On a sultry summer evening, a cluster of foreign diplomats stands chatting in the formal garden of the British embassy.

As a waiter carrying a sterling canape tray moves away, the conversation again turns to a familiar topic in Iraq - executions.

The ostensibly pro-Soviet government of this puzzling country had just put 21 Communists before the firing squad for allegedly forming cells in the armed forces.

Since executions in Iraq - where public hangings were a regular feature of life in the 1960s - tend to be political statements, the diplomats try to decide whether the latest wave signals a shift toward the West.

The question is of no small significance.

From all avaiable evidence, this obsessively secretive nation of 12 million Arabs is sitting atop what is at least the world's second largest pool of oil.

"Iraq may be as big as Saudi Arabia," says World Bank energy expert Efrain Friedman. "They have tremendous potential."

Some of the most bullish assessments of Iraq's future come from the Saudis, who have already accumulated more than $80 billion in foreign reserves.

"Iraq is the richest Arab country from my perspective," says deputy Saudi Planning Minister Faisal Beshir. "They have minerals aside from oil, agriculture potential, land and water, and frankly enough people to build a balanced and prosperous economy."

But unlike the other petroleum giants - Saudi Arabia, Iran and Kuwait - Iraq is the wildcard in the high-stakes Middle Eastern power game.

It is playing the game, moreover, with a style and strategy all its own.

There are no stories here of Iraqis squandering millions of petrodollars in European casinos in the manner of Saudi sheikhs. Nor has Iraq embarked on an all-out industrialization effort like Iran.

How, then, is Baghdad spending its oil money - currently flowing into its coffers at a rate of $12 billion a year?

For openers, the government is giving top priority to the development of agriculture - the source of much of Iraq's riches since the days when this ancient civilization between the Tigris and Euphrates rivers was called Mesopotamia.

But, in addition to plowshares, the oil money is also guaranteeing Iraq a continuing supply of new tanks, missiles and warplanes to add to its already formidable military arsenal.

There is strong evidence, moreover, that Iraq is interested in acquiring a nuclear weapon potential.

Taking into account the nation's uncommonly critical geopolitical location - wedged like a keystone between Iran and Saudi Arabia, poised like a dagger aimed at Kuwait and the Persian Gulf, little more than a half-hour by jet bomber from hated Israel - it is hardly surprising that both of the superpowers are keenly interested.

Despite recent, very tentative signs of a warming by Baghdad toward the United States, the Soviet Union - Iraq's chief arms supplier - continues to hold an edge.

What is certain, however, is that Iraq has quietly begun shifting away from Moscow towards the West, and is establishing closer links with the pro-American Persian Gulf states.

The Carter administration, nevertheless, has been unable thus far to get Iraq to agree to restore the diplomatic relations that Baghdad angrily severed following the 1967 Middle East war.

"Recognition is a trump card," declared one Iraqi official enigmatically. "Why should we play it now?"

Who are the Iraqis?

To the extent Americans have any general impression of Iraqis at all, it is a blurred image of a repressive, warlike people who aid and abet international terrorists, kill their own Kurds, continually denounce their fellow Arabs, and cling rabidly to the dream of driving the Israelis into the sea.

Few Americans even begin to understand Iraq's strange-sounding blend of nationalism cum Pan-Arab socialism called "Baathism" - or the theological distinctions that fuel the bitter schism between Iraq's Baathists and the ruling Baathists of Syria.

Perhaps only a handful of Americans could identify the president of Iraq as Ahmed Hassan Bakr. And hardly anyone - even in the U.S. government - claims to have a real feel for the internal dynamics of the ruling Revolutionary Command Council.

If Iraq is unhappy with his image, it partially has itself to blame. Over the past decade, few American reporters have been allowed to visit this country.

Nor has Iraq shown any interest in encouraging visits by tourists, despite an extraordinary wealth of archeological sites - Babylon, the Arch of Ctesiphon, the Ziggurt at Ur, the Tower of Samarra - that together rival the treasures of Egypt's Nile Valley.

The result has been creation of something of a hermit state of which less is known by the outside world than of any other major Middle Eastern country.

Concedes one Iraqui official: "To some extent, we are much of a mystery as Cambodia."

The explanation for this self-imposed isolation lies in the paranoia of a security-conscious government that seized power ten years ago in a coup, and has since seen virtually everyone - Zionist, capitalist, Communist, Arab royalist, or non-Iraqui Baathist alike - as the enemy.

This obsessive paranoia goes a long way toward explaining what might otherwise look like rather strange contradictions in the Iraqi government's policy.

For example, while fiercely independent Iraq prods the Soviets for more Mig 23 fighters and longrange TU-22 bombers under the spirit of their "friendship" treaty. Baghdad denies Moscow one of its prized goals in the Arab world: a permanent Persian Gulf naval facility at Um Qasr.

"The Soviets are trying to have a foothold on every island." says one characteristically suspicious top Iraqi.

"We cannot allow the Soviets or anyone to interfere in our internal affairs," adds Dr. Abdul Mejid Rafia, a leader of the ruling Baath Party. "Um Qasr is an example of that."

Nor does Iraq's friendship treat with Moscow provide much of an umbrella of protection for Iraqi communists. They are executed with about a much hesitation as is shown in hanging alleged Israeli spies.

"All communist parties all over the world are always trying to get power," says Naim Hadad, a senior member of the Revolutionary Command Council, in explaining the latest round of executions. "We chop off any weed that pops up."

This constant worry about enemies - understandable perhaps given Iraq's stormy politics over the past two decades - has seen Baghdad create the Middle East most repressive police states.

Iraq is the only Arab country where an elaborate structure of disciplined party cells helps three independent intelligence services keep tabs both on Iraqis and foreigners.

And while the ruling Baath Party is on the record as opposed to nepotism, suspicion has led Iraq's rulers to consolidate power in the hands of a few men with close personal and family ties.

President Bakr, aging and in ill health, has turned over much of the responsibility for ruling Iraq to a long-time close associate, 41-year-old Saddam Hussein.

It is no coincidence that the two men were born in the same village of Tikrit, halfway between Baghdad and Mosul.

Yet another native of Tikrit, a little known air force officer named Lt. Col. Adham Khairralla, recently became Iraq's new defense minister.

Khairalla has the added advantage of being President Bakr's son-in-law, and Saddam Hussein's brother-in-law, foster brother, and cousin.

Remarked one top Saudi: "To think that they accuse us of being feudal."

For all the distrust of foreigners. Iraq's oil bonanza and concern for its own prosperity is slowly foreign the nation to emerge from its shell.

In the past couple of years, Iraq has taken major steps to improve relations with its Persian Gulf neighbors.

No longer is Baghdad trying to undermine the Shah of Iran. No longer does Iraq operate a clandestine radio transmitter in the Arabian desert calling for the overthrow of the Saudi royal family.

Iraq even has halted its long campaign of blackmail against its tiny but wealthy neighbor to the south, Kuwait.

Disappointed with the quality of technical assistance they have received from the Soviets, the Iraqis have also started reaching out toward the West.

In an aviation sale worth hundreds of millions of dollars, Iraqi Airways became the only airline in the world to introduce all four models of Boeing's passenger jets at the same time.

They've gone whole hog," says Boeing Vice President Murray Dickerson.

Iraq chose an American and West German consortium to construct a $1.1 billion petrochemical plant rising at al Zubvair in the southern desert.

On the outskirts of Baghdad, amid heavily guarded concrete forms and a stand of cranes. France is helping Iraq build a 70 megawatt nuclear research reactor.

"If we want technology, we buy it - whether it is from East or West," says Badie Kadou, a top official of the Ministry of Planning.

And while Iraq continues to ban direct foreign investment, Baghdad recently has been quietly allowing western companies to provide services and labor - as well as technology.

Perhaps as a sign of things to come Baghdad's few fashionable European-style restaurants are increasingly crowded at night.

That is hardly to suggest, however, that thousands of Western businessmen and technicians will soon bepouring into Iraq the way they have set up shop in Saudi Arabia and Iran.

"There's still a hell of a lot of paranoia here," remarked one Western businessman.

He related how one night recently, while driving through Baghdad, he saw four men in an unmarked car force an auto driven by an elegantly dressed Iraqi off the road.

The men, apparently secret police agents, jumped out of the car with drawn guns, pulled the Iraqi from his auto and began knocking his head against the car.

The Western businessman, needless to say, drove on without stopping.

And despite Iraq's tentative efforts to live at peace for a change with at least most of its neighbors. Baghdad seems to be having a tough time abandoning its old ways as an international renegade.

Last month an Arab gunman assassinated former Iraqi Prime Minister Abdel Rezak Naif as he was climbing into a taxi in front of London's fashionable Intercontinental Hotel.

Naif had lived in exile since Saddam stormed into the Iraqi presidential palace a decade ago, and ordered him at gunpoint out of the country.

British authorities have since arrested two Iraqis - including one of Baghdad's top intelligence agents - in connection with Naif's slaying.

Iraq's image in the West seems likely to be slow in changing.

NEXT: The Oil Bonanza.