Fresh evidence links Mandelson to oligarch

Peter Mandelson faced new questions today over his relationship with Russian billionaire Oleg Deripaska. The newly-appointed Business Secretary is at the centre of a row over a potential conflict of interest, the Evening Standard can reveal, after two European companies sought his help following allegations that Deripaska's company cheated them over a $1 billion deal in Moscow.

Mandelson, then European Trade Commissioner, took up their case. To their surprise, the two companies then learned that Mandelson was enjoying lavish hospitality aboard the Queen K, the yacht owned by Deripaska, the man they blamed for defrauding them.

The revelation comes at an awkward time for Mandelson. The Business Secretary, now Lord Mandelson after his ennoblement yesterday, was parachuted into the Government by Gordon Brown at a time of grave crisis. Mandelson had already resigned from the Cabinet twice and this new disclosure yet again raises questions about his judgment. Why, it was asked, did he not declare a personal interest when his role as commissioner clashed with a friendship?

Mandelson dismissed suggestions that he had acted unwisely and, in a long statement to the Standard, defended his right to a private life. Yet the Russian connection raises nagging doubts at a time when the Government is fighting to stabilise the turmoil engulfing Britain's financial sector.

Deripaska, 40, currently faces problems of his own. He has struggled for years to distance himself from rumour and innuendo about his turbulent early business career. He built his $28 billion empire in Russia during the 1990s at a time when disputes often ended in contract killings and many were forced to abandon their holdings as gangsters moved in.

Deripaska prospered but in 2006, the FBI asked the US State Department to cancel his American visa and he is currently denied entry to the United States. No reason has been given. Deripaska blames "bureaucracy" for the ban.

Now it has emerged he is under investigation in America and Britain over a $57.5 million money transfer. The funds were moved from a Deripaska company in Russia, through Barclays PLC offices in New York and London, to a firm in Washington which, according to one report, is being probed by the US authorities for alleged money laundering.

Evening Standard's inquiries also raise a question about how frank Mandelson has been about his contacts with Deripaska. When it emerged he had been aboard the Russian's yacht in Corfu this August, Mandelson said he simply attended a drinks party. But an informed source told the Standard that Mandelson had previously spent a week aboard the vessel and had stayed on another occasion. His partner Reinaldo Avila da Silva had also been a guest, the source said.

When we put that to his office, his spokesman said: "He (Mandelson) sees no legitimate interest in how he chooses to spend his private time. He is not going to respond to inquiries about what he does in his private life."

That point will be pondered long and hard by a group of business people in Italy and the Czech Republic who sought Mandelson's help when a deal with Deripaska turned sour.

In 2006, a Russian businessman made it known he was keen to sell 38.46 per cent of Russia's second biggest insurance company, Ingosstrakh, which is majority-owned by Deripaska's company, Basic Element. The deal was worth around $1 billion and a Czech company, PPF Investments, went in with an Italian corporation, Generali, to purchase the minority shareholding. The transaction, approved by the Russian authorities, went through in December 2006.

Deripaska did not welcome his new shareholders. In October last year Ingosstrakh held a special meeting at which the majority shareholders voted to reduce the European companies' stake to less than 10 per cent. The Czechs and the Italians alleged it was a classic share dilution scam. They knew nothing of the meeting at which their shares had been reduced in value and their claim they had been defrauded was later upheld by a Moscow court.

But their battle with Deripaska was only just beginning. His company appealed to a Russian court, which has never been identified, and it found in Deripaska's favour. This mysterious court decision cancelled the Europeans' voting rights, effectively reversing the decision that they had been cheated in the share dilution.

PPFI is headed by Petr Kellner, a Czech billionaire who started his career selling photocopiers. He went on to build an insurance empire and was keen to invest in Russia. Generali, his partner in the Ingosstrakh deal, agreed they had to fight Deripaska's actions and they took their case to Mandelson.

He agreed to investigate. Italian MEP Mario Mauro called on the European Commission to intercede with the Russian authorities, alleging discrimination against European investors.

Then, executives in the Czech and Italian companies learned Mandelson had been a guest aboard the Queen K. Jan Piskacek, spokesman for PPFI, told the Standard: "Naturally we were surprised by this private meeting. We do not understand the circumstances under which it would have taken place. Our previous communications with Mr Mandelson on this case have always been very useful and fair."

Syed Kamall, Conservative MEP for London, was among those dismayed by what he called "a potential conflict of interest". He told the Standard: "I think Mandelson must now make a statement to the House of Lords. He should come clean as soon as possible because as long as these allegations are swirling around they are a distraction from the very serious matters in which he and the Government are involved."

Dr Kamall, who plans to table questions for the European Commission, said: "We need to know precisely what treatment these European companies were given and we need to know why Mandelson did not explain there was a potential conflict of interest."

Mandelson's spokesman in Brussels told the Standard that the European Trade Commissioner had raised the Ingosstrakh issue with the Russian trade minister and, on leaving his post, had left instructions that it was to be pursued. "There is no conflict of interest," he said.

Not everyone may agree. It has also emerged that Mandelson acted twice to cut European import duties on aluminium, something for which Deripaska had campaigned. His company Rusal, one of the world's largest producers of aluminium, was among the beneficiaries of the reduction in duty.

There has been no suggestion that Mandelson acted to benefit a friend. Indeed, the Standard was told that he launched an investigation into aluminium foil dumping that involved a company under Deripaska's control.

The question is over Mandelson's judgment in pursuing a friendship with a man whose often controversial business came within his remit as trade commissioner. Mandelson has always courted the very wealthy. His link to Deripaska is believed to have been made by Nat Rothschild and his father Lord Rothschild.

The Rothschild home on a cliff in northeastern Corfu was the centre of dazzling social activity this summer. Rupert Murdoch's daughter, Elisabeth, was there celebrating a birthday and shadow chancellor George Osborne was holidaying on the island. According to one report, Mandelson "dripped poison" about Gordon Brown into Osborne's ear, shortly before accepting Brown's invitation to join the Government.

Deripaska's yacht, the 238-foot Queen K, made a spectacular sight anchored in a bay close to the Rothschild house. The yacht, with 21 crew, including a cordon bleu chef, has cabins for 16 guests and has an interior created by the leading superyacht designer Donald Starkey. The Queen K cruised the Mediterranean this summer, stopping in Venice and Croatia.

Deripaska and the Rothschilds have a major investment in the Adriatic. They and Canadian businessman Peter Munk are developing a superyacht harbour in Montenegro for the world's richest sailors. Porto Montenegro, as it is to be called, will cater for the biggest leisure vessels afloat which currently have difficulty berthing in many marinas. The partners in the deal are investing more than £200 million in what they hope will be a destination to rival Monaco.

Deripaska is rated one of the world's 10 richest individuals, although the credit crisis recently forced him to give up valuable stakes in construction and car parts industries. Hospitality aboard the Queen K is generous. Guests have spacious staterooms with adjoining bathrooms clad in marble. Cabin service is 24 hours a day, every day.

When Mandelson was first spotted aboard the yacht in Corfu, he said he was merely attending a drinks party given by Deripaska. Then it emerged he told other guests that he had been "billeted" aboard the yacht because Nat Rothschild had run out of room at his house.

He was unwilling to clear up the confusion for the Standard. Rather, he gave us this statement, issued through a spokesman: "His private life has no bearing on his public duties. He was in Corfu to attend a birthday party for Rupert Murdoch's daughter. He does not see why more importance should be attached to Mr Deripaska than any other guest.

"There are no doubt many avenues jounalists may wish to follow about who he (Mandelson) has met in the past four years. He is not going to respond to these fishing exercises. He is entirely satisfied he has separated his private and public lives and will continue to do so.

"It is not a question of dissembling, it is a matter of giving information that pertains only to his private life. Once you start answering some questions you have to keep on doing so in response to any question any journalist wishes to put. He is not going to engage in such a running commentary about his private life."