It seems to me like in a lot of cases retreat would not be an option, unless like Black Elk said they could choose any adjacent friendly territory.
Here’s an example using 1942.2 with Germany and Russia:
Germany starts with 3 infantry, 1 artillery, 1 tank and 1 fighter in Ukraine.
Russia starts with 3 infantry, 1 artillery and 1 tank in Caucasus.
Russia decides to send 2 infantry, 1 artillery to Ukraine from Caucasus, 1 infantry, 1 tank to W Russia from Caucasus.
Germany sends 3 infantry, 1 artillery, 1 tank and 1 fighter to Caucasus from Ukraine.
Now there is a border clash. Let’s say Germany wins losing 2 infantry. Now Germany has 1 infantry, 1 artillery, 1 tank and 1 fighter that move on into the Caucasus. Basically, Germany now takes control of the Caucasus.
Let’s say the battle in W. Russia goes badly for Russia and they decide to retreat the 1 infantry and 1 tank that came from Caucasus.
How would you handle this retreat? Would they go to Russia or Kazakhstan?
Or would they go back to Caucasus and fight the German units there? If this were the case, would they act as attackers or defenders?
Or, if neither Russia or Kazakhstan were available as retreat options, I guess the infantry and tank simply fight on in W Russia until they are destroyed?