Would this be an interesting setting for a story?

I dig it. I'm a bit confused by the "cloaking device" thing, though. If you mean a device that can wipe the island off of radar or satellite images, then I'd buy it, just so long as it's not some kind of "if you look at this country, all you see is an optical illusion" type thing. That would sound hokey. But yeah, definitely a cool idea.