Right in my first 0.33 FFH game one of the AI players got the random event that has one of it's cities split off as the same Civ, but lead by Minister Whatshisname.
Couldn't the "settlements" work in a similar way?
I.e. you can build and capture cities normally, and they will be fully operational, but you cannot directly control them.
Instead they belong to a unbreakable vassal of yours that will trade away all his resources willingly to you.
The vassal would be very weak at producing culture and would have no research of his own. Either he'd just share your tech or you'd have to trade them to him manually.
Additionally, there should be a mechanic to allow the player to tell the vassal on what to focus (produce Axemen for my war effort -> Python) and/or his military units should be under player control.
Captured cities would not magically shrink to useless settlement size and newfound cities would have a chance to grow to meaningful capitals.
Pure luxury: The Kuriotates get a number of "Mobile Palaces", i.e. units like the items in game now, and you can dislodge them from a city (which would turn the city to a "settlement") and move them to one of the cities controlled by your vassal to make that city one of your major (controlled) cities instead. You'd probably not use this too often (the dislodged city would lose all research and most culture and no longer benefit your treasury) but it might be worthwile when you just captured that capital of the Balseraph where they built all those wonderful ... well, wonders.
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rezaf