A thin man in a gray suit, identified by police as a KGB agent, stepped from the black-iron side gate of the Soviet Embassy into an alley yesterday afternoon carrying a wrinkled plastic bag. He was immediately surrounded by a dozen U.S. Secret Service agents and D.C. bomb squad and Emergency Response Team members.

The Soviet agent opened his bag and pulled out two leather belts with Soviet insignia buckles and a yellow one from a ceremonial dress uniform. The American side held up T-shirts, police shoulder patches, a watch, a coffee mug, a U.S. presidential medallion.

The Soviet was unimpressed. Nyet good enough. So a bomb technician brought out a purple felt pouch full of treasures and pulled out a pair of official D.C. police handcuffs.

Bingo. Another U.S.-Soviet trade agreement was reached.

"If they ever write in the history books that the U.S. traded grain first, it will be a lie," said D.C. police Officer G.L. Piatt. "It's right here."

Since the 250-plus members of the Soviet delegation arrived for the summit last week, the delivery alley next to the Soviet Embassy between 15th and 16th streets NW has been a busy thoroughfare for dignitaries staying at the Madison Hotel.

The uniformed police and plainclothes Secret Service agents guarding it began souvenir exchanges with Soviet advance teams the week before Soviet President Mikhail Gorbachev arrived for a summit with President Bush.

But the bidding reached a high point yesterday, when word spread from agency to agency that the big trading would begin at 1 p.m. Such was the level of excitement that it actually started a half-hour early, with at least 32 American officers from two agencies huddled around the three or four Soviets sent out the side gate as envoys.

With Bush and Gorbachev safely out of the city at Camp David for the day, the security officers -- many of whom have worked overtime for three days straight -- could concentrate on economic matters.

"Anything with the word 'police' on it is top dollar," said one officer, who, like others, asked not to be named. "It's like a bazaar back here."

Because Soviets get few U.S. dollars to spend during the trip, no money was exchanged in the alley. It was just stuff: handfuls of gold and red medals with Russian writing fetched silver police medals for marksmanship. A drugstore digital watch brought a salmon-colored Soviet one. M&Ms from Air Force One, repackaged with the presidential seal, were a popular item.

"There's more negotiating going on here than in there," one District officer said with a laugh, pointing to the embassy, where Gorbachev had met with Bush, Vice President Quayle and congressional leaders.

In fact, there was so much negotiating going on yesterday afternoon that the alley was blocked by three marked cars, one unmarked car, six motorcycles and five chairs, not to mention the couple of dozen officers who had to step aside every time a group of dignitaries tried to leave or reenter the embassy.

"I need something for the lieutenant, pronto," a D.C. officer interjected into one group haggling over a bottle of vodka no one wanted.

"The higher-ups send us to do the work," said another officer, smiling.

As the trading continued, one officer got a Soviet police ceremonial hat for a mere two police T-shirts. "I need hats, hats," another barked as he waded through a crowd of his colleagues.

One motorcycle officer got an entire drab green KGB uniform. Another won the dark red cover of a Soviet passport. A bemedaled D.C. officer got a pair of olive green epaulets with two stars.

At one point a bomb squad member took out a dark blue suitcase packed with tradables, among them a can of beer, a bullet shell casing, a camouflage jacket and an octopus knife with a fluorescent pink handle. He picked up a large watch face with "CCCP" inscribed on it for the knife.

"You think they'd want a Glock?" joked one, his hand on his pistol, an Austrian-made Glock 17.

The Soviets, said a high-ranking female officer who stopped by the alley, have refused all week to trade with women, and they were not interested in her rhinestone-studded wristwatch.

But they did want the Mickey Mouse watch that her colleague wore. "My wife said she would cut off my wrist if I traded it," he said.

Several officers said that on Friday, a Soviet had traded a piece of china from the embassy. They said U.S. police tried to trade an issue of Playboy magazine with Russian models but that the Soviets would not even touch it.

"They would go to Siberia for that," was one explanation offered. Police also said the Soviet flag from Gorbachev's black Zil limousine had gone to D.C. Police Chief Isaac Fulwood Jr., an allegation that could not be substantiated yesterday.

A member of the president's Secret Service staff said that the Soviets seemed to be getting low on trading items, but that a plane stocked with tradable souvenirs was expected to land today. "That's what we've heard," he said.