BUILDUP IN THE PERSIAN GULF : Iraqi Moves Put Russia in Quandary : Diplomacy: Moscow has sided with Washington but wants to renew profitable business relationship with Iraq.

Iraq’s massing of troops near the Kuwaiti border put Russia in a quandary: Moscow has sided with Washington against Baghdad for reasons of politics and regional stability, but at the same time Russia aims to avoid alienating a country it sees as an important business partner.

In recent months, Russia has been moving closer to Iraq, eager to renew one of the Soviet Union’s most profitable friendships.

Last month, the two countries signed a $17-billion economic agreement that Russia hopes will allow it to collect at least part of a $7-billion debt and to exploit what it sees as a huge and hungry Iraqi market that will open up as soon as the United Nations lifts the sanctions against Iraq.

Even as the Russian Foreign Ministry urged Iraq on Monday to halt its bellicose troop movements and cooperate with the United Nations, Iraqi Oil Minister Safa Jawad Habubi arrived in Moscow to get a joint oil production deal ready for launch the moment sanctions against Iraq are lifted.

The Persian Gulf crisis apparently had no impact on the previously scheduled visit. Habubi was reportedly to meet the Russian oil minister and four oil companies to discuss a $2.5-billion contract for Russian help in developing Iraqi oil fields, building a petroleum processing plant in northern Iraq and possibly constructing a new pipeline.

The Russian and Iraqi officials “are hopeful for a peaceful settlement of the crisis and feel it possible to thrash out a number of key issues now,” the Itar-Tass news agency reported.

Less than a week ago, Russian officials were still hopeful that the international trade embargo against Iraq might be lifted in as little as six months.

Together with France and China, Russia had been lobbying the U.N. Security Council to consider setting a timetable for a partial lifting of sanctions if Iraq continued to behave, recognized the legitimacy of Kuwait’s borders and complied with other U.N. demands.

“The Iraqi leadership assures us that the debts will be paid as soon as Iraq gets a chance to resume its oil exports,” said Alexander M. Kalugin, head of the Iraq section of the Russian Foreign Ministry, in an interview before the troop buildup began.

The same Russian firms that build Iraqi roads, airports, pipelines and oil facilities want a chance to get back into that lucrative market, Kalugin said.

“Our technology and equipment is not competitive abroad,” he said. “In Iraq, we could still sell it.”

Wails of frustration emanated from other Russian politicians and diplomats who saw those hopes evaporating Monday. Many blamed Iraqi President Saddam Hussein for destroying his own case.

The former Russian ambassador to the United States, lawmaker Vladimir Lukin, complained to the Russian news agency Interfax that if Hussein’s military maneuvers were intended to persuade the Security Council to lift the sanctions, they had the opposite result.

“The provocative actions of Hussein have discouraged any desire by Russia to stand up in his defense,” said an unnamed diplomat in today’s editions of the newspaper Izvestia.

Izvestia said a second Persian Gulf war between Iraq and the Western allies would be “the worst possible development for Russia.”

Russia was quick to denounce the Iraqi action last week, and when President Clinton telephoned Russian President Boris N. Yeltsin on Monday, Yeltsin reportedly assured him that Moscow was urging Baghdad to stop the brinkmanship, according to Russian news reports.

Until Iraq overran Kuwait in August, 1990, Saddam Hussein was one of the Soviet Union’s best customers. He bought billions of dollars’ worth of weapons, and unlike other Soviet client states that paid in sugar or bananas or not at all, Hussein paid his bills promptly in “black hard currency”--oil.

By the time the Gulf War began, about two-thirds of Iraq’s aircraft were Soviet-built, as well as more than 4,000 tanks, roughly 4,000 other military vehicles, surface-to-air missiles, small ships and between 800 and 1,000 Scud missiles, according to Col. Andrew Duncan of the International Institute for Strategic Studies in London.

Russian nationalists and defense industry managers complain that Moscow’s compliance with arms embargoes in the former Yugoslav federation, and Yeltsin’s pledge last month to curtail arms sales to Iran, show that Russian interests are being sacrificed to appease the West. Arms sales to Iraq are out of the question, the Foreign Ministry’s Kalugin said. But newly privatized civilian industries are lobbying the Russian government to get the sanctions lifted quickly so they can go back to waging non-military trade with Iraq.

And just as American executives staked out Ho Chi Minh City trying to secure chunks of the Vietnamese market long before the U.S. trade sanctions against Vietnam were lifted, these private Russian companies are already forging unofficial trade ties with Baghdad.

For example, one newly privatized firm that produces agricultural equipment in the Altai region of Siberia has already agreed to supply about 1,000 harvesters to Iraq, according to Vitaly V. Naumkin, president of the Russian Center for Strategic Research and International Studies.

The Siberians are so desperate to sell their equipment before it rusts--and domestic buyers are so scarce--that the firm has agreed to deliver the harvesters to Baghdad now and accept payment once the trade sanctions are lifted, Naumkin said. The United Nations would have to approve the transaction, but since harvesters are unlikely to have a dual military use, the deal is expected to go through, he said.

“Nobody here wants to turn Saddam Hussein into the leader of the Middle East, as he wants,” Naumkin said. But neither can economically imperiled Russia afford an indefinite boycott of its neighbors’ markets, he said.

“Russia cannot afford to have new enemies,” Naumkin said.