This is how we've been playing. The rules say
"At the end of your turn, you may select one opponent whose Active race you did not attack this turn as your ally."
If they did not have an active race on the board then you did not attack them and can declare them your ally. You choose the opponent, not the race.
Diplomat is very strong in a two-player game unless it is against Ghouls.
Sure is. My wife had diplomatic Ratmen last night to start the game. I grabbed Merchant Trolls as a defense of sorts. I spread out as far as I could and started building a lead, then she also spread out as far as she could with Ratmen then declined.....then destroyed me with a new race.
It was kind of funny, she nearly quit 4 turns into our first game. Thought the game was really stupid. Truth is, she'd never played it's type before and kept comparing it to Wizards Quest and how combat worked there. Anyway, she crushed me in game 3 of the evening with the above opening.