KHARTOUM Sudan and South Sudan are locked in an escalating row over oil payments which is threatening to undermine stability in both countries and risks a return to armed conflict.
Sudan's south became independent last July after a referendum agreed under a 2005 peace deal with its former civil war foe.
But the two countries have so far failed to resolve key issues including how much the landlocked South must pay to export its oil through Sudan, border disputes, and who controls the contested Abyei region.
Tensions escalated when Sudan started taking southern oil at its Red Sea port to compensate for what it calls unpaid fees, prompting the South to halt all output in January, shutting off the lifeline of both economies.
Assets at stake in the row between north and south include not just billions of dollars of oil revenues but millions of acres of fertile land and substantial mineral resources such as gold and copper.
Following are some factors to watch:
Sudan's President Omar Hassan al-Bashir has said the tension over oil payments could lead back to war. A meeting with South Sudan's President Salva Kiir in January failed to resolve the oil issue.
Three quarters of the formerly united country's 500,000 barrels-a-day oil production now come from the South, but the South must export its oil through the northern port of Port Sudan.
Talks sponsored by the African Union are continuing, but no compromise is in sight. South Sudan has offered to pay $1 a barrel as a transit fee, but Khartoum wants around $32 plus $1 billion in rear payments, leaving the sides miles apart.
Both countries regularly accuse each other of supporting rebels in the other's territory.
Both sides have also failed to coordinate the launches of their new currencies, hampering cross-border trade due to a lack of bilateral agreements or payment systems.
Politically a key point of contention is the contested Abyei region. The north sent troops and tanks into the region in May, triggering the exodus of tens of thousands of civilians.
What to watch:
- More meetings. The worst situations in recent years came about whenever the sides stopped talking. A series of high-level meetings would promote confidence.
- Will fighting in Sudan's border regions spread? Rebels in Sudan's Darfur, scene of a separate insurgency, and armed groups in the Blue Nile and South Kordofan states have formed an alliance to topple Bashir. How effective will that alliance be?
- Oil revenues. How long can both countries survive without oil? Any details or signs of escalation in the dispute over the transit fee the South will have to pay.
- Abyei. Will both sides agree to hold a referendum in the border province, originally supposed to happen with the southern independence vote, on which country it wants to be part of?
- Nile water. Sudan's split has created a new country in the Nile Basin. There is a bitter dispute between Egypt, which refuses to give up its major share of the Nile waters, and other basin countries that suffer drought and famine. South Sudan is likely to support its East African neighbors.
After years of relying on oil revenues, which make up more than 90 percent of Sudan's exports, the growing import bill has caught up with Khartoum. Banks are unable to meet the demand for foreign currency in the country, forcing an effective devaluation of the Sudanese pound and driving up inflation.
Khartoum has avoided an "Arab spring", but small protests have become more frequent as many Sudanese fret about annual inflation, which climbed to around 19 percent in December from 15 percent in June. In November 2010, inflation was below 10 percent.
The Sudanese pound has suffered a slide on the key black market due to a shortage of dollars. With oil revenues expected to fall, it has become tough for the government to get foreign currency needed for food and other imports. Plans to diversify the economy are in an early stage.
The United States has just renewed a trade embargo, shutting off the north from international markets, making borrowing to fund its budget deficit difficult.
The central bank has said expenditures will need to be cut, while the government has not provided any details on how to fund the budget next year.
What to watch:
- Will the Sudanese pound fall further? That would hurt Sudan's ability to buy imports. Will food inflation rise further?
- Any signs of further protests after Khartoum saw several small anti-government demonstrations in recent weeks?
- By how much will Khartoum have to cut spending at a time of grave challenges as oil revenues are expected to fall?
South Sudan in 2005 was one of the least developed regions in the world. The ruling Sudan People's Liberation Movement (SPLM) has struggled to find people to run a government and to entice talented members of the southern diaspora back home. So development has been very slow.
Politically and militarily, the south needs to ensure it opens a dialogue with the opposition to build the kind of multi-party democratic state donors will want to see in return for their financial support.
The biggest challenge is how to survive without oil during the row with Khartoum, because oil revenues make up 98 percent of the budget.
The government says the situation is under control, but diplomats estimate the central bank could run out of foreign reserves in a few months. Investors have been very reluctant to commit money due to a lack of infrastructure, corruption and rampant rebel and tribal violence.
Rebellions and violence in southern oil areas with fighting at the border with Sudan could create a humanitarian emergency in the region, soaking up aid meant for development.
More than 100,000 people fled tribal violence in Jonglei state in January, according to the U.N.
What to watch:
- State failure. Some analysts believe the South without its northern enemy will descend into chaos amid ethnic rivalries, political meddling and cattle raiding.
- The South is building from scratch a new nation with a small budget. Help from donors may be less forthcoming following the global financial crisis.
(Reporting by Ulf Laessing)