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[18:00:00] WOLF BLITZER, CNN THE SITUATION ROOM HOST: Lacking diplomacy? America's new Secretary of State gets to work, while his boss makes ways with another key ally. Are U.S. relations with Australia at risk? I'll ask a former Top Foreign Policy Advisor to Hillary Clinton.

Voting Sessions, when will the full Senate consider the nomination of President Trump's choice to become the Attorney General. The answer could hinge on the fate of another controversial Cabinet pick who's facing new opposition from Republicans.

And American spies caught? New questions tonight about why Vladimir Putin's Russia is charging high-ranking agents with treason. Could they have been moles, who gave the U.S. proof of Moscow's role in election hacking? We want to welcome our viewers in the United States and around the world. I'm Wolf Blitzer, and you're in THE SITUATION ROOM.


BLITZER: We're following breaking news on President Trump's response to a provocative Ballistic Missiles test by Iran. Sources tells CNN, the administration now is planning to target Iran with additional sanctions, Mr. Trump is warning that nothing is off the table including military action. Also, tonight, new concern about a possible rift with a key U.S. ally after Mr. Trump's tense and abbreviated phone call with Australia's Prime Minister.

The President openly upset about what he's calls a "dumb" deal, struck by the Obama administration. The President says, he has a right to question why more than 1,000 refugees from an Australian detention center would be allowed into the United States. As the Trump, foreign policy begins to unfold, his new Ambassador to the United Nations just sent a sterner message to Russia than we've heard from the President.

Nikki Haley, condemning Moscow for what she called aggressive action in the midst of new violence in Ukraine. She says, the U.S. will keep sanctions in place, as long as Russia occupies Crimea. There are also question tonight about why Vladimir Putin's regime is conducting a spy purge in Russia right now. Four men have been charged with treason, for allegedly passing secrets to U.S. Intelligence.

Experts suspect, the Russians may have caught some double agents who told the Americans that Russia was behind cyber-attacks targeting the U.S. election. I'll talk about all of this and more, with a former Top National Security Adviser to Hillary Clinton and former Vice President Biden, Jake Sullivan. You see him there. He's standing-by live along with our Correspondents and Analysts as we bring you full coverage of today's top stories.

Michelle Kosinski and Elise Labbott, are working their sources on these major new developments in the President's foreign policy. Let's go to Michelle first, at the State Department with more on the U.S. and Iran. Michelle, the rhetoric on both sides clearly ratcheting up.

MICHELLE KOSINSKI, CNN SENIOR DIPLOMATIC CORRESPONDENT: Yes. Right, Wolf, and beyond rhetoric. It now seems like action is imminent. Sources are telling CNN that the Trump administration is planning sanctions against certain Iranian entities. And when you think of the possible penalties for something like a Ballistic Missile launch, sanctions are an obvious choice. The Obama administration did the same thing just last year, after another launch. And it's possible this could be just the first step. But what's clear, it seems like this administration is willing to act very quickly.


KOSINSKI: President Trump ruling nothing out in dealing with Iran, including a military response.


KOSINSKI: His threat coming on the heels of this one, from his National Security Advisor, Thursday.


KOSINSKI: Tonight, it appears those warnings may not be just talk. CNN has learned the Trump administration is planning to impose additional sanctions on Iran. Penalties already allowed under previous executive actions. The administration's strong reaction after Iran launched another Ballistic Missile, Sunday. Not violating the Iran nuclear deal, but defying a U.N. Resolution. Trump, laying out his hardline approach to world hotspots today, at the National Prayer Breakfast.

TRUMP: The world is in trouble. But we're going to straighten it out, OK? That's what I do. I fix things, we have to be tough, it's time we're going a little be a little tough, folks. We're taken advantage of, by every nation in the world virtually. It's not going to happen anymore.

KOSINSKI: Those comments, hours after these tweets. Iran has been formally put on notice for firing a Ballistic Missile. Should have been thankful for the terrible deal the U.S. made with them. Also, Iran is rapidly taking over more and more of Iraq, even after the U.S. has squandered $3 trillion there, obvious long ago. Tonight, Iran is firing back with its own tough response, vowing to vigorously continue its missile tests, saying, they're purely for defense purposes. A Senior Advisor to Iran Supreme leader adding, that President Trump should not, "make a toy out of himself with his extremism and baseless ranting. The U.S. will be the final loser."


[18:05:02] KOSINSKI: The sanctions wouldn't necessarily affect the Iran nuclear deal, at least not directly. These are intentionally kept as separate issues. Iran also doesn't want more sanctions, but that doesn't mean it's not going to react angrily or with more provocation. Keep in mind there are those within Iran too, conservatives, who would love to see the nuclear deal fall apart, as the rhetoric heats up as well. And Analysts say, there's definitely this testing going on, on both sides, Wolf.

BLITZER: Michelle Kosinski over the State Department, thanks very much. And now, to the President's rocky relationship right now; some pivotal U.S. allies. Now, the President telling Americans not to worry about some tough phone calls he's had. Our Global Affairs Correspondent Elise Labott, is following this part of the story. First, Mexico; now Australia, what's the latest?

ELISE LABOTT, CNN GLOBAL AFFAIRS CORRESPONDENT: Well. Wolf, the White House and the Australian Prime Minister, both trying to paper over differences, saying even though there were disagreements, this discussion was cordial. But sources tell CNN, that the call was tense with President Trump growing angry, and now both his confrontational style with world leaders and chaotic first days in office are making his Secretary of State Rex Tillerson's job even harder his first day on the job.


TRUMP: The world is in trouble, but we're going to straighten it out, OK? That's what I do. I fix things.

LABOTT: Today, at the National Prayer Breakfast, President Trump asked for a little faith in his brash foreign policy, on display in recent phone calls with world leaders.

TRUMP: When you hear about the tough phone calls I'm having, don't worry about it. Just don't worry about it, they're tough, we have to be tough. It's time we're going to be a little tough, folks.

LABOTT: In a tense phone call on Saturday with the Australia's Prime Minister, Trump grew angry when asked to honor a deal struck by President Obama to accept 1200 refugees currently held in detention centers off the coast of Australia.

MALCOLM TRUNBULL, AUSTRALIA PRIME MINISTER: The President assured me, that he would continue with the - honor the agreement we entered into with the Obama administration.

LABOTT: Sources say, Trump insisted it was a very bad deal for the U.S. to take the refugees, and that one of them was going to be the next Boston bomber. The call ended abruptly, because Trump was unhappy, a source told CNN. Late Wednesday, Trump tweeted, "Do you believe it? The Obama administration agreed to take thousands of illegal immigrants from Australia. Why? I will study this dumb deal."

SEAN SPICER, WHITE HOUSE PRESS SECRETARY: The deal that was cut by the last administration, is something that he's extremely, extremely upset with. He does not like it, but out of respect for him, he's going to allow that process - continue to study, and allow it to move forward under the conditions that have been set, that there will be extreme vetting on every single one of those individuals.

LABOTT: A similar confrontation with Mexican President, Enrique Pena Nieto. According to a transcript of the call obtained by CNN, Trump offered to send U.S. troops after Mexican drug cartels. Saying, "You have some pretty tough hombres in Mexico that you may need help with. We're willing to help you with that bigly, but they have to be knocked out and you have not done a good job knocking them out." His undiplomatic tone making waves on Capitol Hill.

TIM KAINE, UNITED STATES SENATOR FROM VIRGINIA: To have a contentious conversation and name call. A country - or the Prime Minister of a country that's one of our greatest allies in Asia is foolish. He's doing kind of amateur hour stuff on matters of significant national importance.

LABOTT: The President's turbulent first days in office make Rex Tillerson's first day on job even harder. Today, the new Secretary of State sought to re-assure a State Department in turmoil with nearly 1,000 diplomats protesting Trump's immigration policies.

REX TILLERSON, UNITED STATES SECRETARY OF STATE: I know this was a hotly contested election, and we do not all feel the same way about the outcome. Each of us is entitled to the expression of our political beliefs. But we cannot let our personal convictions overwhelm our ability to work as one team.


LABOTT: And as Secretary Tillerson's first day wasn't chaotic enough, now there's another flashpoint I want to play for our viewers, some comments by U.S. Ambassador to the United Nations, Nikki Haley, a short time ago, talking to the U.N. Security Council for the first time. She's blaming Russia for the recent surge of violence in Eastern Ukraine, and warning sanctions against Russia will not be lifted until Moscow returns Crimea to government in Kiev. Take a listen.


NIKKI HALEY, UNITED STATES AMBASSADOR TO THE UNITED NATIONS: The dire situation in Eastern Ukraine is one that demands clear and strong condemnation of Russian actions. The sudden increase in fighting in Eastern Ukraine, has trapped thousands of civilians and destroyed vital infrastructure. And the crisis is spreading, endangering many thousands more. This escalation of violence must stop.

The United States continues to condemn and call for an immediate end to the Russian occupation of Crimea. Crimea is a part of Ukraine. Our Crimea related sanctions will remain in place until Russia returns control over the Peninsula to Ukraine.


[18:10:02] LABOTT: And Wolf, that's extremely not worthy, considering during the campaign President Trump, not only suggested that he might lift those sanctions against Russia on the - because of Crimea. But that he might even recognize Crimea as Russian. Now, Ambassador Haley, Defense Secretary James Mattis, and several of Trump's Cabinet nominees have taken a much tougher line in their confirmation hearings on Russia. This is the first time and ready to continue that in office, but today, the White House did ease some sanctions against Russia. The Russian Intelligence Service - The FSB imposed under the Obama administration.

I'm told this is a very minor and technical correction to those existing sanctions that the Obama put on its way really out the door, to allow non-sanctions related trade, and other cooperation with Russia. But even so, these could soften Ambassador Haley's comments and be seen positively in Moscow. Wolf.

BLITZER: Well, maybe some mixed messages going on. Elise Labott, thanks very much. Let's talk about all of this and more President Trump's new moves on the world stage. Joining us, Jake Sullivan, he's a former Top National Security Foreign Policy Advisor to Hillary Clinton, also the former Vice President Biden. Jake, thanks very much for coming in.


BLITZER: So, I assume you liked what you heard from U.N. Ambassador Nikki Haley, right?

SULLIVAN: I like that, And I would like to hear it directly from President Trump. It's exactly the kind of message we should be sending right now.

BLITZER: Why don't we hear that? Why do you believe we don't hear that kind of tough talk on the Russians from President Trump?

SULLIVAN: Well, it's very curious. He's willing to go after pretty hard, friends of ours - close friends of ours like Australia and Mexico. But he reserves only soft speech for President Putin. I don't have a good explanation for it, all I can say is, this is a part of a long and troubling pattern, if the President is not willing to step up and speak out against Russian aggression and actions that Russia has taken that are directly contrary to the interest of the United States.

BLITZER: But I assume the very carefully drafted statement that Ambassador Haley read before the United Nations Security Council was authorized, approved by officials at the White House. Isn't that normal procedure?

SULLIVAN: That'd be normal procedure. We're not living in normal times now, so it's hard to know whether in fact the right hand knows what the left hand is doing. But it's clear from the confirmation hearings of Secretary of Defense Mattis, and Secretary of State Tillerson, that there's a big gap between the people in the Cabinet and the President himself on the issue of Russia. I think that gap has to get resolved, because America should stand with clarity and consistency, in respect to Vladimir Putin and the threat that he poses to the United States.

BLITZER: What was your reaction when you heard that the Trump administration, the Treasury Department, has eased some of the sanctions against the Russian Intelligence Service known as the FSB, used to be called the old base the KGB. Saying, this is just a simply - a minor technical adjustment, and some business deals will be allowed to go through. What was your reaction to that? Because we got word of that today as well.

SULLIVAN: I'm told by Senior Officials, who had just departed who know the issue well, that in fact, it was a technical correction. But I am worried that it is the first in many steps of lifting the sanctions before Russia has done what it has to do in order to get them lifted. President Trump has said repeatedly, that he's looking at the possibility of lifting those sanctions, even as Russia continues to violate Ukraine's sovereignty, continues to threaten the United States and our allies. And until Russia resolves all that behavior, we should not be lifting the sanctions.

BLITZER: But you heard Ambassador Haley say, that as long as Russia occupies Crimea, which is part of Ukraine. The sanctions, or at least those related to Crimea, will not be lifted. What you're worried about is other non-Crimea related sanctions, could be eased against Russia?

SULLIVAN: I think she chose her words pretty carefully there. What she said was, sanctions related to Crimea won't be lifted, but she didn't say anything about the broader sanctions on Russia imposed because of the steps that it took beyond Crimea and Ukraine. And by the way, we should be thinking about further additional steps given what Russia did, in interfering in the U.S. election, and interfering in the elections and the democratic institutions of our allies.

BLITZER: You want more sanctions on that. All right, let's talk a little bit about Iran, a subject you know very, very well. Do you support new sanctions against Iran as a result of its Ballistic Missile test yesterday?

SULLIVAN: I do, and in fact, when the Iranians tested Ballistic Missiles in the Obama administration, the Obama administration imposed sanctions. So, this is consistent with steps that have been taken in the past.

BLITZER: Is that a violation? These Ballistic Missile tests by Iran, of the Iran nuclear deal which you were involved in?

SULLIVAN: It's a direct violation of the deal itself, but it is a violation International Law from our perspective. And that's why we should impose sanctions. BLITZER: Explain why it's a violation of International Law? Because

the Iranians say, these are just defensive Ballistic Missiles test, not a big deal.

SULLIVAN: The United Nation Security Council continues to prohibit Iran from taking these kinds of steps, testing Ballistic Missiles. And while it's not technically part of the nuclear deal, it's part of United Nations Security Council Resolutions. So, if they violate those resolutions, there should be consequences.

[18:15:03] BLITZER: Give me an example of consequences that you have in mind.

SULLIVAN: For example, I think sanctions against entities that are involved in Iran's Ballistic Missile Program, should be pursued immediately, that's what the Trump administration says they're going to do. What I think is a mistake, though, is to saber rattle, and to throw around tough talk without a clear strategy for what they're actually going to do to back that up. And I think we've heard too much talking and not enough straight-forward action from this administration.

BLITZER: You want to hear some tough talk? I'll read to you a tweet that the President of the United States posted earlier today, "Iran was on its last legs and ready to collapse until the U.S. came along and gave it a lifeline in the form of the Iran deal, $150 billion." You supported, that Iran nuclear deal, Hillary Clinton supported it as well. When you - you hear the President of the United States say something like that, your reaction?

SULLIVAN: It's simply not true. That is misinformation.

BLITZER: What is untrue?

SULLIVAN: First of all, Iran didn't get $150 billion out of this deal. They've got far less that.

BLITZER: How much have they got?

SULLVAN: One doesn't know exactly. But probably in the low tens of millions of dollars of its own money, not of money given to it by the International Community it's simply recovered -

BLITZER: But don't you think that it - that it allows this money to flow into Iran, this is money some of which the Iranians had in the United States, going back to the '70s, if you will, at the time of the Shah. But it's accrued a lot of interest and it's gotten a lot of benefits including more money from the United States. Don't you know specifically how much money the Iranians stood to gain by this nuclear deal.

SULLIVAN: The money they got from the United States was not connected to the Iran nuclear deal. That was money to be involved because of the resolution of a hostage crisis - to be exact in 1979.

BLITZER: Was that ransom payment? SULLIVAN: I don't believe it was ransom payment.

BLITZER: Because the argument is, the U.S. gave what, a billion and a half dollars in cash to the Iranians in order to get those Americans released.

SULLIVAN: And what actually happened was not that. What they gave the billion and a half dollars for was the resolution of a claim by Iran against the United States, that's been in the court system for nearly three decades and was finally resolved at a fraction of what the Iranians were actually asking for. That it had nothing to do with the nuclear deal, and it wasn't ransom payment for people, and the effort by this administration to say otherwise and to put out false information on this, when that could lead to the unraveling of this deal, and the potential for a military conflict is very dangerous.

BLIZTER: There are some who suggest that there are radicals, hardliners in Iran who want this nuclear deal to collapse right now, that they're not anxious to see it go forward. Do you believe that?

SULLIVAN: I think there probably are voices in Iran that would love to see nothing more than a conflict between the United States and Iran.

BLITZER: But they would lose?

SULLIVAN: Lose in that conflict?

BLITZER: The Iranians would lose. They're not going to be able to defeat the United States.

SULLIVAN: Of course, of course.

BLITZER: But why would they want to be defeated by the United States of America?

SULLIVAN: Well, I think what they would like to drag us deeper into conflicts and wars in the Middle East. They see that, as bleeding our treasury, causing loss of life in the United States, causing a loss of support for the United States in the rest of the world, and breaking the United States and its allies apart. We built the entire world into a coalition to put off the Iran's nuclear program. All the Iranians want to do is unravel that, they want to separate the United States from everyone else and we should not play into their hands.

BLITZER: And you were one of the early U.S. officials who played a diplomatic role behind the scenes in secret tux with the Iranians in Oman, of all places. The Sultan of Oman, organized a U.S.-Iranian dialogue, and you secretly went. We're going to talk that, there's a lot more to discuss with Jake Sullivan. We'll take a quick break. We'll be right back.


[18:20:00] BLITZER: Tonight, President Trump says the world is in trouble and he's going to fix it. He's downplaying tense phone calls he's had with the leaders of Australia and Mexico. Mr. Trump suggesting to the Mexican President; United States would be willing to send in troops to help knock out drug cartels or tough hombres, as he called them.

We're back with the former - former Policy Advisor to both Hillary Clinton and to Joe Biden, Jake Sullivan is with us, right now. Quick question, Steve Bannon, President's Top Political Strategist; he's now a full member of the National Security Council. From your perspective, you served there, you know that - those issues, is that appropriate?

SULLIVAN: I think it's very strange and probably inappropriate to have a Political Advisor, someone whose job is to talk politics to the President. Sitting IN THE SITUATION ROOM, and weighing in on the most consequential National Security.

BLITZER: Tell us why? If the President of the United States says, you know what, I want the Defense Chief, I want the Secretary of State, I want the CIA Director there. But I really trust this Advisor I have, Steve Bannon. And I want him in those meetings, he helps me a lot, why shouldn't the President have that opportunity to make sure he's part of that conversation.

SULLIVAN: Look, of course the President should get to decide who advises him, but I think it is bad judgment and it reflects a wrong priority to place weight on what a Political Adviser says rather than on your military and intelligence professionals. These are consequential matters of life and death, and politics shouldn't have any part in it.

BLITZER: Let's talk about Mexico for a moment. As you know, the President as a candidate; now as President he says, the U.S. is going to build this wall. It's going to cost between maybe 10 or $15 billion, maybe more. The Mexico, will eventually pay for it. And in this phone conversation he had with the Mexican President, he said, you know what, I can help you too deal with drug cartels and all the bad hombres over there. It was apparently a pretty tense call as well.

[18:24:52] SULLIVAN: You know, what's interesting? You don't have to be a foreign policy expert to understand that it's better to have more friends and fewer enemies in the world. That's how you keep America safe, and that's how you keep us out of trouble. So, I don't understand why the President, both with Mexico and Australia, is choosing to provoke our friends. Of course, we should be cooperating with the Mexicans to go after drug cartels. We've been doing that for years, but we've been doing it discreetly. We've in a way that is dignified and consistent with the interest of U.S. in Mexico, and putting this out all over the place, I don't think is the right way to build a good constructive relationship.

BLITZER: I just have one final political question, because you worked very closely with Hillary Clinton during the campaign. A lot of reports out there, Secretary Clinton, that she places at least some of the blame on her loss, on President Obama not doing enough. During the final months of the campaign, and coming out, and speaking out about Russian hacking, Russian interference in the U.S. election. I'm sure you've seen all those reports. I'm anxious you were on the inside. I'm anxious to get your reaction.

SULLIVAN: Secretary Clinton's concern is about Vladimir Putin, it's not about Barack Obama. It's about the fact that the Russians, from the very top of their government orchestrated a campaign to promote somebody to be elected President of the United States. And she doesn't view this as a political issue, she sees it as a National Security issue, and one that's not going away. And Democrats and Republicans should be coming together around this issue, because it could be a Republican next time.

BLITZER: Because the - there's been some who've suggested the Russians were interfering, hacking, in order to show some disarray in the American democratic process. Others say, no, the Russia had a bigger interest in trying to embarrass Hillary Clinton. They didn't like Hillary Clinton, they wanted to hurt her. And then there's a third school of thought, from the beginning they wanted to do whatever they could to get Trump elected, President of the United States. What's your bottom line?

SULLIVAN: It doesn't matter what my bottom line is, what the bottom line consensus judgment of the entire American Intelligence Community, is that they were putting a thumb on the scale for Trump and against Hillary. That's it. And the fact is, that they have built a body of evidence to reach a high confidence judgment along those lines. That is really troubling, and we should be doing something about it. And those in Congress who are stepping up, both Republicans and Democrats should be supported, because the American people need to defend their democracy against hostile foreign powers.

BLITZER: Jake Sullivan, thanks very much for coming in.

SULLIVAN: Thanks very much for having me.

BLITZER: Just ahead, another unprecedented step by Republicans to try to bypass Democrats and ram through the President's Cabinet picks. We're going to tell you about the extreme measures being taken place on both sides. And Russia's spy purge, is it connected to the cyber- attacks on the U.S. election.


BLITZER: Lots of political drama, and it's roiling Capitol Hill right now as Republicans and Democrats battle over President Trump's nominees.

[18:32:20] Our senior congressional reporter, Manu Raju, is up on the Hill for us tonight. Manu, Democrats are boycotting votes on some of the president's picks. Republicans are pushing them through anyway. Update our viewers.

MANU RAJU, CNN SENIOR CONGRESSIONAL CORRESPONDENT: Well, the Republicans are using the majority to their advantage, Wolf, whether it means changing the rules in the committee to advance nominees to the floor over Democratic obstructionist tactics, or calling in Vice President Mike Pence to break a tie, or even reshuffling their schedule and delaying Jeff Sessions' eventual confirmation to be attorney general, so they can use his vote on another nominee. They're doing all this and sparking some controversy.


RAJU (voice-over): Senate Republicans are playing hardball, taking unprecedented steps to confirm President Donald Trump's cabinet nominees.

UNIDENTIFIED MALE: All those in favor, please...

RAJU: After Democrats boycotted a committee vote today on Scott Pruitt's nomination to lead the Environmental Protection Agency, Republicans pushed forward without them, changing the rules that require Democrats to be present for a vote, and sending the nomination to the full Senate.

UNIDENTIFIED MALE: The ayes have it.

RAJU: Republicans defended the move.

SEN. JOHN BARRASSO (R-WY), ENVIRONMENTAL & PUBLIC WORKS CHAIRMAN: Well, it's a concerted effort by the entire Democrat Party. It's not just Scott Pruitt. It's so many of these. So this is absolutely meant to obstruct. We're not going to allow that to happen today.

RAJU: Republicans already made the same move for two other nominees: Tom Price to lead Health and Human Services and Steven Mnuchin to head the Treasury Department.

SEN. SHELDON WHITEHOUSE (D), RHODE ISLAND: I think they're pretty desperate to get these hugely ethically challenged nominees through the process before the American people get a good look at what they're up to.

RAJU: Just six Trump nominees have been confirmed so far, four of them cabinet secretaries, compared to 11 cabinet secretaries who were approved at this point when President Obama first came into office.

(on camera): Is this frustration from the elections?

SEN. TIM KAINE (D), VIRGINIA: No, it's a frustration, I would say, about particular cabinet members.

RAJU (voice-over): On Friday, Republicans are poised to break a filibuster of Betsy Devos' nomination to lead the Education Department but only after two Republican senators announced their opposition, which will prompt Vice President Mike Pence to cast the tie-breaking vote and delay the confirmation of Senator Jeff Sessions as attorney general, so he can cast a vote to save Devos' nomination.

The cabinet drama is distracting from the GOP's ambitious legislative agenda, including the push to repeal and replace Obamacare. The GOP is divided over how to proceed. (on camera): But even on Obama care, you don't have an agreement

within your own party right now.

SEN. RON JOHNSON (R), WISCONSIN: Because it's so complex. The problem with talking about repeals, we don't have the votes to repeal the entire law.

RAJU: Facing Democratic opposition, and internal GOP division, Republicans are now stressing that their plans will repair the law, rather than an outright repeal.

[18:35:11] But House Speaker Paul Ryan denies that his party is lowering expectations.

REP. PAUL RYAN (R-WI), SPEAKER OF THE HOUSE: There's just a miscommunication or a misinterpretation of what we're trying to say. Our job is to repair the American healthcare system and rescue it from the collapse that it's in.


RAJU: Now Paul Ryan, Wolf, is saying that he does want to move forward on healthcare legislation by the first quarter of this year. And I can tell you, I've been talking to Senate Republicans who do not believe that time frame is really achievable, given all the other things that they have to deal with.

In addition to that, there's no consensus within the party right now, on exactly how to replace the law. And they don't want to do one bill. They want to do a series of smaller bills and administrative regulations. So a lot of questions on how they will achieve their central campaign promise.

BLITZER: Manu Raju reporting. Thanks very much.

I want to dig deeper right now into all of this. Our correspondents, expert analysts, they are standing by. In fact, I want everyone to stick around for a moment. We're getting some new information. We'll take a quick break, resume our coverage right after this.


BLITZER: We're learning new information tonight about a spy purge in Russia linked to the country's cyber-meddling in the U.S. presidential race.

[18:41:03] CNN's Brian Todd is working the story for us.

Brian, Russia believes it's uncovered what they call double agents in its spy ranks.

BRIAN TODD, CNN CORRESPONDENT: The Russians do believe that, Wolf. Tonight, Vladimir Putin's government is taking the extraordinary step of charging four men with treason. Two of them work for Putin's old spy agency. Kremlin watchers say if these charges are legitimate, it's likely enraged Vladimir Putin, even though outwardly, the ex-KGB man is putting on his game face.


TODD (voice-over): Vladimir Putin unfazed as rebels loyal to Russia battle with their enemies in Ukraine. Putin says the Ukrainian government started the fighting to portray itself as a victim to the new American president.

VLADIMIR PUTIN, RUSSIAN PRESIDENT (through translator): If a conflict were to break out, then that would help them.

TODD: The Ukrainians accused the Russian-backed rebels of starting these skirmishes.

Back home, in the shadow of the Kremlin, Putin's taking on internal enemies. Tonight four money face an extraordinary charge, treason, accused of passing secrets to American intelligence. That's according to an attorney for one of the men. Neither the Kremlin nor U.S. officials are commenting on this case.

Two of the alleged spies worked for the FSB, Russia's internal security service, once known as the KGB, Putin's old spy agency. That's one of the bureaus believed to be behind the hacks targeting the U.S. election. Experts say the Russians may have caught some internal double agents who had told the Americans that Russia was behind the hacks.

ERIC O'NEILL, NATIONAL SECURITY STRATEGIST, CARBON BLACK: We do know they were working in areas of Russia cyberattack and cyber defense. So cyber security for Russia, or their cyberattack machine. That would give them inside information, which is what you want if you're going to recruit a spy.

TODD: Eric O'Neill is a former FBI counterintelligence officer who brought down Russian mole Robert Hanson.

UNIDENTIFIED MALE: Put the gun down.

TODD: O'Neill is played by Ryan Philippe in the movie "Breach." He says Putin, a former Cold War KGB agent himself, may have been prompted to hunt down internal spies after the U.S. accused him of directing the hacks.

O'NEILL: They know there must be a source, so they start shaking the tree. And when they do that, a couple people will fall out. Someone gives someone up. They find an e-mail that shouldn't have been written. They follow somebody they suspect; and he meets with somebody he shouldn't be meeting with.

TODD: Analysts say Putin is still very close to his spy agencies, that he takes this alleged double cross personally and knows what it could lead to.

MATTHEW ROJANSKY, THE WOODROW WILSON CENTER: The idea of finding disloyal elements within those agencies carries with it not just an implication for Russia's foreign policy, but actually for the stability of Putin's regime. For the loyalty of those agencies that he depends on to hold onto power in Russia.


TODD: Now, what will Putin and his security services do with these alleged spies? Experts say if this had happened 20 years ago, they might already be dead. Now, with this case so heavily politicized and blown up in the media, experts say they're likely to go through a highly publicized trial, then possibly be imprisoned or executed -- Wolf.

BLITZER: All right, Brian. Thanks very much.

Let's bring in our experts, our analysts. I want to start with Bianna Golodryga. Bianna, what do you make of Brian Todd's report?

BIANNA GOLODRYGA, YAHOO NEWS & FINANCE EDITOR: Well, it could help explain why all 17 U.S. intelligence agencies were so confident the Russians were, in fact, behind the DNC hack.

It also suggests that there is a possibility that there's more information that the Russians have on U.S. hacking, what have you, that they haven't released yet. So there's still a lot of questions to be asked, but it helps explain, at least, why the agencies seem so confident that the Russians were behind it.

BLITZER: Yes. They certainly do seem pretty confident. Very confident. You're absolutely right on that.

Dana, there was a little confusion today, when the Treasury Department here in Washington eased some of the sanctions that the Obama administration had imposed on the Russian security service, the intelligence service known as the FSB, used to be the KGB, as a result of the cyberattacks. Eased it slightly today, and there was some confusion how significant that was. What is your understanding?

GOLODRYGA: Yes, my understanding is similar to what Jake Sullivan told you earlier, that in fact, this is rather routine. I would say what's not routine is the timing of it. There had been a lot of pressure from U.S. businesses in Russia, particular, to have those sanctions lifted and eased. It had been going on and they've been pressuring the Trump administration for a while.

But why do it today? Why do it in a week when fighting has only escalated in eastern Ukraine as your report just suggested? Why seem to reward Russia?

You saw the stock market rally significantly once those sanctions were lifted. So, whether or not this was just a symbolic move, the Russians seem to be a lot more into it.

BLITZER: Yes Dana Bash, Bianna makes an excellent point. As soon as I heard about that Treasury move, I said, wow! In the midst of what's going on in eastern Ukraine right now, the Treasury Department easing sanctions on the Russian intelligence agency accused of being involved in the cyber attacks? DANA BASH, CNN CHIEF POLITICAL CORRESPONDENT: Not only that, but

given the fact that there is so much pressure on this new Republican president by his Republican colleagues in Congress to increase sanctions and to do it through legislation. And instead what the administration did was ease some of the sanctions.

Now, what White House Press Secretary Sean Spicer said today does tend to be true, historically when sanctions are imposed as time goes on, and the United States gets petitions from certain industries as has happened in this case, then they tend to say, OK, well, we can carve out for you. In this particular case, we are talking about the sort of the agency that was the former KGB, but with regard to how Russia operates, it means that the -- any technology company pretty much in the U.S. -- they were stopped from doing any business in Russia, because they had to go through this agency that had sanctions imposed on them.

So, that is understandable. But the reality and optics are very, very different things on something that is so incredibly sort of untenable right now, vis-a-vis the political arguments that many people are making in this country, again, in the president's own party that you've got to be tougher on Russia, and show no sign of letting up.

BLITZER: David Swerdlick, speaking of sanctions, it looks like the Trump administration is going to tighten sanctions against Iran, because of its ballistic missile test yesterday. There are some who are concerned, you know what? This could escalate, things could get out of control, what's your analysis?

DAVID SWERDLICK, ASSISTANT EDITOR, THE WASHINGTON POST: Yes, so tightening sanctions seems like a pretty in terms of President Trump saying that all options could be on the table. All options were already and always have been on the table.

BLITZER: They mean the military option as well.

SWERDLICK: Well, but that's the question -- once you start issuing statements like this, Wolf, what do you do to back it up. If the Iran Revolutionary Guard core take our sailors hostage again, do we fight, or do we negotiate, do we impose more sanctions? You know, that is the unknown and that's the test for the Trump administration.

BLITZER: You know, Jackie, it's a very, very tense moment, right now, not even, what, two weeks into the new administration and people are very, very worried about what's going on, various relations not only with adversaries like Iran or Russia, but with friendly countries as well, like Australia and Mexico.

JACKIE KUCINICH, WASHINGTON BUREAU CHIEF, THE DAILY BEAST: Well, it remains to be seen, the Trump doctrine is going to end up being. But, right now, it seems to be blunt force aggression, and a lot of tough talk. And we're starting to see tough actions. Whether or not that's going to continue throughout this presidency, we're going to have to wait and see. But right now, he's making good on his promise to be tough, on all fronts.

BLITZER: All right. Everybody stand by, we're getting some breaking news.

The White House now speaking out on Israel's plans to build new settlements, expand existing settlements. We'll share that with you the new information, the breaking news, right after this.


[18:53:54] BLITZER: The White House has just put out a statement on Israel plans to build new settlements in the West Bank, expand existing settlements at the same time. It says, and I'm quoting from the statement right now released by the White House Press Secretary Sean Spicer, quote, "While we don't believe the existence of settlements is an impediment to peace, the construction of new settlements or the expansion of existing settlements beyond their current borders may not be helpful in achieving that goal." The statement then says, "The Trump administration has not taken an official position on settlement activity, and looks forward to continuing discussions."

David Swerdlick, the White House has taken an official position on settlement activity right now, saying it's an impediment to peace -- construction of new settlements or expansion of existing settlements beyond their borders. So, there is a position that was enunciated.

SWERDLICK: Yes, releasing that statement is an official position and it's a position that is not entirely unlike the official position that the Obama administration took at the outset in 2009, asking Israel to pause settlement activity to try to get the peace process started. So, we'll see if that sticks with the Trump administration, but now, it's interesting to see what Israel's reaction will be.

[18:55:04] BLITZER: Dana Bash -- I'm anxious to get Dana Bash's reaction, because the statement also says, as the president expressed many times, he hopes to achieve peace throughout the Middle East region.

BASH: Yes, I actually -- I'm pretty surprised that the White House put out this statement, and did it now. You know, perhaps they are kind of learning and perhaps, what President Obama said in and around all of the uproar about the U.N. Security Council resolution that they were a part of allowing to go through, before the end of the Obama administration term, what the president said was that he is hoping to shape the contours of the Trump administration's approach to the Middle East and to Israel, in particular.

Maybe that worked. It's kind of surprising that it did, in any way, shape, or form since there was so much uproar, so much outrage, even and especially among people in Trump world, the president himself, then the president-elect, but perhaps it did.

You know, you're a Middle East expert. I would love to actually get your thoughts on it. We have Bibi Netanyahu coming here soon. Perhaps, this is in advance of that.

BLITZER: And it comes on the heels, Bianna, of the Israeli government in recent days announcing the authorization potentially for another 5,500 housing units in existing settlements, not only settlements along the '67 lines, but settlements that are deep inside the West Bank. So, presumably, there was pressure on the Trump administration to send a message to Jerusalem, cut it out.

GOLODRYGA: Well, there's also pressure on Bibi from the right in his own country. So, if you want to sort of read between the license here, maybe, just maybe, this is the U.S. administration throwing Bibi Netanyahu a bone.

But having said that, just look at the events that have occurred over the past 24 hours. You have the United States now going after its biggest allies in the world, you have Israel, you have Mexico, you have Australia, and the one country that he has not yet been tough with is Russia. And I'm curious to see how Sean Spicer and the president himself will respond to Nikki Haley today, saying that Crimea is, in fact, part of the Ukraine, part of the Ukraine. We have not heard those words from President Trump yet.

BLITZER: Yeah, we heard it from Nikki Haley, but you're absolutely right, not from president Trump.

Jackie, you know, she makes an excellent point. Tough statements involving Australia, Mexico, I guess you could argue, this is not exactly what the prime minister of Israel, the statement as far as settlements is concerned. A tough statement there as well.

KUCINICH: The most strategic thing about this to me is that usually you see Trump reflect the people who are around him. Well, when you talk about Jared Kushner, his family foundation has -- the Kushner family foundation has given money to settlements. David Friedman, the ambassador to Israel, is very pro-settlement. So, the fact that --

BLITZER: The ambassador designate.

KUCINICH: Excuse me, yes, the ambassador designate. This is very surprising considering who is surrounding him and who is in his ear, particularly Jared Kushner, who is his son-in-law who is very close to the president and he listens to. It's going to be really interesting to see how this goes forward.

BLITZER: Yes, I assume that Rex Tillerson, the secretary of state, among others, maybe General Mattis over at the Defense Department, maybe Mike Pompeo over at the CIA, others had some role in dealing with this. I assume Mike Flynn, the national security adviser, as well. You don't release a statement on a sensitive issue like this without organization, presumably, from the president of the United States, himself.

Bianna, what do you -- what do you think of this little fight that's going on between the Trump administration and the Australian prime minister?

GOLODRYGA: Well, the Australian prime minister had told his own country and newspapers earlier in the week that he could understand Donald Trump, that things would be accomplished between them, better through a private conversation. So, I think he went into this phone call on Saturday, thinking that after an hour, they would work things out and have had a great, chummy conversation. That doesn't appear to have happened that way.

Australia is, in fact, our largest trading partner in the region. There is concern that, you know, these types of talks and these types of conversations and sentiments could, in fact, push Australia closer to China. So, at the end of the day, China could benefit from some of the turmoil that President Trump has created in just this week and a half.

BLITZER: And, Dana, we just got word that the Australian ambassador here in Washington, Joe Hockey, was at the White House for what is being described as a productive meeting with Reince Priebus, the White House chief of staff, and Steve Bannon, the top political strategist. So maybe they're trying to fix things.

BASH: It sure sounds that way. This was not a phone call that they clearly wanted to get out. They whitewashed the discussion in their public statements, and you heard the president himself say nice things about Australia today, but we certainly got a window into the way the businessman, Donald Trump, works, in trying to negotiate.

BLITZER: All right, guys, to everybody, thanks very, very much. That's it for me. Thanks for watching.

"ERIN BURNETT OUTFRONT" starts right now.