Harold Elletson: George Osborne steps aboard – and the Tories spring a leak

When David Cameron went to Georgia in the summer to show his solidarity with the country's beleaguered President, Mikheil Saakashvili, he was genuinely shocked by the carefully planned Russian attack on a sovereign state.

In Tbilisi, after demanding the suspension of both Russia's membership of the G8 and negotiations on a partnership with the European Union, he also called for the immediate imposition of tougher visa restrictions, so that Russia's elite who enjoyed "their shopping and their luxury weekends" in Europe would feel the pinch. "Russian armies can't march into other countries while Russian shoppers carry on marching into Selfridges," he said.

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As Cameron flew to Georgia, however, George Osborne, the shadow Chancellor, was hopping on board a luxury yacht belonging to the Russian billionaire Oleg Deripaska. Osborne had been spending his holidays at the luxury villa of a longstanding university friend and fellow "Bullingdon Bertie" Nathaniel Rothschild, financial adviser to Deripaska, whose massive yacht, the Queen K, was moored nearby. On board was Peter Mandelson, apparently billeted there because of "overcrowding" in the Rothschild villa.

When Osborne's subsequent indiscretions about his conversations with Mandelson were made public, Conservative MPs and MEPs were encouraged to ask questions about the European Commissioner's links with Deripaska. When the Tory MP Hugo Swire demanded a debate on Mandelson's links, however, Osborne remained quiet, revealing nothing about his own meetings with the aluminium boss. It is not hard to understand why.

To reveal a connection with the Russian aluminium industry is about as sensible for a modern politician as it would have been 20 years ago to admit a link with the Sicilian tomato industry. More than any other business in Russia, including oil and gas, aluminium has been linked to organised crime, and fraudulent practice.

While there is no evidence of any involvement in malpractice on Deripaska's part, his acquisition of the Russian aluminium giant Sibal would not have been possible without the support of the country's political and security establishment. In common with other members of Russia's wealthy elite, Deripaska has used his acquisition of assets in Russia to go on a "shopping spree" in the West. One of the fruits of his spree was the acquisition of Leyland DAF, the company through which, it is alleged, a donation to the Conservatives could be made.

If it is proved that the shadow Chancellor discussed a donation by Deripaska – Mr Osborne yesterday strenuously denied doing so – it would be highly damaging. Apart from anything else and regardless of the rules on funding of political parties, it would be highly compromising for the Conservative Party to accept a donation from a source so closely connected to the Kremlin.

At the height of sanctions against Yugoslavia, SIS, the secret intelligence service, warned No 10 about a similar donation to the Conservative Party from a Serbian source. The concern of SIS at the time was that this could be used to compromise the party.

Now, the Conservative Party is already highly compromised by its unfortunate Russian connections. In the Parliamentary Assembly of the Council of Europe, which is supposed to promote human rights, Tory MPs have, until very recently, been closely allied with the United Russia Party of Vladimir Putin.

Where does all this leave Mr Osborne, a man who is not, in any case, widely liked in his party and whose performance in recent weeks has been unconvincing? Despite his close friendship with Osborne and whatever Peter Mandelson's position, David Cameron needs to consider the judgement of someone who was prepared to meet one of the Kremlin's favoured oligarchs on his yacht.

At the very least, Cameron was entitled to expect that his putative Chancellor would show greater sensitivity. He appears not to have recognised, and nor has Mandelson, that Russia is neither a democracy nor a normal economy. The long Siberian incarceration of Deripaska's fellow oligarch Mikhail Khordokovsky, the assassination in London of Alexander Litvinenko and the politically motivated murders of numerous journalists should have been enough to convince him that sitting down to dinner with Kremlin insiders on luxury yachts was not a smart move. And particularly not with Mandelson around.

Recent weeks have shown the importance of confidence to the economy. Cameron must now be thinking that George Osborne is not a man to inspire confidence.

The writer is the chairman of the New Security Foundation and a former Conservative MP