The Corfu controversy: How the world really works

A saga of high finance, high living and the high seas, featuring Peter and George, Nat and Oleg, Rupert and Matthew and a cast of many, many more. Jane Merrick and Brian Brady investigate
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In April 1999, as hundreds of thousands of ethnic Albanians fled the Kosovo conflict several hundred miles to the north, a speedboat carried Peter Mandelson and his friend Lord Rothschild from the banking millionaire's villa in Corfu on a four-mile journey across the water to Albania. They were part of an expedition to Butrint, an ancient site where archaeologists have peeled away the layers of past civilisations: Persian, Greek, Etruscan, Roman and Byzantine.

The ruins, which have Unesco world heritage status, were adopted by Lord Rothschild and his friend the Tory peer Lord Sainsbury of Candover six years earlier, shortly after the collapse of Communism, and were being shown off to the close friend of Tony Blair.

Scroll forward nine years to this August, and Mr Mandelson was once again a guest of the Rothschild family in Corfu. He joined a group whose number included some of the most powerful people in the world for what were to be the dying days of another great civilisation: unbridled free-market capitalism.

As this elite and wealthy group partied on their multimillion-pound yachts, the near-collapse of the Western world's banking system just weeks away, the seeds of the bitter donations row between the new Lord Mandelson, shadow Chancellor George Osborne and hedge fund millionaire Nathaniel Rothschild were sown.

Mr Rothschild, a friend of Mr Osborne since their days as fellow members of Oxford's elitist Bullingdon Club, wrote an explosive letter to 'The Times' last Tuesday accusing David Cameron's right-hand man of soliciting a £50,000 donation from Russia's richest man, Oleg Deripaska, during the Corfu holiday. Mr Osborne strenuously denies the allegation. The affair stole the limelight from headlines over allegations of a conflict of interest involving the former EU trade commissioner and his stay this summer on the yacht of Mr Deripaska, who benefited from the lifting of EU trade tariffs on aluminium in 2005.

But the circumstances in which the characters were brought together have significance far beyond a spat between Lord Mandelson, Mr Osborne and Mr Rothschild. They drew attention to the power games of a globe-spanning elite of men and women. They shed light on how decisions that can change the world are made on the yachts of the Mediterranean and Caribbean, the ski slopes of Switzerland, in the fashionable restaurants of New York, London and Moscow and the casinos of Montenegro.

It is not surprising that the first time Mr Osborne met Mr Deripaska was in January at the World Economic Forum in Davos, Switzerland. The annual forum brings together thousands of politicians, businessmen and associates for a week of networking, skiing and partying. Mr Osborne was introduced to Mr Deripaska, who was standing in a group with Mr Mandelson. The then EU Trade Commissioner, who admitted yesterday he first met the Russian billionaire four years ago, must have enjoyed being the power broker in the group as the shadow Chancellor discussed the global economy with one of the world's richest men.

Although he has a chalet in nearby Klosters, like his friend Mr Rothschild, Mr Deripaska bought an expensive property, House Rutiegg, overlooking the mountains in Davos to entertain the rich and famous. He threw a huge party at the wood-panelled chalet, entertaining businessmen including Peter Munk, chairman of Barrick Gold, the world's largest gold producer. Canadian Mr Munk, Mr Rothschild and Mr Deripaska are planning to redevelop an old Yugoslavian naval base in Montenegro into a billionaire's playground. Lakshmi Mittal, one of the world's richest men, who has donated more than £4m to the Labour Party, held a rival party on the same night.

The most exclusive party in Davos was the gathering held by Bill Gates and Bono, attended by Tony Blair, Gordon Brown and David Cameron. Mr Cameron has never met Mr Deripaska; Mr Blair has met the Russian oligarch on one occasion. His office refused to say when this was. But Mr Deripaska is one of the major funders of the Climate Group, a not-for-profit business organisation and pet project of Mr Blair's launched at the G8 in Hokkaido, Japan, this summer.

While Gordon Brown wrestled with a difficult first year in office, his predecessor and Mr Mandelson remained in close contact with each other and the world's major players. As the Prime Minister nursed his wounds from an electoral battering on the night of the local elections in May, Mr Blair, Mr Mandelson and Mr Mittal dined together at Scott's in Mayfair.

So naturally, when the guest list was being prepared for one of the highlights of the global social calendar – the 40th birthday celebrations of Elisabeth Murdoch, the daughter of Rupert Murdoch – Mr Mandelson's name was bound to feature.

In early August Ms Murdoch and her husband, the PR millionaire Matthew Freud, took their 53m motoryacht the Elisabeth F around the Aegean, dropping anchor near Santorini, while her father was nearby on his 56m sailing yacht, the Rosehearty. They then sailed round the Greek Peloponnese to Corfu for the second half of August, where Mr Deripaska had moored his giant 72m craft, the Queen K.

While some of the world's wealthiest and most powerful gathered to sail, swim and party, the Russian-Georgian conflict flared. Mr Cameron, en route to a family holiday on another yacht off the southern coast of Turkey, diverted to Tblisi for talks with the Georgian President, Mikheil Saakashvili. Delaying his Turkish holiday further, Mr Cameron, his wife and their three children were flown to the Murdochs' boats off Santorini in Mr Freud's Gulfstream IV jet.

After Mr Cameron's talks over drinks with Mr Murdoch on the Rosehearty, the party transferred to the more sumptuously decorated Elisabeth F for dinner with the Murdoch family. Later that evening the Freud jet carried the Camerons on to Turkey.

By 22 August, the Murdochs were off the north-east coast of Corfu. On Mr Deripaska's Queen K, George Osborne and his author wife Frances, who had rented a villa nearby, were enjoying hospitality courtesy of an invitation from Mr Rothschild. The 37-year-old scion of the banking dynasty, representing the oldest of old money, is an investor and close business associate of Mr Deripaska, the epitome of new money in post-Communist Russia.

Mr Mandelson was also present and the group discussed politics. The former trade commissioner, while a guest of Mr Rothschild, is said to have stayed on board the Queen K because the Rothschild villa was full, although Mr Mandelson has never clarified this.

Later that day, Mr Osborne attended a party at the Rothschild villa and sat with Mr Rothschild, Mr Deripaska and Mr Mandelson. The agreed version is that there was no conversation about party funding.

The next evening, 23 August, a birthday dinner was held for Ms Murdoch at the Taverna Agni, a low-key family restaurant in the quiet bay of Agni, less than a mile from the Rothschild villa. Amid holidaymakers, a party of 20 seated at a table included the Murdochs, the Osbornes, Mr Rothschild and Mr Mandelson. Mr Deripaska did not join them. As the sun set, the party discussed politics over mezze and red wine. At one point, Mr Mandelson and Mr Osborne removed themselves from the table and were noticed chatting near an olive tree. It is later claimed that Mr Mandelson "dripped pure poison" about Gordon Brown into Mr Osborne's ear. For the shadow Chancellor, this was a nugget of harmless holiday gossip about the ex-cabinet minister and friend of Tony Blair, which crept into the newspaper diary columns shortly after the holiday. He could have had no idea then that Mr Mandelson would return to the Cabinet as Lord Mandelson of Hartlepool and Foy or that the story would be splashed on the front pages.

By the following day, the Osbornes were staying at the Rothschild villa. Mr Osborne and Mr Rothschild were joined on the marble terrace by Andrew Feldman, an old friend of Mr Cameron and Tory fundraiser. He was also on holiday nearby. Mr Deripaska was not present, but the idea of a £50,000 donation from him to the Conservatives was floated. Mr Rothschild claims the two Tories "solicited" the donation, but Mr Osborne insists Mr Rothschild suggested it.

According to the Tory party, Mr Feldman then made it clear donors must be on the UK electoral roll or be a legitimate UK trading company. Someone – they claim it was Mr Rothschild – pointed out that Mr Deripaska owns the British vehicle manufacturer LDV.

Later that day, Mr Rothschild, Mr Osborne and Mr Feldman had a drink on the Queen K with Mr Deripaska. Party funding was not mentioned.

The shadow Chancellor met the Russian oligarch for a fifth time the next lunchtime, but there was no discussion of donations. On 18 September, Mr Feldman and Mr Rothschild spoke on the phone about a Tory fundraising dinner. The Tories claim Mr Rothschild mentioned that LDV would be interested in making a donation, but this was rejected. Mr Rothschild claims it was Mr Feldman who suggested the donation could be "channelled" through one of the Russian's UK firms. Friends of Mr Feldman say he had Googled Mr Deripaska on return to the UK, and discovered he has been refused entry to the United States. James Goodwin, a New York financier and former adviser to Bill Clinton, has now signed a statement backing Mr Rothschild's version of events. By 3 October, Peter Mandelson was declaring it was "third time lucky" on his return to the Cabinet as Secretary of State for Business.

That weekend, the diary story about the Taverna Agni turned into front-page news. Then came the reports about his links to Mr Rothschild and Mr Deripaska, which he dismissed as "muck-raking" and "innuendo". Reports claimed that Mr Rothschild, Mr Deripaska, Mr Mittal and Italian shoe tycoon Diego Della Valle all stood to benefit from decisions taken when Lord Mandelson was Trade Commissioner. This was certainly not in keeping with the urbane, refined and, most importantly, discreet way of doing business preferred by Mr Rothschild and his associates.

And so last Monday, he emailed a letter for publication to his friend James Harding, the editor of The Times. He complained that the focus of the story was wrong, and made the explosive allegations about Mr Osborne attempting to "solicit" a donation.

For seasoned Westminster observers, the Rothschild letter bore all the hallmarks of Lord Mandelson, although Mr Rothschild insisted that he had no idea the story would be so explosive. One Tory insider said: "George may have lobbed a hand grenade by gossiping about Peter Mandelson, but Nat responded with a nuclear strike. It was totally disproportionate."

Both the Electoral Commission and the Parliamentary Commissioner for Standards have ruled there is no case to answer regarding Mr Osborne, because no money exchanged hands.

Nevertheless, the issue has embarrassed the Tories and raised questions about Mr Osborne's judgement. It has also focused unasked-for media attention on Mr Deripaska. Whereas the Rothschilds and the Osbornes are the living embodiment of established wealth, Mr Deripaska's ascent to world domination was rather less trouble-free. Although he remains obsessively protective about his private life, in the past as well as the present, it is clear that the shy oligarch endured hunger and poverty while his new social companions were easing effortlessly along their life paths.

In the early 1990s, for example, while plain Peter Mandelson was directing the New Labour revolution and Mr Osborne and Mr Rothschild were misbehaving with the Bullingdon Club, Mr Deripaska was struggling to feed himself, working on building sites to survive the disintegration of the old Soviet Union.

The young Deripaska was brought up by his grandparents in a Cossack village in southern Russia, then moved around between his relatives from the age of seven as his widowed mother worked for spells in other cities.

The practically minded Mr Deripaska also served in the army, before studying physics at Moscow State University. However, when he graduated, he moved not into a career in theoretical physics, but into the metal-trading market, buying cheap Russian-made aluminium and selling it at a profit overseas.

It was the first step on a fast track to untold wealth – and political influence. Mr Deripaska eventually became Russia's richest man, with a fortune estimated at more than £16bn.

Some 15 years ago he bought a stake in a Siberian aluminium factory and, at 25, famously protecting his investment from rivals by sleeping in the building, next to electrolytic furnaces, reportedly losing his hair – and some teeth – in the process. He formed Rusal, the country's biggest aluminium producer, with his friend Roman Abramovich, another future global player. The Chelsea owner later sold his stake in the company to Mr Deripaska. The deal propelled his business career into the stratosphere. Mr Deripaska's investment company, Basic Element, now includes more than a hundred businesses around the world, a portfolio including construction, fuels, financial services and, of course, the Birmingham van-maker LDV.

Mr Deripaska can boast links with the Russian political elite, notably through a friendship with Vladimir Putin, and an official position within the oligarchs' cadre which allows him regular audiences with President Medvedev. While one of the world's biggest global players, not all of the world is open to him. Mr Deripaska's US visa was revoked in 2006 after concerns over his business dealings were raised by the FBI.

Nevertheless, he remains a central member of the elite cadre who make the really important decisions about how the world is run. As such, his link with Peter Mandelson is not surprising. The Labour peer is a senior politician with international connections and, crucially, when he first met Mr Deripaska he was in charge of trade policy at the European Union, Russia's largest trading partner.

Lord Mandelson moved yesterday to correct a previous statement from his office which suggested that he had first met the oligarch in 2006. "This was not the case: to the best of my recollection we first met in 2004 and I met him several times subsequently," he wrote in a letter to The Times."

Ben Wegg-Prosser, a former Mandelson aide who now lives in Russia, was privy to some of their early meetings and recalls the men once arguing volubly about trade affairs during dinner at a Moscow restaurants.

The ninth richest man in the world, the aluminium tycoon was in regular contact with Europe's Trade Commissioner while the European Commission was dealing with weighty matters including the decision to exempt his business from a tariff on aluminium foil. Mr Osborne has not suggested that anything untoward has occurred at any of the meetings between Mr Deripaska and Peter Mandelson. But people like the Business Secretary, Nat Rothschild, Mr Deripaska and their associates do not like having their business paraded through the pages of a hostile media.

What George Osborne appears to have done in making public details of their social gatherings is to break perhaps the cardinal rule of the global elite. Discussions between the super-wealthy and powerful, whether about matters of world-shaking importance or just mildly scurrilous gossip, are not to be shared with outsiders.

A GREEK DRAMA

The summer's comings and goings from Corfu, Turkey and various Mediterranean homes and yachts have been confusing enough. Throw in the ever-mobile super-rich, their supplicants and courtiers – both permanent and temporary – and the stories that have bubbled to the surface in the past week become almost Shakespearean in their complexity. Time, then, for a little disentangling...

What we know

August in Corfu. Rupert Murdoch's daughter Elisabeth holds one of several 40th birthday parties. The Russian oligarch Oleg Deripaska's yacht drops anchor. Nearby, the financier Nat Rothschild's house is hosting, among others, Peter Mandelson, who then, as other guests arrive, is decanted to Deripaska's yacht. The shadow Chancellor, George Osborne, holidaying with his family in the area, comes over to Rothschild's place and then invites over the Tory chief executive Andrew Feldman. Two allegations are subsequently made. First, that Mandelson, in dining with Osborne in a taverna, "dripped poison" about Gordon Brown into the Tory's open ear. Second, in a letter to 'The Times' from Rothschild, that he, Osborne and Feldman talked about Deripaska being tapped up for a £50,000 donation to the Tories. The latter claim is more vehemently denied than the former. Also, at an earlier one of Ms Murdoch's birthday soirées, this time on her yacht, along came David Cameron, courtesy of a flight provided by the Murdochs.

These events open a whole shelf full of worm cans. Osborne is the immediate focus of press interest, especially when his initial denials specifically refer only to direct requests for money to Deripaska, thus leaving unanswered whether he had talks with a third party about such a gift. Then Mandelson's contacts with Deripaska become the target.

What we don't know

Just how typical were these events of the way people like George Osborne and Peter Mandelson do business? Are there other captains of industry, oligarchs, or other high-net-worth individuals they consort with, dance attendance upon, accept hospitality from, or hobnob with in what appears to be their considerable spare time?

Rothschild has been backed in his claims of talks with Osborne about a Deripaska donation to the Tories by James Goodwin, an American who was present. He says he has a further witness. Will the mystery person now come forward and reveal what he/she knows? And how far did Osborne and his colleague Andrew Feldman go in any discussions? Did they initiate the talks, were they really on the scrounge, or just humouring their wealthy host? Who else has Nat Rothschild had such chats with about his mega-wealthy friend handing over a donation? Has Deripaska or any of his companies made such a donation in the past to any British political party? If so, why? And, here's one for Nat's mum, Lady Rothschild: will she go on funding George Osborne's office?

What we need to know

Peter Mandelson has given the impression that the full details of his contacts with Deripaska have had to be dragged from him. Only on Friday did he admit in a letter to 'The Times' that he had, now he came to think about it, first met the Russian oligarch in 2004. All of which raises more questions. Is that it? How frequent were the meetings? And did Mr Mandelson enjoy any privileges, favours or freebies from Mr Deripaska and his financial confidant Nat Rothschild? Or, for that matter, did he, as European Trade Commissioner, give any to the Russian or one of his many interests, in regard to Montenegro or anything else?

David Cameron has let it be known that he considers Osborne to have been "a bit of a prat" over the affair. Since attending a private party in the Med is unlikely to warrant such a verdict, does this mean that the Tory leader accepts his shadow Chancellor was probably rash enough to engage in discussions (although not with Deripaska directly) about the Russian, or one of his firms, giving cash to the party? And, if so, why is Osborne still in post when, to borrow Mr Cameron's own words from his conference speech, "no one will ever take lectures from politicians about responsibility unless we put our own house in order"?

Party donations: £50,000 for a chance to dine with 'Dave'

A succession of foreign business-men have qualified for direct access to David Cameron by making donations of £50,000 to the Conservative Party. At least 10 foreigners who own British-registered firms or live in the UK are eligible for special privileges, including dinner with the Tory leader, in return for contributions.

A number of Britons who are now based abroad and not registered to vote in the UK have also channelled cash into the party.

The donations, which are within party funding regulations, are among more than 100 contributions of exactly £50,000 made to the Conservatives since Mr Cameron became leader. This is the level of donation which automatically grants donors access to Mr Cameron through his "Leader's Group". The status affords donors preferential treatment including notice of party policy developments.

The Conservatives last night insisted that the donations were "entirely permissible". Donations are allowed if they come from individuals who appear on the electoral roll, or from businesses registered in the UK.

The Russian billionaire Oleg Deripaska, who was last week at the centre of a row over allegations that senior Tories asked him for a £50,000 donation, could have legally contributed to the party via his British-based van-making firm, LDV.

Labour MPs last night claimed that, even though the Tories denied soliciting or accepting any donation from the tycoon, the Deripaska affair had highlighted a "loophole" in legislation.

An analysis of donations to the Conservatives over the past 18 months reveals donations from Americans, Irishmen and a Norwegian, as well as Britons who now live abroad and cannot be found on the electoral roll.

CVS Management, which is a subsidiary of a British Virgin Islands-registered, Swiss-based investment company, paid £100,000 into Tory funds. Andrew Regan, who runs the organisation's parent company, Corvus Capital, now lives in Switzerland.

Venson Automotive Solutions, a British business owned by Dermot Desmond, the Irish billionaire, gave the party £50,000 last year. Star Reefers UK, the British arm of a shipping business whose parent company is chaired by the Swiss-based Norwegian Kristian Siem, also gave £50,000 in February.

Markland Holdings (UK), part of an organisation owned by Irish property tycoons Sean Mulryan and Paddy Kelly, is based in Dublin and has no London office. It gave £100,000 to the Conservatives.

BSN Capital Partners, a London-based hedge fund advisory business run by two Americans and a Briton, is ultimately owned in the Cayman Islands by a company which is, in turn, partly owned by Icap, the Conservative Party treasurer Michael Spencer's vehicle. It gave £100,000 last year.

Australian mining magnate Robert Champion de Crespigny, and the German Andreas Heeschen, who owns the firearms manufacturer Heckler & Koch, both gave £50,000 in May 2007 – but the donations are perfectly lawful because each is eligible to vote in the UK.

Brian Brady

Stranger on the shore: Is it Mandelson?

So, it's a lovely evening in a Greek island idyll. You sit on the water's edge, waiting for the other illustrious guests – a billionaire banker, his chum, the Shadow Chancellor, and a multimillionaire PR supreme among them – to celebrate the 40th birthday of Rupert's daughter, Elisabeth Murdoch.

You are perched outside the Taverna Agni and close to the olive tree where later you will – apparently – drip "pure poison" about your party leader into the ear of said Shadow Chancellor, one of his (and, ostensibly, at least, your) fiercest political rivals. It is late August, just two months ago, remember. Wouldn't you be able to tell if this were you?

Not so Peter Mandelson yesterday. A series of images from the restaurant's own web-cam which mysteriously disappeared from its website last week as the controversy over who-said-what-to-whom-and-when took off. He was unable to say if it was him, or if it wasn't. A little surprising?

Perhaps he simply wanted to avoid the next question: who was he speaking to on the phone? His old mate Tony? His new chum Oleg? Or perhaps it was Gordon Brown, offering him a way back in to government as Secretary of State for Business. On the understanding, of course, that there would be no more of the ducking and weaving and too-clever-by-half spinning that landed him in such hot water before.

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