Inside Kaliningrad’s Museum of History & Arts, deputy director Anatoly Valnev leads the way into his musty office, and lays out a series of maps of the city from the 1930s, back when Kaliningrad was called Königsberg and had a Südbahnhof and Adolf Hitler Strasse. The museum used to be the Town Hall and Hitler himself addressed the citizens of Königsberg from the balcony of Valuyev’s office.

Reminders of the German past are everywhere in Kaliningrad, which, as Königsberg, was a Prussian stronghold and birthplace of the philosopher Immanuel Kant. It was bombed to oblivion by the RAF in 1944 and then captured by the advancing Red Army. Tacked on to the Russian Republic within the Soviet Union, it remained a Russian enclave when the Soviet Union collapsed. Closer to Berlin and Stockholm than Moscow, a bite-sized chunk of Russia wedged into an uneasy EU sandwich, Kaliningrad is a bizarre geographical anomaly. Think of it as a Russian Gibraltar or San Marino.

In the 1990s, Kaliningrad became renowned as a black hole for drugs and people trafficking, Europe’s Aids capital and a place where the gloom of the Soviet Union had never quite departed. Now, it’s make or break time for the city. Most of the soldiers have left the region, and the city has dragged itself out of its Soviet past and is now a pleasant town with handsome German-built townhouses on the outskirts and cafés dotted around the centre. But it still lags behind its EU neighbours Poland and Lithuania in terms of economic development and prosperity.

In 20 years’ time it could either be an economically troubled frontline of the New Cold War, bristling with Russian troops and missiles, or a dynamic region that acts as the gateway for Europeans to Russia and the most exciting and progressive part of the great Russian landmass. Kaliningraders already travel more than other Russians. Although no western airlines except Latvia’s AirBaltic fly to the exclave, local airline KD Avia connects it to cities across Russia and Europe.

“More people here have visited the EU than have visited Russia proper,” says Stephen Dewar, a British economist and long-term resident of Kaliningrad, over dinner at the local sushi joint, a global marker for economic progress. “Almost everyone under 35 will speak one foreign language, maybe two.”

“People here are more European. They travel more, see more and are more open-minded than other Russians,” agrees Alexandra Smirnova, Kaliningrad’s economy minister, a 29-year-old sent to the region from Moscow who looks more like a schoolgirl than a minister. “The federal centre understands that a policy of sustainable economic development is the only way to keep Kaliningrad integrated; otherwise there will be huge protests.”

That sounds good in theory, but many local businessmen and opposition politicians complain of just the opposite. The small and medium business sector has struggled to take off. “It’s a tremendously corrupt region,” says Vitautas Lopata, a restaurant owner and opposition politician. “Everything is based on political clans and on who you know and it’s difficult for innovative businesses to thrive.”

EU-funded programmes help the region develop political transparency and e-government but politicians such as Lopata say that the situation is no better than in other regions. The governor is appointed from Moscow and has no more autonomy than other regional leaders.

Nonetheless there are a few positive business examples that suggest hope for the future. Kaliningrad has emerged as something of a hub for computer game developers, with the company Kranx leading the way. Kranx, which makes PC, online and iPhone games for the Russian and international markets, was created in 2004 by Kaliningrad entrepreneurs who had graduated from the local technical university. Swedish consul Jan Skagbrant says that Kaliningrad can be used by foreign firms as a stepping stone: “It’s a good opportunity to start here, on a small scale, understand the Russian market and then move into Russia proper.” Germany, Poland and the Baltic States also have consulates to foster trade and cultural links and dispense visas. However, in a sign that Kaliningrad has not yet become the economic crossroads that some western Europeans might have hoped, the Swedish Foreign Ministry will close its Kaliningrad consulate in October.

This hardly seems surprising given that Skagbrant and his two diplomatic colleagues are employed to look after just two other Swedes living in the enclave. He says that the authorities are making some efforts to attract business but cites the usual problem of bureaucracy: Swedish businessmen often have to spend the best part of a day just to register their visas.

Kaliningrad does not have much heavy industry. During the Soviet period, the region was oriented towards production for the military machine, and all the other industrial enterprises were linked into the Soviet supply chain, making them economically unviable when the Soviet Union collapsed. It’s the typical post-Soviet story, which in Kaliningrad’s case was greatly exacerbated by location.

A special regime that waives import taxes has helped stimulate the automobile sector, however. Over 2,000 people are employed at the Avtotor plant, which last year produced over 100,000 cars, mostly Kias, Chevrolets and BMWs, all of which were sold on the Russian market. The factory forecourt is dotted with huge black containers, shipped from South Korea, which contain the parts for the Kias that are then assembled at the factory.

One of the big hopes for progressive locals is that Kaliningrad can be turned into a tourism hub. “We get about half a million tourists a year here,” says Vladimir Abramov, deputy head of the government’s press service and a professor at the local university. “We’d like to increase this to around 1.5 to 2 million a year. This is about the number of visitors who go to the Danish island of Bornholm, which has a similar climate and topography.”

The region’s main tourism draws are Svetlogorsk, a pleasant if run-down resort town with leafy streets and German-built seaside mansions, and the Curonian Spit, a national park where the Baltic laps against sand-dunes. Currently accomodation is limited to Soviet-era sanatoria and “holiday villages” that look more like concentration camps than resorts.

With an unreliable climate and a sea that’s chilly even in the summer, the region faces a hard task to attract more visitors. However, with a more enlightened visa procedure and the development of mid-range reasonably priced hotels, it could become an attractive possibility for regional tourists.There’s also the possibility of German nostalgia tourism, although the number of former residents is a rapidly diminishing demographic.

A group of local academics and business leaders have drawn up an informal report listing 11 possible scenarios for the way that Kaliningrad could develop. The most depressing of them involves the city turning into a Russian military outpost. Currently, there is a large Baltic Fleet base in the town of Baltiysk and other military ­installations but nothing like the heavy concentration of troops stationed here during the Cold War. But Russia has threatened to position nuclear missiles in the region if the US goes ahead with its controversial missile defence system in Poland and the Czech Republic. Other more attractive possibilities include the region turning into a “Russian Hong Kong” with offshore banking and financial services companies, a special technology zone or a hub for tourism. The authors note a number of problems with each of the scenarios, however.

“What happens depends on many things, notably how Russia’s relations with the EU shape up in the coming decade and whether the Russian government allows the region to open up fully to Europe,” says Vyacheslav Dykhanov, a professor at Immanuel Kant State University and one of the report’s authors. “We are hoping that the region will become more integrated with Europe and enjoy special status. We want to be Russians but live like Europeans.”

Population: 937,000 Area: 15,100 sq km Average salary: 15,648 roubles (€343) a month Foreign investment: $376m (€267m) in 2008

An estimated 90 per cent of the world’s amber is sourced in Kaliningrad but there are no legal exports of amber from there. Organised gangs in Kaliningrad control the local amber market and smuggle huge quantities out of the region to neighbouring Lithuania, Poland or further afield where it’s made into jewellery. Therefore, most high-quality amber we buy has been exported illegally. “This should be the amber capital of the world,” says Stephen Dewar, Kaliningrad-based economist. “There is hope, but it requires political will.”

1. Make Kaliningrad visa-free. The effect on trade and tourism would be powerful.
2. Invest in casinos – an area in Kaliningrad Region is one of four designated gambling zones in Russia but nothing has been done yet.
3. Take on the organised crime rings and ensure that Kaliningrad rightfully becomes the world’s amber centre.
4. Appoint a governor with real autonomy from Moscow.
5. Revamp the airport to make Kaliningrad a viable hub for trans-European flights.