FP’s Situation Report, presented by Lockheed Martin: Australia’s fears are realized with hostage crisis in Sydney; Fallout from the torture report continues; Congress raises the stakes with Russia; and much more.

Australian fears are realized as gunmen believed to be radical Islamists have taken hostages in Sydney. Australian officials have long warned that its citizens were fighting in the Middle East under the Islamic State banner, leading to concerns that the fight against the group could land on Australia’s shores. It now appears if their fears have been realized, as gunmen holding hostages in a central Sydney café have displayed the Islamic State flag. Australia now joins Canada as a victim of the fight against the Islamic State outside of the Middle East, a grim reminder of the global nature of the fight to dismantle the group.

The Australian’s Kate Sullivan on the known and unknown facts of a crisis they say could last for days. More here.

The Sydney Morning Herald’s Anne Davies and Tim Elliott on Muslim leaders condemning the hostage takers: “Community leaders were bracing for a backlash against their communities in coming days and warned mosque members to head straight home on Monday evening. More here.

President Barack Obama and CIA Director John Brennan walk a fine line in the wake of the Senate’s torture report. Ahead of the report’s release, Obama and Brennan synchronized their response to the revelations that the United States had tortured prisoners. The result of this close partnership is a president who hasn’t endorsed torture but won’t punish those who oversaw it.

The New York Times’ Peter Baker and Mark Mazzetti: “[F]ew presidents have had as close a bond with their intelligence chiefs as Mr. Obama has forged with Mr. Brennan. It is a relationship that has shaped the policy and politics of the debate over the nation’s war with terrorist organizations, as well as the agency’s own struggle to balance security and liberty. And the result is a president who denounces torture but not the people accused of inflicting it.” More here.

More on the torture report below.

The U.S. Senate raises the stakes with Russia as new sanctions head to the president. Last week the Senate passed the Ukraine Freedom Support Act authorizing Obama to send lethal military assistance to Ukraine, while imposing new economic sanctions against Russia’s energy sector. Russian officials said potential penalties would warrant a “response” from Moscow, although it is unclear what Russia could do to reciprocate against the United States. The bill shows a growing consensus within the Senate that more needs to be done to check Russia’s aggression. It’s unclear whether the president or his European allies would support the legislation.

Bloomberg’s Indira A.R. Lakshmanan: The sanctions “go beyond what the White House and European Union have been willing to do so far.… The measure, HR 5859, which won unanimous initial approval in both the Senate and House last week, would mandate U.S. sanctions against Rosoboronexport, the state agency that promotes Russia’s defense exports and arms trade. It also would require sanctions on OAO Gazprom, the world’s largest extractor of natural gas, if the state-controlled company withholds supplies to other European nations.” More here.

More on Russia and Ukraine below.

Welcome to Monday’s edition of the Situation Report.

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Who’s Where When Today

Secretary of State John Kerry is in Rome.

9:00 a.m. The Atlantic Council releases a report on “25 Years of Transition: Post-Communist Europe’s Economic Transformation.” 9:00 a.m. CSIS hosts a discussion on “Religious Radicalism after the Arab Uprisings.” 9:00 a.m. CSIS hosts a discussion on “The Future of Homeland Missile Defense: A Fresh Look at Programs and Policy.” 9:30 a.m. Stimson Center hosts a panel discussion on “The Escalating Shi’a-Sunni Conflict: Assessing the Role of ISIS.” 10:00 a.m. U.N. Security Council holds its monthly meeting on Israel-Palestine. 2:45 p.m. Obama delivers remarks to the troops at Joint Base McGuire-Dix-Lakehurst in New Jersey. 3:00 p.m. U.N. Security Council hold meetings on Liberia, Syria, Sudan, and South Sudan.

What’s Moving Markets

The New York Times’ Ashley Parker and Robert Pear on the Senate approval of the 2015 appropriations bill: “The vote concluded a long day of brinkmanship, spurred by a legislative challenge to Mr. Obama’s executive action on immigration by Senator Ted Cruz, Republican of Texas, who helped force the Senate into a weekend session. By the end of the day, Mr. Cruz found himself isolated even from members of his own party.” More here.

Bloomberg’s Cheyenne Hopkins and Silla Brush on Wall Street’s big win in the appropriations bill: “With must-pass spending legislation making its way through Congress this week, banks seized on an opportunity to attach a measure that would halt a planned restriction on derivatives trading they had long opposed.” More here.

The Wall Street Journal’s Alexander Kolyandr: “The International Monetary Fund said Sunday its team is expected to return to crisis-gripped Ukraine early 2015 to conduct policy discussions.” More here.  

Torture Report

The Huffington Post’s Matt Sledge on Washington closing ranks: “Republicans are dismissing the document as a biased Democratic product. A few Democrats are calling for Brennan’s resignation. Almost no one in office is calling for widespread changes at the CIA — or for a renewal of the Justice Department investigation into whether to prosecute those who knew about or carried out torture.” More here.

The Washington Post’s Wesley Lowery on other Bush administration officials defending their actions: “Current and former intelligence officials have been sharply defensive of CIA tactics in the years after the Sept. 11, 2001, terror attacks, and have insisted that declassifying a report that details counterterrorism tactics puts intelligence agents and troops participating in ongoing efforts at risk.” More here.

The Washington Post’s Karen DeYoung on doctors’ role in enhanced interrogation: “As described in the Senate Intelligence Committee report released this week, CIA medical doctors, as well as psychologists, were intimately involved in virtually every interrogation session to a far greater extent than was previously known.” More here.

Russia

Voice of America with more on Russia’s response to possible sanctions: “It accused the United States of again making ‘unfounded accusations’ against Russia, adding that Russia would not succumb to ‘blackmail,’ compromise its national interests or permit interference in its internal affairs.” More here. 

Reuters reports on a near collision: “A Russian military jet nearly collided with a commercial passenger airplane in international airspace near southern Sweden on Friday, the Swedish authorities said, but Russia insisted on Sunday that its jet had kept at a safe distance.” More here.

FP’s Jamila Trindle on paying the bills in Ukraine: “The International Monetary Fund, after hinting in September that Ukraine would come up short, officially sounded the alarm this week, acknowledging that Kiev’s coffers face a $15 billion shortfall. That’s over and above the $17 billion package the IMF put together for Ukraine last spring.” More here.

Islamic State

The Boston Globe’s Jacob N. Shapiro and Danielle F. Jung on the Islamic State’s effective bureaucracy: “Whether under the flag of the Islamic State, or ISIS before that, the group organizes the territory it administers into well-defined geographic units, levies taxes in areas it controls, and manages large numbers of fighters across a sparsely populated territory roughly the size of the United Kingdom.” More here.

The Los Angeles Times’ Nabih Bulos and Molly Hennessy-Fiske: “An Iraqi military helicopter has been shot down by Islamic State militants near the Sunni-dominated city of Samarra, killing the two pilots. The Sunni extremists also were reported on the verge of taking a western Iraq town from poorly equipped government forces.” More here.

The New York Times’ Ben Hubbard on Mosul’s new order: “Six months after the Islamic State seized Mosul, Iraq’s second-largest city, its efforts to overhaul the school system reflect the limits of its progress toward building a self-governing caliphate on the land it controls in Iraq and Syria.” More here.

Afghanistan

The New York Times’ Azam Ahmed on continuing violence over the weekend: “In the last month, insurgents have claimed responsibility for attacks during a performance at an elite Kabul high school, on a British Embassy vehicle, on the compound of an aid group and against a prominent member of Parliament.” More here.

The Atlantic’s Allen McDuffee on a particularly deadly day: “The U.S. is supposed to be reducing its troops to 9,800 by year’s end, but has had to adjust troop levels because European allies have had delays approving their troop deployments.” More here.

National Security Agency

Business Insider’s Armin Rosen and Michael B. Kelley on German reports that Chancellor Merkel’s cell phone may not have been hacked by the NSA: “Germany’s top public prosecutor says Berlin hasn’t found any evidence proving there ever was a tap on Merkel.” More here.

Der Spiegel’s Rüdiger Ditz stands by the magazine’s claim that it has seen the original NSA document that authorized Merkel’s cell phone to be tapped. “In 2013, SPIEGEL reported on the tapping of chancellor Angela Merkel’s mobile phone by the NSA. Now the case is back in the news following the German federal prosecutor’s efforts to publicly undermine SPIEGEL’s credibility.” More here.

The Guardian’s Kate Connolly on a blow to those in Germany who invited Edward Snowden to Berlin: “The Green and Left parties wanted the whistleblower to give evidence in person to a parliamentary committee investigating espionage by the US agency, but Germany’s constitutional court ruled against them on Friday. The government has argued that Snowden’s presence in Germany could impair relations with the US and put it under pressure to extradite him.” More here.

Climate Talks

The Washington Post’s Joby Warrick on the outcome of the climate summit in Lima: “Diplomats hailed an agreement — approved in Sunday’s early hours after an 11-day effort — in which more than 190 countries pledged to take action to stem the growth of greenhouse gases that scientists say are heating up Earth’s atmosphere. But the rancorous talks also highlighted deep divides that will have to be overcome to finalize the proposed treaty, set to be hammered out in Paris late next year.” More here.

Israel

The New York Times’ Steven Erlanger reports that Kerry is urging compromise:, reports “Mr. Kerry will spend the next few days meeting Israeli and Palestinian leaders, the new European foreign policy chief and the foreign ministers of Russia, France, Britain and Germany in an effort to find a compromise that Washington can accept.” More here.

The New York Times’ Stanley Reed and Clifford Krauss on a pipeline for peace: ”Natural gas is both a geopolitical tool and a target in Israel, where a newfound bonanza of resources has the potential to improve ties with energy-hungry Egypt, Jordan and even the Palestinian Authority.” More here.

Nikkei’s Yuichiro Kanematsu on the growing IT cooperation between Israel and China: “Officials from Alibaba Group, Tencent, Baidu and other major Chinese Internet firms have been seen visiting Israel frequently. They come to the Middle Eastern country to look for local startups to buy.” More here.

Libya

Reuters reports Tunisia is closing its biggest border crossing with Libya due to clashes between Libyan warring factions on the other side. More here.

Japan

The New York Times’ Martin Fackler on Japanese Pprime Minister Shinzo Abe’s landslide victory in parliamentary elections: “When the prime minister called the snap elections last month, he proclaimed them a referendum on his economic-revival policies, known as Abenomics. The policies appeared to be losing steam recently after initially lifting the long-stagnant economy when Mr. Abe took office two years ago.” More here.

Nikkei news agency on the problems Abe’s economic policies will face in the year ahead. More here.

North Korea

The Washington Post’s Anna Fifield on North Korea parading a U.S. citizen who denounced his home country as a “mafia enterprise”: “Although details remain sketchy, it seems that the man, Arturo Pierre Martinez of El Paso, willingly went to North Korea. He says he is not being detained.” More here.

The Daily Beast’s Kevin Bleyer raises doubts about the assumption that North Korea was behind the hack into Sony Picture Studio’s computer system — based on his own observations during a trip to Pyongyang. More here.

Writing for the Diplomat, Robert Potter describes North Korea’s recent diplomatic outreach to South Korea, Japan, and the United States: “Taken together, this recent bout of activity paints a picture of a North Korea clearly operating from a different diplomatic playbook to the confrontational one it had been using for the previous two years. It doesn’t follow, however, that the North Korean leadership has altered its underlying strategic aims. All of those negotiations have essentially pursued a similar objective — that of diversifying relations and reducing the North’s diplomatic reliance on China.” More here.

Nigeria

The Daily Beast’s Nina Strochlic on the new face of Boko Haram: “[A]n increasing number of young girls are donning explosive devices and blowing themselves up in public places — all in the name of the terror group, known for its egregious crimes against Nigeria’s women.” More here.  

Ebola

The New York Times’ Jeffrey Gettleman on Ebola orphans: “The United Nations Children’s Fund, or Unicef, says that across the region there may be 10,000 of them. Many are stigmatized and shunned by their own communities.” More here.

The Associated Press’s Jonathan Paye-Layleh: “Officials in Ebola-stricken Liberia have postponed senatorial elections elections until the end of the week, while some urged calling off the vote for fear the results would not be credible.” More here.

And finally, Xinhua reports on Chinese outrage over the U.S. appropriations bill — for banning the import of Chinese poultry for school meals. More here.