FP’s Situation Report: Front-runner to replace Defense Secretary Hagel drops out; Next defense chief inherits a host of problems; Iran’s supreme leader says the West failed in nuclear talks; and much more.

By David Francis with Sabine Muscat

Michèle Flournoy, widely seen as the front-runner to replace Chuck Hagel as the next secretary of defense, abruptly took herself out of the running for the job Tuesday. Flournoy, the co-founder and CEO of the Center for a New American Security (CNAS), would have been the first female secretary of defense. Her withdrawal now muddies one of the most important decisions of President Barack Obama’s second term.

FP’s John Hudson and Yochi Dreazen with the exclusive: "[I]n a letter Tuesday to members of the CNAS board of directors, Flournoy said she would remain in her post at the think tank and asked Obama to take her out of consideration to be the next secretary of defense. Flournoy told the board members that family health considerations helped drive her decision and the fact that two of her children are leaving for college in the next two years.

"’Last night I spoke with President Obama and removed myself from consideration due to family concerns,’ reads the letter, first obtained by FP. ‘After much agonizing, we decided that now was not the right time for me to reenter government.’" More here.

Flournoy joins Democratic Sen. Jack Reed of Rhode Island, a former Army Ranger, who withdrew his name. Of the three frontrunners, only Ash Carter, former deputy secretary of defense, remains. The decision by both Flournoy and Reed to withdrawal pre-emptively underscores the challenges of working with the White House, where policymaking and decision-making has been centralized. The new Pentagon chief would also have to deal with hostile Republicans on Capitol Hill and a series of crises around the world.

Hagel’s successor must deal immediately with the prolonged fight against the Islamic State. The legacy of the next secretary of defense will likely be cemented in Iraq and Syria, where the president has vowed to fight the Islamic State for years. However, there is no guarantee this fight would be a successful one.

The Washington Post‘s Missy Ryan: "No matter who Obama selects as Hagel’s successor, the next defense secretary is likely to struggle, as Hagel did, to contain the instability rippling across the Middle East, given the potency of the Islamic State, the weakness of U.S. partners on the ground and the limits White House policymakers have imposed on U.S. involvement." More here.

The fight against the Islamic State is the main challenge, but there are a host of others. The crisis in Ukraine shows no signs of abating, forcing the Pentagon to reevaluate European defense policy. He or she will also be forced to do more with less, with DoD’s budget set to shrink in the coming years. And all of this has to be done under strict restrictions from the White House.

More on the fallout from Hagel’s resignation below.

With an extension in hand, Ayatollah Ali Khamenei, the supreme leader of Iran, said the West failed to bring his country "to its knees." Khamenei, speaking on Tuesday to Muslim clerics in Tehran, dismissed the diplomatic and economic pressure the P5+1 tried to exert on Iran. Khamenei suggested that he would support seven additional months of negotiations but was skeptical about the prospects of a deal.

The New York Times‘ Thomas Erdbrink: "In a series of posts on a Twitter account used by his office, Ayatollah Khamenei accused the West of meddling in the Middle East and using Sunni militant groups to thwart the Arab Spring uprisings with intra-Muslim infighting, ‘in line with arrogant goals.’ The Iranian authorities often use the term ‘arrogant powers’ as shorthand for the United States and its allies." More here.

Khamenei’s comments are another roadblock for negotiators hoping to agree to a long-term pact by June 30. His comments also reflect an Israeli concern that even if a deal is reached, Khamenei would not abide by its terms.

More on Iran below.

Welcome to Wednesday’s edition of the Situation Report.

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The Situation Report is taking a break tomorrow for the Thanksgiving holiday. We’ll be back in your inbox first thing Friday morning.

Who’s Where When Today

General Philip Breedlove, head of U.S. European Command as well as NATO’s top military commander, is meeting with senior military and government officials in Kiev today. He is visiting Ukraine in his U.S. military capacity. More here.

Hagel, Deputy Secretary of Defense Bob Work, and Chairman of the Joint Chiefs of Staff Army Gen. Martin E. Dempsey have no public or media events on their schedules.

What’s Moving Markets

Reuters reports the American economy outperforms GDP projections: "The Commerce Department on Tuesday raised its estimate of gross domestic product to a 3.9 percent annual pace from the 3.5 percent rate reported last month, reflecting upward revisions to business and consumer spending." More here.

The Wall Street Journal‘s Eric Morath on the power of the American economy: "The upward revision from a first estimate of 3.5 [percent] put the combined growth rate in the second and third quarters at 4.25 [percent], affirming the best six-month pace since the second half of 2003. The output figures are inflation adjusted." More here.

Defense News‘s Jaroslaw Adamowski on the Romanian government looking for private investors in its defense industry: "Bucharest aims to maintain a share of at least 50 percent in the manufacturers, and secure investors who will provide the necessary technology and know-how to upgrade the plants’ production capabilities, the government said in a draft bill obtained by local news site Digi24.ro." More here.

CNBC on a Saudi push to cut OPEC output: "Saudi Arabia will this week push the Organization of Petroleum Exporting Countries (OPEC) to cut production by up to 1.5 million barrels a day to help re-balance the market and lift oil prices from their four-year lows, analysts and strategists told CNBC." More here.

Defense Secretary

The Wall Street Journal’s Adam Entous, Julian E. Barnes, and Carol E. Lee on Hagel’s frustrations with the White House: Hagel "repeatedly found fault with what he saw as indecisiveness by the White House National Security Council, according to current and former officials close to him." More here.

The New York Times‘ Peter Baker on how Hagel’s exit is different from that of Donald Rumsfeld: "The ouster of Mr. Rumsfeld signaled a fundamental change of thinking about the United States’ war strategy and a profound shift in power inside Mr. Bush’s administration as it came to the end of its sixth year. The departure of Mr. Hagel, on the other hand, augurs no such pivot for the Obama administration and seems to cement the current approach to national security." More here.

Writing for Foreign Policy, Gordon Adams on why Hagel’s exit from DoD was about more than the Islamic State: "It has become clear over the past four years that the permanent leadership of the department — the military services — has been chafing under constrained resources and has become increasingly resistant to disciplined leadership from the office of the secretary. The consequence has been growing pressure from the services to raise the defense budget, pressure that the secretary has not resisted." More here.

Defense News‘s Andrew Tilghman on questions about the Pentagon’s future: "US President Barack Obama’s new pick to run the Pentagon will face a dizzying set of challenges affecting the Defense Department’s mission, budget and culture." More here.

FP’s Reid Standish on reaction to Hagel’s exit in Egypt: "One day after announcing that Chuck Hagel is being dismissed as defense secretary, his greatest foreign-policy legacy — relations with Egyptian President Abdel Fattah al-Sisi’s government — seems to be evaporating." More here.

Iran

The Wall Street Journal‘s Laurence Norman, Stacy Meichtry, and Inti Landauro on progress toward narrowing gaps with Iran: "Western officials said finding ways to better track how quickly Iran is able to produce nuclear fuel is central to the talks. The issue goes to the length of time it would take for Iran to ‘break out,’ or rapidly amass the quantity of highly enriched nuclear fuel needed to build atomic bombs." More here.  

Quartz‘s Steve LeVine with more on Iranian leadership’s response to the extension: "It is a response that can be read two ways: president Hassan Rouhani and his cohort will continue to dig in in order to avoid such predictable trickery, thus confounding any near-term future agreement, or it will now start to genuine horse-trade, having proven to hardliners at home that they are alert to Western cunning." More here.

Bloomberg’s David Lerman on the Republican push for new sanctions: "While a number of Republicans called for speedy action on sanctions legislation after the new Congress is seated in January, even some top Republicans stopped short of demanding a new round of penalties unless Iran violates an interim accord or the talks between Iran and world powers collapse." More here.

The Guardian‘s Julian Borger on the race to reach a deal before Republicans take over Congress: "Negotiators are racing to complete an elusive deal on the Iranian nuclear program before conservatives in the US and Iran can close down the talks." More here.

Writing for Foreign Policy, Barry M. Blechman on why a deal needs to get done: "If the talks had ended in complete failure, with both sides giving up and walking away from the negotiating table, Iran would no doubt restart its program, causing the United States and its allies to choose between military action and living with a nuclear-armed Iran. Either choice would have had devastating consequences, possibly marking a fatal blow to preventing the spread of nuclear weapons worldwide." More here.

Afghanistan

The Military Times‘ Brendan McGarry on the Pentagon downplaying plans for expanded combat operations: "Pentagon Press Secretary Navy Rear Adm. John Kirby on Tuesday denied that the guidelines — which also allow for U.S. aircraft and drones to be used to support Afghan forces — reflect an expansion of the American combat mission." More here.

Reuters’s Jessica Donati on plans to leave more U.S. troops in Afghanistan: "Under the U.S. commitment, described as a ‘bridging solution’ until other nations fulfill their pledges later in the year or the troops are no longer needed, Washington may provide up to 1,000 extra soldiers." More here.

The Associated Press’s Lynne O’Donnell on an Afghan review of its military: "President Ashraf Ghani has ordered a top-to-bottom review of the operations of Afghanistan’s defense forces, including discussing the resumption of controversial night raids banned by his predecessor." More here.

The Islamic State

McClatchy’s Susannah George on the fight for Ramadi: "Islamic State fighters on Tuesday penetrated to the core of Ramadi, the provincial capital of Iraq’s largest province, prompting local security officials to warn that the city was on the verge of falling to the extremists. Such a gain would be the Islamic State’s most significant victory in months." More here.

The Associated Press on bombings in Raqqa: "Activists have raised the death toll from a series of Syrian government airstrikes on the Islamic State group’s stronghold in northeastern Syria to at least 95." More here.

The Minneapolis Star Tribune‘s Paul McEnroe on two Minnesota men charged with aiding the Islamic State: "Two Twin Cities men accused of trying to join a terrorist organization in Syria were charged with conspiracy Tuesday by federal prosecutors, part of a continuing investigation into a pipeline used to recruit Somali-Americans to fight overseas." More here.

The Daily Beast‘s Tim Mak on how the United States has not yet begun to train rebels: "It’s been two months since Congress authorized a train-and-equip mission to help Syrian rebels fight ISIS — but recruiting has not started, and training won’t begin until spring of next year." More here.

Reuters reports on the status of the fight: "Islamic State insurgents battled Iraqi forces in the center of Baiji on Tuesday, a week after the army broke their prolonged siege of the country’s largest oil refinery just outside the town, an army officer and residents said." More here.

Russia

Reuters’s Noah Barkin and Andreas Rinke on German Chancellor Angela Merkel’s dead end with Putin: "German officials say they have run out of ideas about how they might sway the Russian leader. The channels of communication with Putin will remain open, but Berlin is girding for a long standoff, akin to a second Cold War." More here.

The BBC reports that France has delayed a shipment of warships to Russia indefinitely: "President François Hollande blamed continuing unrest in eastern Ukraine, where Russia is accused of backing separatists in their fight against the government in Kiev." More here.

Reuters reports on accusations of new Russian supplies arriving in eastern Ukraine: "Ukraine leveled fresh charges on Tuesday that Russia was sending support to pro-Russian separatists in the east, saying that five columns of heavy equipment were seen crossing onto Ukrainian territory on Monday." More here.

Israel

Haaretz‘s Jonathan Lis, Revital Levy-Stein, and Revital Hovel on opposition to Israel’s nation-state bill: "As the political battle over the Jewish nation-state bill escalated, President Reuven Rivlin came out strongly against it on Tuesday, saying the framers of the Declaration of Independence ‘in their great wisdom, insist that the Arab public in Israel not feel like the Jews felt in the Diaspora.’" More here.

U.K. Anti-Terrorism Law

The Daily Beast‘s Nico Hines on England’s new anti-terror law: "Britain has had enough: the government will announce radical plans to end centuries of free speech on Wednesday in an unprecedented terror crackdown that would force Internet companies to monitor users; restrict the movement of suspects and ban extremist speakers from public forums." More here. 

Ferguson

NBC News reports on additional National Guard troops in Ferguson: "Gov. Jay Nixon of Missouri ordered more National Guard troops into the embattled city of Ferguson on Tuesday to keep order on the second night after a grand jury decided not to indict a white police officer who shot and killed an unarmed black teenager." More here.

Revolving Door

From the Navy Times: "Rear Adm. John Haley, the director of global operations at U.S. Strategic Command, will take over for Rear Adm. Mike Shoemaker, according to the DoD release. Shoemaker is moving out west to take over Naval Air Forces and Naval Air Force Pacific in San Diego." More here. 

And finally, happy Thanksgiving!