Declining to offer Iceland a quick €4 billion loan is one of the worst decisions the US and European countries have made in the financial turmoil. It is a false economy that will prove diplomatically expensive.

Not that Iceland is the world’s most attractive credit risk, it hardly needs saying. The chance that it will lack resources to repay a foreign currency loan would be a conventional reason for saying no (although its Government says firmly that it will be able to meet the terms). But the collective refusal, including, it seems, a rebuff by other Nordic countries, has allowed Russia to offer the deal.

It doesn’t take much to work out what Russia is thinking. A former superpower, in search of territory and allies, which planted its own flag last year on the seabed of the North Pole – what better prize could it want than a Nato member that has just been rebuffed by fellow allies? Come to that, what is the point of the US and Britain courting Georgia and Ukraine at such high diplomatic cost if they are so casual about older allies? The €4 billion snub is going to take some repairing.

Talks with a Russian team about the loan will begin on Tuesday in Moscow, Geir Haarde, Iceland’s Prime Minster, said. His office has said that there will be no strings attached to the deal, calling it a normal commercial loan. Officials familiar with early discussions talk of a loan of three or four years, at 30 to 50 points over Libor (the London Interbank Offered Rate, the daily rate at which banks lend to each other). Iceland has dismissed reports that Russia is angling for use of the Keflavik airbase, which was abandoned by the US two years ago, when it deemed that its Cold War purpose had expired.

But Russia’s interest could not be clearer. Iceland’s mid-Atlantic location makes it a hugely desirable ally, as Nato appreciated. Russia has its eye on oil and gas below the North Pole (the point of the flag-planting stunt). Those will be easier to reach if global warming melts the ice cap. Russia has spent years probing at weak points in old alliances. It has driven a wedge (a small one) between Germany and the US over bringing Ukraine and Georgia into Nato. It has plenty of cash for the courtship.

No question that the Russian gesture has gone down well in Iceland (and Gordon Brown’s railing at Icelandic banks has not). Mr Haarde voiced a sharp sense of grievance when he said: “We have not received the kind of support that we were requesting from our friends. So in a situation like that one has to look for new friends.”

Icelanders might point out that they have taken Russian help before, while a Nato member. In 1952, when British trawlermen (although not the British Government) were blockading Iceland in the first Cod War, Iceland agreed a fish-for-oil swap with Moscow. During later scraps with Britain, Nato members’ awareness of how easily Iceland could leave the alliance helped to swing support to its side.

Iceland is now doing what it has adroitly done before: using its location to court both sides. The US, European Union and Nato are in danger of taking its deep links to them for granted. They missed a trick in allowing in the Russian loan.

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