FP’s Situation Report: One U.S. spy convicted as three Russian spies are exposed; War reignites in Ukraine; Washington may go solo in Yemen; Exclusive details on DoD’s 2016 budget request; and more from around the world.

By David Francis with Sabine Muscat

One American spy is convicted and three Russian spies are exposed. A federal jury convicted former CIA officer Jeffrey Sterling for leaking secrets to New York Times’ reporter James Risen. FP’s Justine Drennan: “The conviction is a major win for the Obama administration, which has cracked down on whistleblowers — and the reporters to whom they pass their information.” Meanwhile, in New York, three men — Igor Sporyshev, 40, and Victor Podobnyy, 27, posing as Russian government officials, and Evgeny Buryakov, 39, working for a Russian bank — were arrested for allegedly trying to collect intelligence on possible U.S. sanctions against Russia. But these spies are hardly John le Carré’s infamous Karla. FP’s Elias Groll and Colum Lynch: “In an embarrassing turn for the [Russian foreign intelligence agency] SVR, the FBI was even able to penetrate the New York office of its Russian adversaries and place microphones there.”

More on espionage below.

War reignites in eastern Ukraine. The ceasefire between Ukrainian forces and pro-Russian separatists appears to have fully dissolved, and President Vladimir Putin takes fresh aim at the West. FP’s Reid Standish: “Putin said on Monday that Ukraine’s army is a NATO proxy whose aim is to weaken Russia.”

More on Ukraine below.

Washington faces a solo counterterror mission in Yemen. For years, President Barack Obama pointed to drone strikes and American military in Yemen as proof of the effectiveness of a soft-power approach to terrorism. The collapse of the Yemeni government last week puts the future of this strategy in doubt. FP’s Gopal Ratnam and Seán D. Naylor on what’s next: “[T]he United States may now find it has to carry out more missions on its own. In practice, that will likely mean an acceleration of the covert effort to track and kill individual militants using armed drones.”

More on Yemen below.

A SITREP TIPSTER with details on the still-tentative Pentagon budget ask for 2016: “DoD’s request will be $534 billion for base budget and $51 billion for overseas contingency operations — of that, $42 billion is allocated toward Afghan operations. Total is $585 billion … $38 billion above the Fiscal Year 2015 base budget level. This is $35 billion above the caps, about 8 percent growth.”

Breaking Tuesday morning: Gunmen in Libya attack a hotel popular with Westerners, taking hostages. The Islamic State is claiming credit. Check foreignpolicy.com later today for more on this developing story.

PRESS PACK: GREEK ELECTION AFTERMATH

The Washington Post’s Griff Witte on young, impatient Greek Prime Minister Alexis Tsipras, who “has promised to govern in a completely new way — but it remains to be seen whether that way will lead Greece to salvation or to ruin.”

The New York Times’ James Kanter and Andrew Higgins: The election “highlighted a fundamental tension at the heart of Europe’s six-decade-long push to forge a closer union of democratic states: what to do when voters in different countries have different, even opposite, demands.”

FP’s Elias Groll on an messy path forward: “It is unclear how the parties will share power, and describing Syriza and the Independent Greeks as strange bedfellows is something of an understatement.”

The Daily Beast’s Barbie Latza Nadeau: “It is safe to say that after Greek elections that vaulted the untested leftist leader Alexis Tsipras to power on Sunday, the Eurozone may never be the same again.”

Welcome to Tuesday’s edition of the Situation Report, where we do our best to keep our drones in unrestricted airspace.

Connect with me at david.francis@foreignpolicy.com and @davidcfrancis and spread the word about SitRep — your on-time destination for global security news and Washington whatnot. Like what you see? Tell a friend. Tell your colleagues, although it might be hard to share us on Facebook. Don’t like what you see? Tell me. Or holler with tips, reports, or anything else the world needs to know, and I’ll try to include it.

WHO’S WHERE WHEN TODAY

9:30 a.m. Senate Armed Services Committee holds a hearing on “Global Challenges and the U.S. National Security Strategy.” 9:30 a.m. Assistant Secretary of State for European and Eurasian Affairs Victoria Nuland speaks on the transatlantic alliance at the Brookings Institution. 10:00 a.m. House Foreign Affairs Committee holds a hearing on the nuclear negotiations with Iran. 10:00 a.m. U.S. Senate Banking, Housing, and Urban Affairs Committee holds a hearing on Iran sanctions. 2:00 p.m. General David M. Rodriguez, U.S. Commander of U.S. Africa Command, speaks at the Center for Strategic and International Studies.

President Obama holds a bilateral meeting with newly crowned King Salman in Saudi Arabia.

ONLY IN SITREP — Syriza’s Victory to Benefit Greek Nemesis

FP’s David Francis: Those hoping for a predictable start to 2015 are out of luck: Expect at least six months of market volatility after the victory of Greece’s radical anti-austerity party Syriza. But this instability doesn’t mean suffering for Germany, the most important European economy.

In a research note circulated to investors Monday, Tom Elliott, international investment strategist at deVere Group, said uncertainty about the makeup of the Greek government makes it difficult to predict its future with the European Union. But it’s easy to predict the euro is going to lose value to the dollar.

Don’t assume this is a bad thing. A cheaper Euro has its benefits, especially for Greece’s European rival.

“One of the ironies of the Euro crisis is that the more that Greece looks likely to cause problems for the single currency, the more Germany and the core economies benefit from resulting Euro weakness,” Elliott wrote.

WHAT’S MOVING MARKETS

Bloomberg’s Anna Andrianova and Ksenia Galouchko: “Russia’s foreign-currency credit rating was cut to junk by Standard & Poor’s, putting it below investment grade for the first time in a decade, as policy makers struggle to boost growth amid international sanctions and a drop in oil prices.”

SPIES LIKE US: The United States undertakes automotive espionage, while Moscow’s spies arrived from Russia without love.

The Wall Street Journal’s Devlin Barrett: The United States has created “a secret domestic intelligence-gathering program that scans and stores hundreds of millions of records about motorists, according to current and former officials and government documents.”

The Daily Beast’s Shane Harris and M.L. Nestel: “An initial attempt to recruit two female students in New York went south, with Sporyshev evincing a misogynistic side when complaining that trying to turn women into spies was hopeless.”

UKRAINE CONFLICT: Despite a plummeting ruble at home, Russia keeps gaining ground in Ukraine in its latest push for Mariupol.  NATO offers condemnations and the West threatens tightened sanctions over new Russian actions there, but Moscow appears unmoved.

The Daily Beast’s Michael Weiss and James Miller: “What happens next is anyone’s guess, but few doubt that Putin’s immediate objective is to batter Ukraine’s already anemic economy.”

USA Today’s Oren Dorell: NATO chief Jens “Stoltenberg said NATO leaders will continue to meet with Ukraine’s military leaders to discuss modernizing that country’s armed forces. He also said he favors putting economic pressure on Russia.”

YEMEN: As the United States prepares to step up operations in Yemen, a CIA drone strike there killed three.

The New York Times’ Helene Cooper and Mona el-Naggar: “Monday’s strike was a clear demonstration that American counterterrorism efforts have not abated.”

ISLAMIC STATE: The Kurds win back Kobani, while Syrian President Bashar al-Assad, in an interview with Foreign Affairs, played down the chances of a peace deal ahead of talks in Moscow. Meanwhile, a CIA covert mission falls short.

The Washington Post’s Karen DeYoung and Hugh Naylor: “Defeat deprives the militants of a key border crossing into Turkey, as well as an anticipated symbolic triumph over U.S. air power.”

The Wall Street Journal’s Adam Entous: “All sides now agree that the U.S.’s effort to aid moderate fighters battling the Assad regime has gone badly. The CIA program was the riskiest foray into Syria since civil war erupted in 2011.”

POWER CHANGE IN SAUDI ARABIA: Obama and Saudi Arabia’s King Salman are expected to discuss the fight against the Islamic State today. Meanwhile, Germany refused to comment on reports it had cut off arms sales to Riyadh because of human rights abuses.

Reuters’s Roberta Rampton: “The tense regional security situation means Washington needs Saudi Arabia as much as ever, even though its domestic oil boom means it no longer relies as heavily on oil supplies from the world’s leading oil exporter.”

AFP: “The decision was taken on Wednesday by the national security council, a government body that includes Chancellor Angela Merkel, Vice Chancellor Sigmar Gabriel and seven other ministers.”

OBAMA IN INDIA: Obama ends a trip to India with a pledge of $4 billion in investments and loans, but disputes between the nations still remain.

Reuters’s Sanjeev Miglani and Roberta Rampton: “The United States views India as a vast market and potential counterweight to China’s assertiveness, but has been frustrated with the pace of New Delhi’s economic reforms.”

Livemint’s D. Ravi Kanth: “Even as Prime Minister Narendra Modi and U.S. President Barack Obama signed an agreement on Sunday to promote clean energy and expand solar energy initiatives … the two countries are preparing to slug it out in the World Trade Organization over India’s solar policy.”

NIGERIA: Nervous voters wait for Boko Haram’s next move.

The Daily Beast’s Chika Oduah: “With less than three weeks left for presidential elections to begin in Africa’s largest economy, the electorate in the continent’s most populous, ethnically diverse country are anxiously gauging an ignitable political situation.”

AND FINALLY, writing for Foreign Policy, Fiona MacGregor on what it takes to be a beauty queen in Myanmar.