Swedes grapple with dilemma of talking peace, selling arms. Traditionally peaceful Sweden is struggling with its own variation of the US Iran-contra scandal. The nation's largest arms producer has admitted to illegally smuggling weapons and is being investigated for alleged bribery.

Rune Borg, senior vice president of Nobel Industries, flips through a large stack of newspaper clippings, each bearing part of the headline ``Bofors arms scandal.'' ``It never stops,'' he laments. ``This is just one day's worth of reports.''

Sweden is suffering from its own variation of the United States Iran-contra scandal. The nation's largest arms manufacturer, Bofors, is a Nobel Industry subsidiary. Bofors admitted last spring it had smuggled high technology weaponry to blacklisted Bahrain.

Police also are investigating Bofors for allegedly giving out bribes and kickbacks to win an important order for 400 howitzers from India and for engaging in a series of other illegal arms sales to Dubai, Oman, Libya, and even, Iran.

The Bofors affair carries implications as profound for this traditionally peaceful country as anything that happened in Washington.

Swedes are questioning how its leaders could preach pacifism on the one hand, while selling arms to fuel war on the other. And, they're wondering who in the government knew of the illegal arms exports and what, if anything, they did to stop them.

``Swedish self-confidence is shaken,'' admits Carl Aberg, undersecretary of state for foreign trade. ``This wrongdoing at Bofors raises a painful moral dilemma.''

On the one hand, Swedes see themselves as outposts of morality and pacifism. This is a neutral country which has not fought a war since the beginning of the 19th century. In 1936, Sweden become the first country in the world to voluntarily restrict its arms exports.

On the other hand, Sweden's neutrality is an armed neutrality. It aims to deter aggressors through military strength, thus making invasions unlikely.

To achieve this goal, the country needs a healthy arms industry. And to have a healthy arms industry, businessmen such as Mr. Borg argue that Sweden must sell arms abroad.

``Our arms industry needs a minimum size [a sufficient scale for large production runs] to be competitive,'' Borg says. Bofors, he adds, exports 70 percent of its arms production. ``Sweden is a small country with a small market.''

Traditionally, Sweden sidesteps this problem. Take Nobel Industries, for example. Its founder, Alfred Nobel, was a proud pacifist who, in the 1880s, invented smoke-free gunpowder, dynamite. He ended up selling it to armies and using part of the profits to create the Nobel Peace Prize.

One century later, Swedish law forbids arms exports to countries at war or in ``zones of conflict,'' a sweeping category which includes the entire Middle East region. But in practice, loopholes are available. Companies such as Bofors are allowed to market their products, sign contracts, and accept down payments before applying for an export license.

Bofors did this with a sale of laser-guided missiles to Bahrain in 1978. Its marketing was legal. However, the missiles were illegally shipped to a dummy company in Singapore, and then exported to Bahrain.

Former Bofors President Martin Ardbo said government officials approved the scheme. But government officials deny any involvement. They underline the obvious self-interest behind Mr. Ardbo's accusations: If he can prove that the government was aware of his activities, then he will escape prosecution.

Unfortunately, the truth probably never will be known. Carl Algernon, the man responsible for regulating arms sales, fell beneath a subway train at Stockholm's Central Station on January 15. Swedish officials ruled his death a suicide.

In the wake of this death, the scandal escalates. Bofors only admits to the illegal Bahrain contracts.

The public prosecutor has charged two former Bofors officials with illegal sales of gunpowder to Iran. The press says there were further shady deals and further prosecutions may follow.

``Where do we draw the line?,'' asks Mats Svegfors, political editor of the Stockholm daily Svenska Dagbladet. ``India is OK, even though it has fought two wars, but not Bahrain, even though it is a peaceful little country in a nasty region.''

Opposition leaders pose similar questions - with a deeper political edge.

``Bofors modified the image of [former Prime Minister Olof] Palme the peace angel,'' complains Daniel Tarschys, a Liberal Party opposition member of Parliament.

``Just before his death, he went to India on a five-continent peace initiative and spent most of his time selling arms,'' adds Mr. Tarschys.

The governing Social Democrats soon must offer some answers. At next month's party congress, left-wingers will be pressing for a complete ban on arms exports.

Government officials plan to fight back by saying that some arms exports, including those to India, served honorable aims.

``I think its logical, moral for a neutral country like Sweden to sell to other neutral countries like India,'' says Minister Aberg. ``Otherwise, they will buy from the superpowers.''

Mr. Aberg promises to introduce legislation this autumn which will tighten the export laws. Arms companies now will be forced to report any contacts with potential foreign buyers.

Most Swedes accept this response. Journalists such as Mr. Svegfors, opposition leaders such as Tarschys, and businessmen such as Borg all say arms sales must continue for Sweden to guard its armed neutrality.

As with the United States after the recent Iran-contra scandal, however, they say Sweden must better reconcile its idealism and moralism with world realities.

``We don't want to become cynical ... and sell to anyone,'' says journalist Svegfors. ``There must now be no more double standards.''