President Vladimir Putin’s annexation of Crimea caught Western governments by surprise and has sparked fears of a new Cold War. While it is too soon to know the long-run impact of the Ukrainian crisis on European and global security, the annexation of Crimea has dealt a major blow to Western hopes for the creation of a “Europe whole and free.”

The annexation challenges two basic assumptions on which U.S. policy toward Europe in the post-Cold War era has been based: (1) that Europe is essentially stable and secure, freeing the United States to focus its attention on other areas, particularly Asia and the Middle East, and (2) that Russia had become a potential partner rather than an adversary.

The annexation of Crimea has called into question both of these assumptions. The United States can no longer assume that Europe will be stable and that Russia will not be an adversary. As a result, Washington needs to rethink critical aspects of its policy toward Europe and Russia.

Putin’s World

At the same time, the annexation has highlighted the degree to which Putin’s worldview differs from that of Western leaders. As German Chancellor Angela Merkel pointedly remarked during the Crimean crisis, Putin is “living in a different world.” While most Western leaders do not share this mindset, they need to understand it and take it into account when dealing with Putin.

Putin is driven by 19^th century concepts of geopolitics and great-power competition. In this world, sovereign states are the key actors. Conflict and competition are inevitable, because sovereign states seek to maximize their power. Hard power is the coin of the realm.

Ukraine, with its 46 million people, rich natural resources and access to the Black Sea, is a vital interest for Russia. A compliant Ukraine closely linked to Russia is essential for the realization of Putin’s objective of rebuilding Russia as a strong Eurasian power. As Zbigniew Brzezinski noted some time ago, “Without Ukraine, Russia ceases to be a Eurasian empire. However, if Moscow regains control over Ukraine...Russia automatically again regains the wherewithal to become an imperial state, spanning Europe and Asia.”

President Yanukovych’s ouster threatened to deal a severe blow to Putin’s hope of eventually drawing Ukraine back into the Russian orbit. A pro-Western Ukraine closely tied to Europe would alter the strategic balance in Central Europe and pose a significant obstacle to Putin’s goal of reestablishing Russia as a Eurasian power.

Many members of the Russian political elite have a difficult time regarding Ukraine as an independent state. Putin shared this point of view at the NATO summit in Bucharest in April 2008. Putin reportedly remarked to President Bush that Ukraine was “not a real state”, implying that its status as an independent state was unnatural and provisional.

Having spent two decades as a KGB operative, Putin could not imagine that the mass protests and ouster of Yanukovych were the result of spontaneous actions. In his view, the Ukrainians were incapable of organizing such effective protests on their own. Therefore the protests had to have been instigated and orchestrated by Western intelligence agencies whose goal was to consolidate Western influence in Ukraine.

The annexation of Crimea was aimed at reasserting Russia’s hegemony in what Moscow considers to be its sphere of influence. Ukraine is central to the success of Putin’s integration effort in the post-Soviet Space, especially his attempt to establish a Eurasian Economic Union. Without the participation of Ukraine the union makes little sense and has little chance of success.

But Putin’s action was also aimed at underscoring a broader point: that Russia is an important international power that has its own interests and these must be taken into account and respected. This has been a persistent theme in Putin’s speeches harking back to his controversial address to the Munich Security Conference in 2007. The speech was a strident attack on the West, especially the United States, which he characterized as a rogue elephant with little regard for international law or Russian interests.

Many of these same themes ran through his speech to both houses of parliament in the Kremlin on March 18th. His speech sought to tap into the deep well of Russian nationalism and anti-Western sentiment, which has increasingly characterized his rule in the last several years, and was designed to project the image of a strong, decisive leader who stood up for Russian interests and refused to kowtow to the West.

Putin believes that the West took advantage of Russian weakness in the first decade after the collapse of the Soviet Union and that the current post-Cold War security system does not adequately take into consideration Russian interests. Under Putin, Russia has, in effect, become a revisionist power. Putin believes that the security system that emerged after the end of the Cold War was one-sided and did not adequately reflect Russian interests. It resulted in a European security system based on NATO and the European Union that reflected the strategic interests of the United States. He wants the system revised to more adequately take into consideration Russian interests.

Ukraine: The Dangers Ahead

The key question is: what is Putin’s end game? Will he be satisfied with getting Crimea back? Or will he now try to destabilize the eastern and southern parts of Ukraine as well?

At this juncture, the answer is not clear. Much will depend on the impact of the Western response to Putin’s actions in Crimea. If the Western response is weak and ineffective, Putin might be tempted to “double down” and send troops into eastern Ukraine in order to “protect” the Russian-speakers there.

However, an intervention in eastern Ukraine would be far more difficult than invading Crimea. In eastern Ukraine the majority of the population is made up of ethnic Ukrainians whose primary language is Russian. They voted overwhelmingly for an independent Ukraine in l991. The majority wants close ties to Russia, but most do not want to join Russia. Thus, Putin cannot automatically count on the strong support of the population in eastern Ukraine as he could in Crimea. Moreover, the Ukrainian army, though smaller and less well equipped than the Russian army, is not likely to sit idly in its barracks if an invasion occurs. Thus, an attempt by Russia to intervene militarily in eastern Ukraine would entail serious political and military risks.

The military invasion and occupation of Ukraine, a country whose size is close to that of Texas and whose population is about 45 million, would be significantly more difficult than the invasion of Crimea. At least 150,000 active forces would need to be deployed with a likely follow-on occupation force of similar size drawn from the various internal security services.

Over the last five years, the Russian armed forces have been undergoing a transition from a Soviet-era mass-mobilization force to that of a much smaller and more technologically enabled force. That transition has led to a much smaller total force that is still highly reliant on one-year conscripts due to a faltering attempt to professionalize the military.

The Crimean operation revealed that Russian military reform, while slow and not without serious problems, has succeeded in upgrading the performance of select special-operations forces and paratroop units. These units were the backbone of the forces that carried out the seizure of Crimea and were better trained, better equipped and better disciplined than regular Russian army forces. They would probably spearhead the initial phase of combat operations in an invasion of eastern Ukraine. However, in the later phases of the intervention, the Russian forces would have to rely heavily upon one-year conscripts of indifferent fighting quality. In addition, the Russian armed forces’ operational logistics system would have difficulty supporting a high-speed expeditionary operation.

However, even if he doesn’t openly stage a large-scale military invasion, Putin has the capacity to exacerbate internal tensions in eastern Ukraine and cause serious unrest through a variety of covert actions and economic coercion. This unrest could further destabilize the central government in Kiev and provide a pretext for pro-Russian forces in eastern Ukraine to call on Russia to intervene to “protect” the Russian-speaking population. Bearing this in mind, Foreign Minister Sergei Lavrov’s proposal that Ukraine’s constitution be changed to make Ukraine a “federalized state” could be cause for concern. Under the proposal, Ukraine’s Russian-speaking regions would have significant autonomy and be granted “wide powers” to establish economic and cultural ties with their neighbors. The plan would weaken the central government’s authority and control over the Russian-speaking regions and enable Russia to strengthen its influence in those areas. This would make it easier for Putin to conduct a Crimea-like takeover in the Russian-speaking areas.

Moreover, Putin would not have to conduct the takeover of eastern Ukraine all at once. He could do it slowly, in piecemeal fashion, concentrating on key cities such as Donetsk and Kharkiv and gradually extending the effort to other Russian-speaking areas. This would make the takeover harder to prevent and oppose.

America Must Lead

The Obama administration needs to confront Putin’s challenge head-on and develop a broad-based, sustained response designed to deter further attempts by Russia to destabilize Ukraine or its neighbors. This is not a time when the United States can afford to “lead from behind.” Our European allies will be looking for – and expecting – firm American leadership.

The U.S. response should encompass a broad range of political, economic and military measures. These should include:

Economic Sanctions

The sanctions announced on March 20th provide a good start. They are directed at officials and supporters close to Putin and are designed to promote internal fissures between the regime and its close supporters. They can be progressively expanded to “target Russia’s trading connections with the West, its use of global capital markets, and its reliance on the international banking system”, says Tom Keatinge, a former investment banker at J.P. Morgan.

The sanctions are not likely to compel Putin to change his behavior immediately, but over time, they can increase the economic costs to the Russian economy. Even before the Ukrainian crisis, Russia’s economy had begun to show signs of stagnation. Keatinge states, Russia’s GDP growth fell from 3.4 percent in 2012 to 1.3 percent in 2013. Even without significant sanctions the Russian economy is sliding toward a recession.

Capital flight from Russia has spiked dramatically since the annexation of Crimea and is anticipated to reach $65-70 billion in the first quarter of 2014, far higher than initially expected. This has prompted fears that Russia may have to impose capital controls to stem the loss.

Since the sanctions were imposed, the Russian economy has shown further signs of stagnation. Stock prices have fallen and the ruble has weakened, increasing the costs of imports and dealing a sharp blow to companies with foreign currency denominated borrowing. Inflation is expected to rise even higher than the seven percent predicted by the Russian Ministry of Economics.

Taken as a whole, these indicators suggest that the impact of the sanctions on the Russian economy is likely to be considerably higher than initially anticipated. This is because Russia is much more closely integrated into the international global economy than the Soviet Union.

The energy market is undergoing important changes that will increase the economic dilemmas Russia will face. The price of oil is expected to drop as low as $70/barrel – well below Russia’s break-even price of slightly above $110/barrel. The development of US shale gas and tight oil, European efforts to reduce their dependence on Russian gas and Iran’s expected return to the international energy market will reduce demand for – and income from -- Russian energy imports. Thus Putin cannot rely on the type of large revenue windfall from high oil prices that contributed to a visible improvement in Russian living standards during his first two terms as president while dramatically increasing the size of the military budget.

Russia has about $494 billion in foreign currency and gold reserves in the central bank that can be used to defend the ruble and prop up its banks. However, as Ambrose Evans-Pritchard of the Telegraph states, “the central bank cannot easily deploy this money in a recession since foreign exchange intervention entails money tightening.” At the same time, Evans-Pritchard asserts that it is risky for Russian authorities to allow the ruble to continue to decline “since Russian banks and companies owe $650 billion in foreign currencies”. The ruble has already fallen 8% this year, making it harder for struggling Russian companies to repay dollar debts.

Putin’s popularity and power are closely tied to Russia’s economic success. If the economy seriously declines, he could face growing social discontent at home that could constrain his ability to rebuild Russia into a powerful and influential Eurasian actor.

The Obama administration needs to work closely with our European allies, especially Germany, to coordinate an effective sanctions regime. Germany is Russia’s most important European trading partner and investor. Its voice carries weight in Moscow. Thus ensuring Washington and Berlin’s policies are closely politically and diplomatically synchronized will be important.

However, getting Germany to sign on to a robust program of sanctions will not be easy. Germany has a strong economic stake in trade with Russia. German companies have invested over $20 billion in Russia and 300,000 jobs in Germany depend on the economic relationship with Russia. Germany also is heavily dependent on the import of natural gas from Russia. Chancellor Angela Merkel has strongly condemned the annexation of Crimea, but she is likely to be reluctant to impose robust sanctions against Russia, especially if Putin does not escalate the crisis beyond the annexation of Crimea. The position that Germany adopts will have a significant impact on EU policy. If Merkel refuses to impose robust sanctions on Russia, the EU is not likely to support imposing them either. This could provoke a serious split between Washington and Berlin and strengthen Putin’s view that he will not pay a high price for his aggression in Crimea – or elsewhere in Ukraine.

A Robust Economic Assistance Package for Ukraine

The Ukrainian economy is in dire straits. Ukraine will need significant economic assistance in order to stave off bankruptcy. In 2013, the budget deficit increased to about 8 percent of GDP while the current account deficit reached almost 9 percent of GDP. Economic growth has been unusually low for the last two years. Washington should coordinate a package of economic assistance with the EU and the International Monetary Fund that enables the Ukrainian government to stabilize its economy. This assistance should be conditioned on a commitment by the Ukrainian government to implement a coherent program of economic and political reform and to reduce corruption.

Bilateral U.S.-Ukrainian Bilateral Defense Cooperation

TheUnited States should upgrade and expand defense cooperation with Ukraine. This should include a military assistance package with emphasis on programs designed to modernize and reform the Ukrainian Armed Forces and improve their capacity to defend the country’s borders. Washington and its key NATO allies will have to be very careful. Too vigorous an effort at military engagement could provoke Moscow to take quick military action. Finding the right balance in this regard will be very important.

Ukrainian Relations with NATO

Defense cooperation with NATO in the immediate future should focus on strengthening Ukraine’s capability for self-defense and enhancing civilian control of the military. The issue of NATO membership should be put on the back burner. Ukraine is not ready militarily or politically for NATO membership. Pushing for Ukrainian membership in NATO now would be counterproductive. It would only antagonize Russia and could prompt Moscow to take military countermeasures that could exacerbate the current crisis.

Regional Reassurance

In the wake of Russia’s annexation of Crimea, greater attention needs to be paid to measures designed to reassure the new allies from Eastern Europe, especially the Baltic states and Poland, that the alliance takes their security concerns seriously. In March, six F-15 and two air refueling tankers were sent to Lithuania to reinforce the air patrol of Baltic borders. The United States also sent 12 additional F-16 fighter jets to Poland to bolster the U.S. aviation detachment there in an attempt to reassure the members in Eastern Europe.

In the past, NATO has not permanently deployed allied troops in Eastern Europe. However, in the wake of the annexation of Crimea, it is time to reconsider this decision. Many East European allies fear that the United States is losing interest in Europe. They see a permanent stationing of NATO troops on East European soil as a tangible indication of the U.S. commitment to their security and an important deterrent against Russian aggression. Polish officials, for instance, have indicated that Warsaw would like the alliance to deploy two combat brigades in Poland. The Baltic states and Romania have also expressed an interest in having “boots on the ground.” Additional air power assets such as combat aircraft, tankers and Intelligence, Surveillance, and Reconnaissance (ISR) aircraft could also be part of this reinforcement.

The annexation of Crimea has also given new impetus to internal debates within Finland and Sweden about the possibility of NATO membership of one or both countries. While neither country is likely to apply for membership soon, this could change if the security environment in northern Europe deteriorates further. From a purely military perspective, Swedish membership in NATO would significantly improve NATO’s ability to deter any Russian aggression against the Baltic states.

Global Impact of a New Cold War

As highlighted above, the comfortable strategic assumption that Europe would remain an island of stability has been shattered by Russia’s annexation of Crimea and the near-term prospect that Moscow may dramatically escalate the Ukraine crisis. At the moment, Putin’s end game is not clear. If Putin were to take military action in eastern Ukraine, then this could result in a dramatic deterioration of relations with the West, and a new Cold War. Such a development would have serious strategic implications in a number of important foreign and defense areas. A key strategic assumption of the Quadrennial Defense Review (QDR) is that the modernization of the USAF and USN can be paid in part by the substantial downsizing of the U.S. Army to accommodate a secular downtrend in defense spending. That downward trend in defense spending will likely be reversed, but a large increase during this decade is unlikely due to the heavy federal budget demands made by the retiring “baby boomers” on the national health care system and domestic demands for major increases in infrastructure spending. This suggests that any reinforcement of NATO Europe, especially Eastern Europe, will be modest unless the Ukraine crisis breaks out into a full-scale regional war.

In East Asia, there is a genuine fear that China might learn the “wrong” lessons, especially if the Putin regime appears to pay only a modest price for its forceful annexation of Crimea. The Obama Administration has taken this prospect seriously with Secretary Hagel’s recent announcement in Tokyo that additional missile defense ships will be permanently deployed to Japan.

As for the turbulent Greater Middle East, a radical downturn in U.S.-Russian relations could transform the ongoing negotiations between the P5+1 and Iran to create a “grand bargain” that contains the Iranian nuclear infrastructure under tight international supervision while giving significant financial and economic sanction relief. In a form of geo-strategic “Roller Ball” Moscow could well decide to act as a spoiler to these negotiations. That disruptive role might emerge in the form of providing Iran with advanced air defense systems (currently denied) and taking additional actions that undermine the current sanction regime.

The prospect of a new Cold War between Moscow and Washington will put other very important bilateral cooperation at risk. For example, Moscow could close down the Northern Distribution Network that provides the ISAF with an alternative route of supplies to Afghanistan than through Pakistan. On another matter of logistics, Moscow may decide to end its special relations with the United States by denying NASA space taxi services to the International Space Station (ISS) and disallow further sales of Russian-made rocket engines that propel important U.S. space launch vehicles.

Finally, a second Cold War would end the prospect of any further progress in nuclear-arms reductions below the limits set by the New START and even put the viability of the Intermediate-Range Nuclear (INF) Treaty at risk. The prospect of setting in motion a robust, bilateral nuclear-arms reduction process that opens the vista of long-term global abolition of nuclear weapons would be terminated for the foreseeable future.

F. Stephen Larrabee holds the Distinguished Chair in European Security at the RAND Corporation. Peter A. Wilson is an adjunct senior defense analyst at RAND and an adjunct professor in the Strategic Studies Program at Georgetown University.