Of course they'd retaliate. They're not going to let just Russia live so that the human race goes on.
The more interesting question is what happens if Putin actually goes for a small non nuclear NATO nation. I'd expect retaliation via troops, air etc but what if Putin sends a nuke or 2 to flatten it and threatens nukes for the entire world if they don't back down?
Will US, UK, France etc say, 'Well, country X isn't worth ending the world for even though they're NATO' and let it be? I'd be surprised if Putin hasn't thought of this and push comes to shove, there's a part of me that thinks he'd be right and the west would back down.
I don't think the way Russian conducted this operation fits to the idea that Putin is that indifferent to using nukes. He clearly fears the West and the NATO, that much is obvious. I believe it is much more likely that he just thinks of a new Soviet empire than about world domination. Nukes are just contrary to his goals as they are to ours.