I have checked my own version of the scenario and I found out what happened. It's not a bug, it works as designed, but the design had some misconceptions that create the issue. I'll explain what I found:
* the first cause of trouble is that, as a RED player, you chose to accept the German ultimatum, so you are at peace with them...the event creates the first error, as it gives a relation value between GER and RED of 50...this value not only means peace, it means you can see and click on all of your "friend's" units...hence what happens to you.
--> to fix that first point, the relation between at peace Ger/Red should be max of 5..i.e. no war but nothing else
* the second issue is that the Caucasians do not exist as a faction, in fact they are GER units 'disguised' as Caucasians...the subfaction system that we use in AGE games since the origin...so the second error here is that Ger and Red being at peace, the "DOW" does not have effect, as I checked that the DOW does not change the relationship
--> the DOW event must be fixed so that Ger and Red are at war (and you keep the Ost front blocked / locked to avoid mass offensive till general war erupts
So I would say, in the end, that it works as designed
...but a few little changes need to be made for that design to fit with the original intent...
I'll take the files from the DB and see how I can do a quickfix for you and post it here...not sure I have time this week but I'll do my best within the next 10 days
Congrats for finding out