The tanks may have stopped rolling in Crimea … for now. But the costs of Russia’s invasion of the Black Sea peninsula — and President Vladimir Putin’s saber rattling over Ukraine — are just starting to mount. And the economic pain from the turmoil is spreading far beyond either country’s borders.
As eastern Ukraine faces the prospect of civil war, several other nations in the region, some of which share long borders with Russia, are scrambling to preempt any new Putin-led incursions. The sense of urgency is particularly acute in the former Soviet republics of Latvia, Lithuania, and Estonia. As with Crimea, each has a large population of ethnic Russians, many of whom feel a strong historical and emotional attachment to Moscow.
Both Latvia and Lithuania have vowed to double their respective defense budgets and are at least talking a tough game. “The annexation of Crimea by Russia has fully destroyed the European security system,” Raimonds Vejonis, Latvia’s minister of defense, tells Fortune. Vejonis, who was in college when the Soviet Union collapsed in 1991, says he’s convinced that Putin would use military force in order to create “a Russian world … We have learned our lessons from Ukraine.”
Mired in recession and outsize debt, most governments in the region have spent years cutting defense budgets. Putin, by contrast, has plowed billions into modernizing his Soviet-era arsenal, with new aircraft, drones, and two French-built warships. Russia now trails only the U.S. and China as the world’s biggest military spender. When Putin’s forces rumbled into Crimea in March, they carried new body armor and GPS-jamming trackers, a far cry from the aging kit they dragged into Georgia during their 2008 war in that country.
The lightning invasion of Crimea jolted leaders throughout Europe. “It has stopped once and for all the cutting of Europe’s defense budgets,” former NATO Secretary General Jaap de Hoop Scheffer told the BBC. On April 1, the 28 NATO members voted to beef up the alliance’s military presence on Russia’s periphery. And later in the month the U.S. Army began rotating four infantry units in Poland, Estonia, Latvia, and Lithuania, where they are conducting joint military exercises and training expected to last through the year.
The Russian leader, of course, would face a far tougher fight in the Baltics — where Estonia, Lithuania, and Latvia are all NATO members — than he has in Crimea. If Russia invaded any one, it would be taking on NATO itself: that is to say, the full might of the U.S., Britain, France, and others. “It seems unlikely right now,” says Edward Hunt, senior research consultant with IHS Jane’s in London. “But then, so too did the Russian occupation of Crimea a year and a half ago.” And we know how that worked out.
This story is from the May 19, 2014 issue of Fortune.