GEORGE SHULTZ, the Reagan administration's impassive and durable diplomatic negotiator, once revealed his thoughts about dealing with the Soviets. ``You hold out your hand to them,'' he said, ``but you be careful to keep your balance, lest they pull you across the line.'' It is not bad counsel for President Reagan as he prepares for the suddenly arranged, and not particularly well-prepared, meeting with Mikhail Gorbachev in Iceland next week.

What kind of Russian bear will Mr. Reagan be wrestling with?

It is a bear that has been trying for some months to appear more genial. Mr. Gorbachev, the new Soviet leader, has been preaching openness and has been working the international circuit with a smile and with style. Just how badly this desired image has been sullied by the Daniloff affair, and the Soviets' lapse into their bad old ways, remains to be measured.

There is no question that Gorbachev seeks modernization and higher productivity from his country's Marxist-constrained economy. But so far there has been no suggestion of a change in the system, only exhortations to workers to perform better within that system.

The need to improve the economy may have propelled the Soviets to legitimate new ideas for curbing the arms race.

Here is an issue on which the United States can negotiate carefully and thoughtfully with the Soviets.

But while the desire for a better image, and for movement on arms reduction, is all very well, there is no sign of significant Soviet reform on human rights, no hint of greater sensitivity in the way the Soviets treat people.

Butterfly bombs that maim children in Afghanistan; the ill-treatment of political prisoners; the harassment of Soviets who disagree with official policy; the refusal to let unhappy Soviets emigrate, even to be reunited with their families -- all this adds up to a record that underlines the moral and spiritual differences between the Soviet system and the West's.

These are crucial differences in attitude President Reagan must bear in mind even as he probes to find those areas of common interest where deals may be cut to mutual advantage.

The deception and ruthless manipulation practiced by the Soviets in the Daniloff case are a timely reminder of Soviet methods.

Short term, the Soviet benefits seem substantial.

Despite all the careful diplomatic language designed to explain it, they engaged the US in a deal that got their spy sprung in return for the release of an American journalist they should never have arrested.

In effect they called the President of the US a liar and got away with it.

They jolted the Western press corps in Moscow and may have inhibited its coverage of less attractive aspects of Soviet society.

They have delivered a clear warning to their own citizens that it is dangerous to talk to foreigners.

They have apparently caused the US to give a little on the terms of its expulsion of 25 Soviet intelligence agents from New York.

The implications of the Daniloff affair have now been dramatically overtaken by the announcement of resumed summitry.

Both sides appear eager to eschew victory claims over the Daniloff-Zakharov deal and get on to broader issues.

But Soviet behavior must remain an important factor in the developing Soviet-United States relationship.

Is the Russian bear better behaved under Gorbachev's touch? Was its swipe at Mr. Daniloff a temporary lapse? Is it the same old bear trying some new tricks to get its way?

Reykjavik may shed a little light on the puzzle.

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