This may be butter on pork as we say in my country, but I want to clarify my above statement.
The real world neutral rule is, all neutrals are true neutrals, and they dont join the war because other neutrals got attacked at the other side of the globe, because in that case they would not have been true neutrals in the first place. Only when a true neutral got attacked himself is he no longer a neutral, and he can now join the side that did not attack him. When a nation at war lose its Capital, the remaining unoccupied territories will switch to neutrals, and follow the rules of engagement for neutrals.
Let me talk you through history.
Poland was a true neutral and did nothing when China, Ethiopia, Spain, Austria and Checkoslovakia got attacked just before WWII started.
Poland is attacked by Germany and is no longer a neutral, and must join the Western Allies UK and France, since Russia at this time is allied to Germany, the aggressor. Russia may later in this Turn attack and occupy Eastern Poland, to honor the treaty with Germany. Since all territory of Poland is now captured, Poland is out of play. Polish soldiers and sailors that want to continue the fight must go to London and fight under British command.
Finland was a true neutral too, and did nothing when neutral Poland got attacked. Part of Finland, the Viborg territory, is now attacked by Russia, and Finland is no longer a neutral. The Allies Britain and France want to help Finland, but are not able to move a unit into it since Finland is surrounded by true neutrals that dont allow passage. Only when Germany break the pact with Russia, is Finland able to join the Axis side. But the Fins only want to retake the lost territories, they never move into original Russian territories, no matter how much Hitler push them.
Romania was a neutral too, and did nothing when Poland and Finland got attacked, but when Russia attack the eastern part of Romania, known as the Bessarabia territory, Romania is no longer neutral, but can not join France because of its location, and is forced to join Germany.
Norway was a neutral too, and did nothing when their neighbors Finland and Poland got attacked. Now Norway is attacked, and immediately join Britain and France. British and French soldiers come to Norway, but must retreat after two months of fighting, because Germany take Paris and threaten UK with Sea Lion.
Neutral Belgium and Netherlands got attacked, and since Netherlands got colonies and territories on the Pacific map, that territories now got neutral. In this game they are pro Allies, but in the real world the Allies never got to test the pro neutrality before japan occupied it, and then they joined the Allies.
Not very neutral France never got attacked, in fact it was France that attacked Germany. But now Germany has captured the French Capital, and France surrender. When a player surrender, he stick em up and drop the gun to the ground. He never keep on fighting. Germany did not occupy all French territories, since that was impossible, but this unoccupied territories is now true neutrals. They will defend themselves against any aggressor. Some people name it Vichy France, but that is like Quisling Norway or Stalins Russia or Hitlers nazy Germany, its just a name. The fact on the ground was that the other players had to fight for every neutral French territory they wanted to move into, from French Indo China to Morocco. The casualties were from less to nobody, because the French morality was low and they were out of ammo, but anyway they had to fight. And the Free French forces was just locals drafted from French colonies after the Allies had occupied them.
Trade agreements.
True neutral Sweden had trade agreements with both Britain and Germany, and sent half of the iron to Germany and the rest to Britain with Blockade runners, and never joined the war no matter how many true neutrals got attacked. They did not care when their brothers in Finland, Norway and Balticum got attacked.
True neutral Turkey had trade agreements with both Britain and Germany and sent resources to Germany with train and to Britain with ship. They would only join the war if they got attacked themselves. They did not care when their brothers in their former Ottoman empire got attacked, like Persia, Iraq, Syria etc etc
True neutral Spain had trade agreements with both Britain and Germany, and sent resources to both. They never let Germany use their territory to attack Gibraltar, and Franco promised that anybody who tried to walk into Spain would meet resistance, both Germans and Brits. And if any had tried, you can bet Spain would join the other side.
Of course there are exceptions to the true neutral pattern rules, like Brazil that suddenly joined the Allies for some reasons just before the war was finished.
But I think this neutral rule is simple and historical correct. Now if USSR had lost Moscow, I belive the same thing would have happened as in France. USSR was multi ethnical with lots of different people, languages and cultures, all ruled from Moscow, and with Moscow gone they would be neutral territories, like when the empires of Austria and Turkey lost in WWI, the different people would claim independency and neutrality. Even if Stalin had escaped pass the Urals to claim a Government in Exile in Siberia, there are no way the Ukraineans, Belorussians, Georgians or Tsjekians would have kept on fighting. When you lose you lose. A boxer that is knocked out dont suddenly jump up and continue the fight after the bell has silenced. With UK I dont know, the Canadians and Aussies would for sure kept on fighting, but they were independent nations, and not British colonies as on the A&A map. Maybe Canada should be a specific nation with own nation specific units, but I dont think that is gonna happen soon
