KHARTOUM/JUBA Fighting between Sudan and South Sudan broke out in April, the worst violence since South Sudan became independent in July after a 2005 peace deal, undermining stability in both countries and threatening to start a broader conflict.
Much of their border is disputed and the two countries have failed to resolve a long list of disputes, including how much the landlocked South should pay to export oil through Sudan and who will control the contested Abyei region.
Tension rose 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 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:
The African Union managed to bring both sides back to talks in Addis Ababa at the end of May but there have been few public signs of progress.
Some analysts say Sudanese President Omar Hassan al-Bashir and his southern counterpart Salva Kiir need the confrontation to shore up domestic legitimacy as both economies have started crumbling due to the loss of oil revenues.
Positions at the talks seem wide apart. Each side accuses the other of supporting militias in the other's territory. There is no compromise in sight over oil fees.
Three quarters of the former Sudan's roughly 500,000 barrels-a-day oil production went to the South with secession. The only export pipelines run through the north to Port Sudan.
South Sudan has offered to pay almost $4 a barrel in export fees, but Khartoum wants around $36 per barrel in a variety of tariffs, plus back payments since July.
Politically, a key point of contention is Abyei, which has fertile grazing land and some oil reserves. Khartoum seized the region a year ago, leading to the exodus of tens of thousands of people. Both sides have withdrawn their troops but still insist Abyei is theirs.
What to watch:
- More meetings. The worst situations in the past few years came about whenever they stopped talking. Continued talks at the African Union would promote confidence.
- Border fighting. Insurgents have taken up arms in Sudan's Darfur region and Blue Nile and South Kordofan border states. Last year the rebels formed an alliance to topple Bashir. How effective will that alliance be? Could rebellion spread further?
- Oil revenues. How long can both countries survive without crude production? If they do make a deal, how long will it take them to restart production?
- Abyei. A referendum for the region was supposed to coincide with the southern independence poll last year, but it broke down over disputes around who could vote. Will they agree to reschedule it?
- 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 may decide to support its East African neighbors.
After years of relying on oil revenues, which made 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 prices. Annual inflation climbed to 29 percent in April, up from 15 percent in June last year. In November 2010, inflation was below 10 percent.
The central bank has been unable to halt the slide of the Sudanese pound on the black market due to a shortage of dollars. With oil revenues gone, 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.
Finance Minister Ali Mahmoud said in May the government needs to plug a budget deficit of $2.4 billion. Bashir's ruling National Congress Party now plans to cancel fuel subsidies, a sensitive move that would hit the poor.
What to watch:
- Will the Sudanese pound fall further, hitting Sudan's ability to import. Will food inflation rise further?
- Any signs of further protests - Khartoum had several small anti-government demonstrations in recent months? By how much will Khartoum have to cut spending?
SOUTH SUDAN STABILITY
South Sudan's economy is showing increasing signs of strain, including fuel shortages in the capital Juba as a result of the loss of oil revenues which made up 98 percent of state income.
The government says the situation is under control, but foreign experts estimate the central bank could run out of reserves soon. The South Sudanese pound is trading on the black market at an exchange rate of around 5 to the dollar, compared with 3.55 before the oil shutdown.
Investors have been reluctant to commit money due to a lack of infrastructure, corruption, absence of laws and rampant rebel and tribal violence.
Most senior officials in Kiir's ruling Sudan People's Liberation Movement (SPLM) are former bush fighters who have little experience with state institutions or economic management.
The South also 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.
Rebellions, cattle raiding and fighting with Sudan could create a humanitarian emergency, soaking up aid meant for development. More than 100,000 people fled tribal violence in Jonglei state in January, according to the United Nations.
What to watch:
- How long can the South survive without oil? Will essential food items and fuel get scarce? Will the South Sudanese pound lose further ground?
- State failure syndrome. Any signs of state disintegration such as spreading of rebellions or tribal violence? Will Kiir be able to stop widespread corruption?
(Reporting by Ulf Laessing)