By Alexander Dziadosz and Ulf Laessing
(Reuters) - The outcome of the dramatically escalating border fighting between Sudan and South Sudan is more likely to be determined by which of the two faltering economies collapses first than by relative military prowess.
South Sudan, which seceded from Sudan in July, seized the disputed Heglig oilfield on Tuesday, edging the two former civil war foes closer to full-blown conflict than any time since the South gained independence.
But rather than sparking an all-out military confrontation, each side's aim may now be to target one another's oil facilities and wait for their opponent to crumble under armed insurgencies, popular unrest and fuel shortages.
"It is a question of which side can maintain the basic governance and military structures longer," a Sudan expert with government contacts said, speaking on condition of anonymity.
The two countries have already driven their economies to the brink of implosion since the South split away, cleaving the vital oil industry in two.
Squabbling over oil payments and border fighting has withered combined crude output - previously the main source of foreign currency and state revenues for both countries - from around 500,000 barrels a day before partition to just over a tenth of that.
Food prices are soaring on both sides of the border and currencies reeling as officials scramble to make up for the sudden loss of revenues in countries already reeling from years of war, mismanagement and U.S. trade sanctions.
But despite their weaknesses, both sides have consistently reckoned they have the upper hand on their foe, partly explaining why fighting has escalated despite the obvious fact that neither side can actually afford to fight a war.
"Khartoum is fighting for its survival," said Peter Bashir Gbandi, a deputy for the ruling Sudan People's Liberation Movement (SPLM) in the South's national assembly, during an emotional Juba panel debate packed with bellicose comments and broadcast live on radio.
"Khartoum is economically khallas, collapsing," he said, using the Arabic word for "finished".
"I AM NOT UNDER YOUR COMMAND"
With popular uprisings convulsing the Middle East, many in the South have predicted Sudan's President Omar Hassan al-Bashir, in power since a 1989 coup, will soon meet the same fate as leaders in neighboring Egypt and Libya.
If the South can hold out a few months longer, the reasoning goes, Sudan's people will surely overthrow their government and replace it with a regime more receptive to Juba's demands.
Khartoum, on the other hand, sees a good chance the South - already hit by domestic rebellions, horribly violent cattle raiding and widespread poverty - will soon run out of money and descend into ungovernable chaos.
The result is what Harry Verhoeven, a University of Oxford researcher who has studied Sudan extensively, calls a "war of attrition" in which both sides wait for the other to crumble internally or run out of the funds and fuel needed to wage war.
With its MiG and Antonov planes, Sudan still has a huge advantage in terms of air power, which even South Sudan's military spokesman admits the South's forces can do little but "take precautions" against.
But even before Heglig fell, Sudan was fighting insurgencies on three fronts - the western Darfur region and the South Kordofan and Blue Nile border states - and the South may be betting Khartoum cannot afford to stretch the military further.
"As we speak now there are demonstrations in Khartoum. You cannot fight, you cannot open another front in southern Sudan if you already have four fronts to fight," SPLM deputy Gbandi said.
That may explain why South Sudan's rulers have been unrepentant about the occupation of Heglig, even under pressure from the United States and other global powers.
In a speech to parliament interrupted by clapping and cheering last week, South Sudan's President Salva Kiir chided U.N. chief Ban Ki-moon for asking him to withdraw his troops.
"I told him you don't need to order me because I am not under your command. I am a head of a state," he said.
Juba's defiance is likely a sign it believes it can catalyze regime change in Sudan, Verhoeven said. "If Khartoum falls, of course, the SPLM thinks we're looking at a very different game and everyone will forget their gamble."
And yet many in Khartoum's ruling National Congress Party (NCP) will likely take a similar view of the South, despite the shock of losing Heglig. Officials often contrast Sudan's relatively diverse economy with that of South Sudan, which depended on oil for 98 percent of state income.
"If there will be war after the loss of oil it will be a war of attrition. But it will be a war of attrition hitting them before us," Sudan's Bashir told state television a few days after the South's oil shutdown.
Sabir Hassan, a former central bank governor who co-chairs Khartoum's economic negotiations team, insists the country is still better off than its southern neighbor despite the chance it will have to import more fuel now.
"In the south there is no economy as such. It is a salary-based economy," he said. "Experience has shown that our economy has some resilience when it comes to facing such crises. We have had crises which were very similar to this before."
Some foreign experts and advisers estimate South Sudan may struggle to pay for imports and support its currency within a couple months without outside help, an assessment officials in Khartoum are certainly aware of.
The loss of Heglig knocked out about half of Sudan's 115,000 barrel-a-day oil output. Landlocked South Sudan shut down its own roughly 350,000 barrels per day in January in a row over how much it should pay to export crude via Sudan.
And while friendly governments could offer some financial support to avert economic disaster in either country, both may struggle to secure enough loans to see them through the crisis, especially while the threat of war looms.
One flashpoint for both countries is fuel prices - a red line for unrest in many poor countries this year, such as Nigeria.
Both Sudan and South Sudan have seen long queues as motorists tried to stock up on petrol in the past week. Four filling stations in Juba visited by Reuters had run out of fuel on Sunday.
In Khartoum, rumors have spread the government may have to cut fuel subsidies after losing Heglig despite official assurances the state has enough reserves to handle the crisis.
Food prices are another worry. The loss of foreign currency from oil revenues has driven up the cost of imports, especially in South Sudan, where staples like rice and tomatoes are trucked in at a premium from Kenya and Uganda.
Any halt or delay in state salaries could also make it harder for either side to keep its government functioning.
In Bor, capital of South Sudan's Jonglei state, a government worker this month said his ministry's budget for cleaning, water and other services had already been halved under government austerity measures.
"It's not a problem, of course. When it touches salaries, this is where the problem comes in," he said.
There are similar risks in the north. One Sudanese economic expert with political ties estimates three quarters of the budget goes to Sudan's military, security forces and high-level officials. If true, that does not leave much room to trim spending without hitting sensitive areas.
"The government is unable to get us out of this miserable situation," the expert said. But he said a bloody political transition could lead to a "Somalia situation", and fear of chaos like that affecting the Horn of Africa failed state could deter many Sudanese from rising up.
(Additional reporting by Khalid Abdelaziz; Writing by Alexander Dziadosz; Editing by Peter Graff)