diff --git a/pkg/rhcos/openstack.go b/pkg/rhcos/openstack.go
index 04044cb53e6..98bd8640e7b 100644
--- a/pkg/rhcos/openstack.go
+++ b/pkg/rhcos/openstack.go
@@ -3,6 +3,7 @@ package rhcos
 import (
 	"context"
 	"net/url"
+	"strings"
 
 	"github.com/pkg/errors"
 )
@@ -25,9 +26,16 @@ func OpenStack(ctx context.Context) (string, error) {
 		return "", err
 	}
 
-	// Attach uncompressed sha256 checksum to the URL
-	checkSuffix := "?sha256=" + meta.Images.OpenStack.UncompressedSHA256
-	baseURL := base.ResolveReference(relOpenStack).String() + checkSuffix
+	baseURL := base.ResolveReference(relOpenStack).String()
+
+	// Attach sha256 checksum to the URL. If the file has the ".gz" extension, then the
+	// data is compressed and we use SHA256 value; otherwise we work with uncompressed
+	// data and therefore need UncompressedSHA256.
+	if strings.HasSuffix(baseURL, ".gz") {
+		baseURL += "?sha256=" + meta.Images.OpenStack.SHA256
+	} else {
+		baseURL += "?sha256=" + meta.Images.OpenStack.UncompressedSHA256
+	}
 
 	// Check that we have generated a valid URL
 	_, err = url.ParseRequestURI(baseURL)
diff --git a/pkg/tfvars/openstack/openstack.go b/pkg/tfvars/openstack/openstack.go
index 7dc329a9702..9d428769b1c 100644
--- a/pkg/tfvars/openstack/openstack.go
+++ b/pkg/tfvars/openstack/openstack.go
@@ -2,8 +2,13 @@
 package openstack
 
 import (
+	"compress/gzip"
 	"encoding/json"
 	"fmt"
+	"io"
+	"net/url"
+	"os"
+	"strings"
 
 	"github.com/gophercloud/gophercloud/openstack/identity/v3/tokens"
 	"github.com/gophercloud/gophercloud/openstack/imageservice/v2/images"
@@ -11,6 +16,7 @@ import (
 	"github.com/openshift/installer/pkg/rhcos"
 	"github.com/openshift/installer/pkg/tfvars/internal/cache"
 	"github.com/pkg/errors"
+	"github.com/sirupsen/logrus"
 
 	"sigs.k8s.io/cluster-api-provider-openstack/pkg/apis/openstackproviderconfig/v1alpha1"
 )
@@ -63,7 +69,32 @@ func TFVars(masterConfig *v1alpha1.OpenstackProviderSpec, cloud string, external
 			return nil, err
 		}
 
-		cfg.BaseImageLocalFilePath = localFilePath
+		// Compressed image support was added to OpenStack Glance only in Train release. Unfortunately previous
+		// versions do not have this feature, so we have to check whether or not we need to decompress the file.
+		// For more information: https://docs.openstack.org/glance/latest/user/formats.html
+		// TODO(mfedosin): Allow to skip this step if Glance supports compressed images.
+		baseImageURL, err := url.ParseRequestURI(baseImage)
+		// If the file has ".gz" extension, then its data is compressed
+		if strings.HasSuffix(baseImageURL.Path, ".gz") {
+			localFilePathUncompressed := localFilePath + ".uncompressed"
+
+			// Do nothing if we already have the uncompressed file in cache, otherwise decompress the data
+			_, err = os.Stat(localFilePathUncompressed)
+			if err != nil {
+				if os.IsNotExist(err) {
+					logrus.Infof("Decompress image data from %v to %v", localFilePath, localFilePathUncompressed)
+					err = decompressFile(localFilePath, localFilePathUncompressed)
+					if err != nil {
+						return nil, err
+					}
+				} else {
+					return nil, err
+				}
+			}
+			cfg.BaseImageLocalFilePath = localFilePathUncompressed
+		} else {
+			cfg.BaseImageLocalFilePath = localFilePath
+		}
 	} else {
 		// Not a URL -> use baseImage value as an overridden Glance image name.
 		// Need to check if this image exists and there are no other images with this name.
@@ -99,6 +130,32 @@ func TFVars(masterConfig *v1alpha1.OpenstackProviderSpec, cloud string, external
 	return json.MarshalIndent(cfg, "", "  ")
 }
 
+// decompressFile decompresses data in the cache
+func decompressFile(src, dest string) error {
+	gzipfile, err := os.Open(src)
+	if err != nil {
+		return err
+	}
+
+	reader, err := gzip.NewReader(gzipfile)
+	defer reader.Close()
+	if err != nil {
+		return err
+	}
+
+	writer, err := os.Create(dest)
+	defer writer.Close()
+	if err != nil {
+		return err
+	}
+
+	if _, err = io.Copy(writer, reader); err != nil {
+		return err
+	}
+
+	return nil
+}
+
 func validateOverriddenImageName(imageName, cloud string) error {
 	opts := &clientconfig.ClientOpts{
 		Cloud: cloud,