How Would A Western Cloud Shutdown Affect Russia?

Mar 23, 2022
4 min read

Russian businesses and government agencies have traditionally depended on technological development to ensure efficiency in all sectors across the globe. Ukraine has encouraged cloud computing and software behemoths such as Microsoft Corp (MSFT.O) and SAP SE (SAPG.DE) to isolate Russia to avert a Russian invasion. What is at risk is as follows.

A slew of technology giants, including Amazon, Microsoft, and Google, have suspended sales of services and goods in Russia in reaction to the country's invasion of Ukraine and the subsequent government sanctions. Now, analysts warn, US technology firms might go a step further and deny access to Russian businesses that rely on their cloud computing services.

What Does Ukraine Require?

The Ukrainian digital transformation ministry requests that North American and European technology businesses suspend all business with Russian customers, possibly damaging Russia's economy and compelling the Kremlin to reassess what it has dubbed a "special military operation" in Ukraine. Since the invasion started last month, several corporations, like Microsoft, have stopped taking new clients in Russia. However, many have not terminated contracts with current clients, except those subject to new sanctions and export restrictions.

What Role Do Western Businesses Play in Russia's Information Technology Systems?

Russian businesses and government organizations have long depended on Western-developed technology as the foundation for their own and managed information technology systems. In Russia, the market is dominated by servers from International Business Machines Corp (IBM.N), Dell Technologies Inc (DELL.N), Hewlett Packard Enterprise and many more.

Additionally, SAP, Microsoft, IBM, Oracle Corp (ORCL.N), and Salesforce.com Inc. applications are famous (CRM.N). The tools assist firms in sending emails, analyzing data, storing records, and managing their operations in general. Vendors are unable to switch off certain technologies remotely. However, there are ways to suffocate customers' systems. According to two former IBM Eastern Europe senior salespeople, banking, telecommunications, transportation, and other industries in Russia may suffer if suppliers discontinue delivering replacement parts, security patches, software updates, and technical support. If services become unavailable or deteriorate owing to a lack of upgrades, clients may be compelled to pursue alternatives, like pen-and-paper accounting.

How Would a Closure of The Western Cloud Affect Russia?

According to IDC analyst Philip Carter, Russian businesses have been most hesitant to entirely depend on cloud services, particularly those offered by US-based providers such as

Microsoft Azure and Alphabet Inc's Google Cloud (GOOGL.O). Carter added that cloud computing represents 5% of total domestic IT expenditure in Russia compared to 19% in the United States. Consequently, he claimed that Russian businesses that are dropped from the cloud would not be severely harmed. Nonetheless, the Russian cloud business has risen rapidly over the previous two years, according to experts, with the epidemic pushing trade online. According to IDC's 2020 market share predictions, Microsoft has the most significant market share in Russia at 17%, followed by Amazon.com Inc's cloud unit at 14% and IBM at 10%. Yandex NV (YNDX.O), a Russian corporation, is fourth with a 3% portion of the market. However, according to IDC, Russia and Ukraine together account for just 5.5 percent of total information and communication technology investment in Europe and 1% globally.

What Have Western Businesses Said?

Salesforce said on Monday that it had begun terminating client connections in Russia, citing a tiny, non-material number. Other businesses refused to comment on whether they contemplated terminating relationships with current customers. Amazon Web Services has said that most of its clients in Russia are multinational corporations and that the company has a long-standing policy of not conducting business with the Russian government. IBM and Oracle both said that they had ceased all operations in Russia, and IBM emphasized that they do not conduct business with Russian military entities. HPE, Dell, SAP, and Microsoft have all said to halt sales. A request for comment from Google Cloud was not responded to.

It is one thing to put an end to sales inside a nation. Another is to cut off access to critical internet services.

"Isolating Russia from Western internet capabilities, whether Office 365 or Amazon Web Services, would almost certainly have a debilitating impact, at least in the near term," said Alexander Gounares, CEO of Bellevue, Washington-based security technology business Polyverse.

This is what Mykhailo Fedorov, Ukraine's minister of digital transformation and deputy prime minister, has urged.

"Suspending AWS services in the Russian Federation would support a worldwide unified motion of several countries and enterprises that have prioritized long-term stability and development above possible short-term economic losses," Fedorov said in a letter to Amazon founder Jeff Bezos.

Who Might Benefit From The Exit Of Western Companies?

Indigenous office software such as MyOffice or local clouds services such as Yandex and ActiveCloud. However, IDC's Carter noted that prices and quality might be less advantageous. According to Canalys' Blake Murray, Chinese technology businesses might fill the void. Alibaba Group Holding Ltd (9988.HK) and Tencent Holdings Ltd are two cloud service providers (0700.HK). Huawei Technologies Co Ltd, located in China, established a data center in Moscow last year for Russia's scientific and academic communities. Nonetheless, any usage of Western components in their operations might hinder Russian sales in light of recent US trade restrictions.

Conclusion

Gounares said that the Russian people must get the truth — and that turning down internet access may obstruct that process. Quinn noted that technology businesses are operating in an unknown area. "During prior wars, the globe was not as interconnected and reliant on a limited number of firms."

This week, Amazon, Microsoft, and Google all published blog articles outlining how their cloud and security technologies assist Ukrainian organizations in combating cyberattacks. Amazon included information about its AWS terms of service in its article – even though Amazon does not run an e-commerce operation in Russia.

"AWS has explicit terms of service that prohibit customers from using their services to threaten, provoke, advocate, or actively support violence, terrorism, or other significant damage to others," the blog post added. "Any client we are aware of who engages in this sort of activity will have their AWS account suspended." Stopping cloud services for any client harms cloud providers' financial lines. However, Ives estimated that it would have a "1% to 2% revenue effect in the worst-case scenario," considering that Russia-based consumption represents for a minor portion of their entire company.