oil and natural gas delivery could also accelerate efforts to transition to alternative fuels.
Sustainability and efficiency were already becoming key areas where large-scale data centers had an advantage over older, smaller enterprise data centers, and this will likely boost their appeal. As a result of the war in Ukraine, we expect to see an uptick in European demand for leased data centers and cloud, which can offer as much as 80% greater energy efficiency compared to enterprise data centers.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.