Russia Cancels Sale of Submarines to Iran--for Now : Trade: The Kremlin denies bowing to U.S. pressure, cites financial dispute as the reason.

Russia’s controversial plan to sell submarines to Iran has been canceled for now, not because the United States opposes the deal but because of a financial dispute between Moscow and Tehran, a high-ranking Russian official said Friday.

“In connection with certain difficulties in settlements between Russia and Iran for the delivery of special equipment, armaments and hardware, the question of selling Russian diesel submarines to Tehran does not stand on the agenda,” Vladimir Pakhomov, an official of the Russian Ministry of Foreign Economic Relations, told the Itar-Tass news agency.

When reached by telephone, another official in his department said that Pakhomov had confirmed the Itar-Tass report, but he refused to discuss the issue further.

At the United Nations on Thursday, Acting Secretary of State Lawrence S. Eagleburger registered a stern objection to the proposed deal with Russian Foreign Minister Andrei V. Kozyrev.

The Russian sub sale, involving two or three older-model diesel craft, would be the first to a Persian Gulf nation, officials said.

Defending his country’s right to sell the military equipment, Kozyrev said the sale would be in Russia’s interest, because it needs the money--an estimated $750 million--to help its ailing economy and because it wants to improve relations with Iran.

Although it was announced a day later that the deal was off, the flip-flop had nothing to do with Washington’s complaint, a Russian diplomat said.

The United States opposed the deal, fearing it would upset the military balance in the Persian Gulf region and because Washington is suspicious of Iran’s militant Islamic regime.

America and its Arab allies in the Gulf also worry that Iran may use its military might to further its claims to Abu Musa, an island at the mouth of the Gulf whose ownership is in dispute.

Moscow insisted Friday that Washington’s fears about the submarine sale were unfounded.

“In our arms deals, we are guided by the principles of the agreement that the five permanent members of the Security Council reached last October in London,” Mikhail Peshkov, the head of the Iranian desk at the Russian Foreign Ministry, said in a telephone interview. “One of those principles is that arms sales to any region must not disrupt the strategic balance, and we stick to this.”

Peshkov said Washington’s attack is nothing new and that it was motivated not by political worries but by financial concerns. He asserted that Washington hopes to recapture the lucrative arms market that it monopolized under the old Iranian regime. Peshkov noted that the Iranian army is still equipped with American aircraft and other U.S.-made weapons.

“I can tell you that Iran now has no Russian submarines, but it does have two or three American-made ones,” the diplomat added.

Both Moscow and Washington have been big players in the international weapons market, but the two did not often compete for the same clients.

Under Soviet rule, the Kremlin sold arms to its ideological allies and potential partners. Washington avoided selling weapons to the same countries. But now that the ideological war between the White House and the Kremlin is over, the battle for the world’s arms market is likely to heat up.

Kozyrev made it clear that Russia now has another motivation for selling arms--earning the money it needs to avert Russia’s economic ruin. One of the specifics of the new game, Peshkov said, is that Russia is now following the unwritten rules of commerce.

“We do not conceal from anyone that we do have a program of military cooperation with Iran, which naturally includes a naval aspect,” Peshkov said. “But neither we nor the Iranians are prepared to disclose the details. This is business, and no one reveals commercial secrets.”

Peshkov indicated that the submarine deal may be “off the agenda” only temporarily.

“As far as the specific deal involving Russian submarines for Iran, like in any agreement, certain frictions are bound to appear and cause delays. But if the sides are interested, they will sooner or later iron out these glitches and the deal will proceed.”