Step 2 Assign each territory to a country
There are three levels of countries
Major Countries
Russia, Germany, Britain, Japan, United States
The world's leading powers. If active they are always separate players. At least one of these powers must be trying to change the current world order.
Medium Countries
France, Italy, China
Powers of regional importance. If active they are usually separate players, but sometimes they are combined with a major country.
Minor Countries
Everyone else
They are never their own player. They may be combined with a major or medium country. If not they will be part of the "Victim" or "Impassable" country
There are three dummy countries, "Victim", "Impassable" and "Split"
The "Victim" country has units but no moves or production. It can invaded by aggressor nations and is passively aligned with their opponents. This reflects countries with only defensive capabilities. This includes minor countries which have not been combined with a player country and major & medium countries that have fallen into disorder. Yugoslavia was a historical example.
The "Impassable" country is impassable of course. This reflects countries which can't be invaded because of some combination of difficult terrain, military strength, good relations with both sides or the lack of anything worth attacking. Switzerland and Afghanistan were historical examples.
The "Split" country reflects territories occupied by two distinct countries such as "Northwest Europe" and "Spain". They will be assigned randomly in step 3.
Some countries are conditional in that depending on step 3, they may come into existence or not such as Poland or an independent India.
Composite countries are combinations of different real countries which were in the same territory can be treated together such as the Baltic States and Central America.
Some countries, especially British colonies in the Middle East are protectorates. They are technically independent countries but they are likely to be combined with their colonial overlords in step 4. Egypt is a good example. Iraq is an example of a wayward protectorate attempting to ally with another country.