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From a literary standpoint, setting is defined as both the time and place in which a story takes place.
By placing this story in the context of an imaginary country on the fringe of a geopolitical area we actually do know something about (Central Europe), Hope creates a cocktail somewhere between reality and fantasy. Credibilty is created by intermittent allusions to real places or things (the Dresden train, the town of Zenda), but the purely invented country of Ruitania (see reference link below) evokes imagery of a faraway, fairytale-like kingdom full of kings, queens, coronations, palaces, dungeons and the like. This kind of mystical, sylvan setting lends itself well to the cloak and dagger scenario which follows; the general confusion and political chaos typical of an emerging state also pave the way to the complex intrigue in The Prisoner of Zenda's story line, involving subversion, romance and mistaken identity.
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