I have just returned from St Petersburg, regarded as the most 'European' of all Russia's cities. Burgeoning investment has made St Petersburg look modern (if still a little grim), and many of its residents have a worldly and cultured air. Shiny new office developments are starting to crowd out older grey concrete monoliths, and expensive products are advertised everywhere.

But for all that, St Petersburg is still Putin's Russia. The only media sources are state-approved. Bloggers with more than 3000 followers must register as official media entities and are subject to tight laws that carry jail terms for criticising public officials. All internet companies must store data on their users and make it available to the government. Journalists who are too critical of the Kremlin receive 'warnings' via a phone call to their superiors.

Near the famous Hermitage museum, market stallholders sell a bewildering array of clocks, clothing and crockery, all emblazoned with Putin's stern face. You can buy 'Russian leader' tea (the Putin variety is naturally the strongest). Against a backdrop of fighter planes and tanks, a T-shirt bearing the slogan 'Russian Military Power' is currently a hot seller.

In many ways, St Petersburg is emblematic of Putin's novorossiya ('New Russia'): modernised and affluent. Yet Russians are strangely determined to constantly remind everyone – and themselves – of Russia's status as a world power.

Many of Russia's foreign policy specialists subscribe to a school of geopolitics which places an emphasis on stability in Eurasia based on the spread of Russian language, ethnicity and culture that was notionally achieved under Catherine the Great. Yet novorossiya has a deeper and more troubling meaning than a new modern Russia with a radicalised politics of identity. It was used during the Russian Empire of the 1700s and 1800s to denote the territory north of the Black Sea, currently part of Ukraine. It included much of the industrialised Donbass region and the cities of Luhansk and Donestsk, as well as the coastal town of Mariupol where Russian (and Russian-backed) troops have opened a new front.

Putin has made two major recent references to novorossiya. The first was in April this year, to justify the annexation of Crimea. The second came when he addressed the 'militia of novorossiya' on 28 August. Now he has explicitly called for the formation of a new state in Eastern Ukraine.

If this was just posturing or signalling, there would be little reason for the West to worry. The problem, though, is that Putin is using a significant amount of hard power to bring about his vision. The T-72B1 tanks (which are not used by Ukraine) videoed near Amvrosiyivka in Ukraine are proof that he has escalated from a campaign of deniability and deception to outright intervention. Russian media made little attempt to explain what ten Russian paratroopers captured by Ukrainian forces were doing on the other side of the border, except for a bland suggestion that they had 'got lost'. When the ten were swapped for over 60 Ukrainians, it sent the message that Russian lives were intrinsically more valuable than Ukrainian ones. And the decision to keep sending relief convoys to the separatists is designed to goad Ukraine into taking action against them, which would be a pretext for a full-scale invasion.

The vast majority of Russians, including even some among the marginalised 'liberal' intelligentsia, would strongly back Putin doing exactly that. Notwithstanding his media dominance, Putin is genuinely popular, especially among young people. He is seen as having restored Russia's sense of Derzhavnost: acting and thinking like a great power. Russians also generally accept Putin's regional Eurasian Union vision as being institutionally legitimate, just like the EU. They see his moves in Ukraine as authentically humanitarian, with a solid basis in international law. After all, they ask, why is it acceptable for the West to intervene in conflicts and not for Russia, whose own people (ethnic Russians) are being threatened?

Westerners are also often surprised to find that Putin is seen at home as a moderate. The Russian political landscape allows generous airtime for figures like the one-time Putin confidante Aleksandr Dugin and Vladimir Zhrinovsky, the clown prince of Russian politics. Dugin was formerly the ideologue of the proto-fascist Russian National Bolshevik party, and among many other antics Zhirinovsky's misnamed Liberal Democratic Party of Russia once published a foreign policy manifesto entitled Plevok na zapad ('Spitting on the West'). When Zhirinovsky recently suggested that Putin should be made 'supreme leader', Putin demurred, saying he ruled only due to the will of the people.

It is often said that Putin appears to hold all the aces in the imbroglio with Ukraine. This is mistaken. The EU is far more powerful economically, and so is the US, which is also vastly superior militarily. Closer to the truth is that Putin is the only one prepared to play the cards he has. The US is hoping that the Ukraine problem will go away, and sees managing Putin as a job for Brussels. But given its small military capabilities and deep internal divisions, the EU has little option but to appease members (like Germany) who are not keen on punishing Moscow too much.