OK, the exciting conclusion!
Nobody knows how exactly the warhead made its way from China to the hands of the Iraqi resistance. Rumors that it had been transported by a US nuclear submarine that had somehow remained on the loose for over fifteen years were later dismissed by the Soviets as paranoid fantasy.  However, it is known that it made its way to Moscow as part of a consignment of supposedly illegal drugs destined for high (and frequently “high”) Politburo members, with plentiful bribes and authentic-looking documentation on hand and cushioned in bags of the finest Afghan opium. Negotiations for the transfer of said narcotics were actually under way in downtown Moscow that afternoon of September, 2003, when the warhead went off, taking out a sizeable chunk of the city including the Kremlin and most of the Soviet leadership, the Politburo being in full session at the time. Central authority temporarily collapsed, and rebellion broke out all over Eastern Europe.
(The world did not burn in nuclear fire, since - unlike a couple decades earlier - there was no immediately obvious suspect, and soviet nuclear arsenals were not on hair-trigger alert. Still, the first few hours were pretty white-knuckle-ish)
Turmoil also broke out in the USSR proper, as several different people claimed that they represented the proper line of succession, and nationalist revolt broke out in the Baltic States, Iraq, Kurdistan and the Trans-Caucuses. (The careful and corrupt leadership of the Central Asian states carefully stayed immobile, as did the Mongolians – unpleasant neighbors, you know). There was still no recognized government some weeks later when radiological scientists reported that judging from the fallout product, the weapon was most likely of Chinese origin: this did not prevent Mendeleev’s Leningrad regime from making use of the missile bases under its control to blow up several of China’s remaining cities, in spite of loud protestations by the government that it must have come from the Maoist Fundamentalist faction (still holding on in Qinghai and Sichuan). Pro-Soviet puppet regimes in America and Eastern Europe collapsed like a house of cards in most cases, although the hard man the Soviets had given the nod to replace Ceausescu managed to stay in power for a while through savage measures.
The Leningrad regime did not long survive, nor did the Kiev faction: by early 2004 an army-KGB alliance had taken control of the big cities and set about a flurry of purges. The absence of the head of the KGB at the time of the disaster has led to a great deal of paranoid theorizing, but Chairman Putin has always been a survivor.
The highly centralized economy pretty much collapsed with the destruction of the Moscow “head”, and only food aid from the European Community prevented large-scale famine as distribution systems fell into disarray (ugly rumors remain about deliberate starvation policies directed at rebelling Georgians and Azeris). Restoring the economy to some sort of functioning level took nearly two years, and large parts of the Soviet Empire were forced to work on an improvised barter system for lengthy periods. In the end, the pragmatic new leadership decided that a policy of “nuke the US and Eastern Europe until they let us occupy them again” would be more trouble than it was worth, especially since it gave them no incentive to avoid doing something like 9/7/03 again…
STILL NUMBER ONE
In 2012, the Soviet Union is still the dominant global power, but by necessity has been forced to diminish the scope of its planetary empire. It still has a wide constellation of allies, but a lot of them are principally Soviet aid black holes, and after fourteen years of economic reforms (with a two year time out for emergency measures) the Soviet economy is looking capitalist enough that it feels a bit silly to be supporting such determinedly old-fashioned Stalinists as the Koreans and the Indonesians. The increased dissonance between ideology and practice threatens to undermine social stability, and the government has been working hard to promote a “Soviet nationalism” to combat the attractions of local ethnicity. The government is presently located in Leningrad: supposedly it will return to Moscow when the rebuilding is done and the fallout dies back a bit more.
The economy is finally growing at a clip better than anything seen since the early 70s, in spite of the fact that the Europeans are no longer importing any gas or oil to speak of: Soviet industrial combines increasingly work like international corporations, seeking market share abroad (and quite often essentially control the economies of many Soviet allies, which is an increasing cause of resentment in Africa and Latin America). Government censorship has been relaxed, allowing for a bit of a cultural and entertainment efflorescence, but anything that looks like separatism or rebellion is brutally repressed.
Although Soviet global dominance is less open than it used to be, and weak nations no longer feel the need to loudly trumpet their socialist credentials, there are very definite limits: with the exception of the EC and India (which have few anyway) nobody is allowed to have nuclear weapons. The government has made it quite clear that any nuke-building will immediately be followed by a visit from Comrade Missile, and perhaps as an example, the Soviets are in the habit of ever now and then lobbing (non-nuclear, but quite ouchie) missiles at any suspicious Chinese structures the spy satellites spot. Space programs other than the EC’s are forbidden (satellite launch capacity = ICBM capacity) except in “partnership” with the USSR, which essentially means you pony up the money and a satellite and they launch it for you.
China remains a Problem. After the government got back on its feet, there was an effort to overthrow the Chinese government in retaliation for the bombing (which the Chinese still insisted they had nothing to do with) but after a limited penetration into what turned out to be a pretty nasty wasp’s nest the Soviets established a new depopulated border zone and stood pat: there was talk of nuking China into oblivion, but besides looking bad in front of the Joneses by this point Chinese population and industry was so dispersed (and often underground) that bombing them back to the stone age would require so many bombs as to radioactively poison half the USSR and possibly bring on a nuclear winter (Soviet scientists had studies Sagan’s work with interest). So essentially China was let be, and used for occasional target practice. Contact with the outside world is limited, but from what is known the Chinese state is an insanely regulated totalitarianism designed for survival at all costs, and with an army comprising perhaps ten percent of the entire population.
Japan, where a more “pragmatic” political coalition replaced (with much Soviet prodding) the “enthusiasts” of the early post-US years, has mutated into an odd blend of state as corporation and Socialist dictatorship, with lots of patriotic singing and marching and everything planned by computer to maximize productivity (and robots). What somewhat worries the Soviets is that the Japanese system seems genuinely competitive – the economy is now growing rather faster than the USSR. Of course, it’s possible they are just faking the numbers.
The Middle East is pretty much a wash for the Soviets, although they have retained much of their oil muscle with harsh measures. Afghanistan is actually fairly quiet nowadays, and has slowly made it out of the Middle Ages into the bright lights of, say, 1930s Turkey. Speaking of which, although the Soviet Union has not used force to restore a pro-USSR government in Turkey, the Straits are still under Soviet control.
The European Community is now 100% powered by local coal, solar and nuclear power (in spite of that unfortunate little incident in Italy). Cars are all electric. It’s poorer than our Europe, but quite egalitarian, and somewhat smug about how civilized they are compared to the thuggish Soviets or the revanchist, perpetually pissed Americans. This to some extent covers a deep, nagging feeling of insecurity and a sense of shame at having survived by carefully kissing up to their neighbor to the east for years. Now there is little chance of the Red Army storming west, but a certain cringe remains. Many Europeans bombastically call for a New Europe, a Europe that Can Say No, a Europe capable of standing up to Leningrad. Other Europeans ponder the limited number of European nukes capable of hitting the USSR and the still huge Soviet arsenal and shudder and shake their heads in disbelief at the idiot. Economic ties with North America and Eastern Europe continue to grow.
The UK, always more geographically protected from Soviet non-nuclear forces, has taken a sharp turn to the right, and Margaret Thatcher has been “rehabilitated” to the point of getting a statue in Parliament.  Germany was officially united at last in 2006, after the EC (Germany most of all) paid some truly massive bribes (“recovery aid”) to the USSR (it had “informally” been united shortly after the nuking of Moscow, when the East German government collapsed like a bad soufflé).
However, the Soviets have nixed any expansion of the EC further east, so although the former Warsaw pact nations are now trading vigorously with the west (and sending loads of immigrants thataway) they remain politically nonaligned. Under Polish leadership they have formed an alliance of their own, the Prague Pact, including governments varying from the quite democratic Czecho-Slovak Union to the Greek Junta. Of the former enlarged Warsaw Pact nations Yugoslavia is an exception: the USSR having supported its challenge to Croatia re Bosnian borders when Poland, etc. would not, the Serbs have rediscovered their love for their fellow Orthodox Slavs.
REUNITED AND IT FEELS SO GOOD
The non-Soviet East European troops mostly joined the rebels or deserted when the news from home came in, and those from east of Poland mostly withdrew to their bases. The situation had not improved from 1997: although many Americans were willing to go along with the notion of trading national unity for normal economic and political conditions, such views were poorly represented among the actual rebels, which flocked to the new “Heartland Republic” in hopes of spoiling the new initiative. In spite of optimistic reports by local officials (“if we fight them in the Heartland, we won’t have to fight them in California”), the movement of large numbers of troops from elsewhere led to the embarrassing takeover of Boise and the declaration of the “free republic of Idaho.” The 2001 nuking of the city temporarily dampened the rebellion, but pretty much blew any remaining legitimacy for collaborating governments, none of which lasted through the winter of ‘03.
In 2012, the United States is once again a nation. The Deep South and Texas rejoined “with conditions”, retaining certain local autonomies and the right of legal secession if the damn Yankees ever get pestiferous again: Hawaii has its own special arrangements. Total population is rather lower than OTL, immigration to the US being understandably lower during the occupation years, and children more expensive: the current total is about 267 million.
Relations with Cuba are even worse than OTL: Puerto Rico is Unredeemed Territory.
Living standards have grown rapidly with rapid post-unification growth as the US once again became an integrated economy. (In fact, Soviet statisticians have noted that US living standards once again exceed Soviet ones, something that is not reported to the general Soviet public). With the traditional political parties somewhat tainted by collaboration in the early years of the Occupation, there are now New Democrats, Truman Republicans, and five other political parties to confuse voters at the polls. Said politics remain turbulent, as people point fingers and try to prove their credentials as the most anti-Commie, resistance-fightingest, super-patriot ever. (Ironically, the economy is by OTL standards rather socialist: the reconstruction of the country and its infrastructure and the need to keep people employed means that the government does a lot of social spending, and employs rather more of the population than OTL).
New York City, having been governed separately from the rest of the NE Occupation Zone, decided afterwards it didn’t want to rejoin a state whose government took more in taxes from them than they ever received in government benefits (and then told them to drop dead when they had a financial crisis) and formed its own state out of the Five Boroughs and a large chunk of Long Island. The now largely rural rest of the state is currently feuding with them over the name.
The US is forbidden by the USSR from developing nuclear weapons or space capacity, and the Soviets have made it clear that any efforts to, say, embargo the USSR would be seen as a hostile act; indeed, the Soviets are currently trying to pressure the US into paying off a huge debt the Soviets claim they owe for reparations due to losses when the occupation collapsed! Americans grumble, and curse, and some of them, in hidden places and in European labs, carry on with certain projects…
To the south of China, most of SE Asia sticks close to the USSR for fear of the Chinese. The Singapore Pact nations are a small island of moderately successful capitalism in a Socialist sea, and trade vigorously with Europe and the few other functional Capitalisms. They have been trying to get Thailand to join up, but the Vietnamese have been rather cold to the idea. Burma/Myanmar is depressingly similar to OTL.
In Arabia, Rabi’ Bin Laden, inspired by his cousin Osama’s heroic death in Afghanistan, became one of the leaders of the rebellion, initially based in breakaway N. Yemen, that overthrew the House of Saud, seen as compromised by kowtowing to the Soviets. The Islamic Union after the Soviets sliced away the Shi’a regions still has enough oil to pull it out of dirt-poor status, although the large proportion of dirt-poor Yemenis who have come north in search of jobs since unification are a source of internal stresses. So far, this world considers political Islam as more of a nuisance than a severe threat.
The Israelis have indignantly denied rumors of having developed a vast chemical and biological arsenal, and it’s true there is no serious evidence: but nobody knows just how deep down those tunnels under Tel Aviv and other Israeli cities go…
(There are less than 3% Arabs within the borders of the shrunken Israeli state. The rest have been energetically encouraged to move to “their” country, unpleasant as many of them have found the one-party regime that rules it. Given their parlous situation, the only Jews who live in Israel are the, shall we say, highly dedicated ones).
South Africa continues to bleed. Africa is generally as screwed up as OTL, although some of the Soviet-backed Red regimes at least offer a bit more stability and more actual nation-building than the historical kleptocracies: unfortunately, Africa seems likely to actually fall behind ours as the globalization-aided boom that many African countries OTL have experienced in recent years is not being duplicated in this poorer, more socialistic world. The AIDS epidemic is also as ghastly as OTL, not helped by the fact that the poorer first world of this TL took nearly a decade longer to develop effective medications. At least in this TL there aren’t any international corporations trying to sue the makers of generics.
(The AIDS plague outside Africa is actually a bit more controlled: China due to relative isolation has avoided it entirely, and the Soviet medical establishment has done a better job of keeping it under control than the post-Soviet states of OTL).
Latin America is divided into a still “red” and pro-Soviet block and a more capitalistic (if still often a bit socialistic) block of nations edging towards closer ties with the market economies of the US, Canada, and Europe. The Soviet-aligned nations face difficult choices in terms of economic reform and often political turmoil: the dream of a unified socialist Latin America does not really reach beyond the political control of Havana, and people wonder if Castro’s brother and other political leaders can really keep the show on the road once Castro (currently on some good drugs) finally goes the way of all flesh.
Technology is generally more backwards in this world than OTL: the US, Japan and other places have of course contributed less to progress since 1987, and a Soviet science establishment superior to that OTL post-1991 Russia does not make up for that. The Soviets have kept Mir in orbit and enlarged and modernized it, but with nothing to prove to anyone haven’t bothered to do any manned travel beyond Earth Orbit. They have developed a space shuttle, in fact a better designed one and a more reliable one than the OTL US one, but haven’t really done too much with it: Heavy Dumb Boosters remain the basis for putting stuff into orbit, and the satellite business is dominated by Soviet launchers, with a smaller EC effort ongoing. Computer science is also more backwards, as are consumer electronics: only in the last few years have European parents started to grumble about how much time their children are spending on the “network.”
The future still looks pretty Grimdark, and most people doubt the Soviets will ever allow a serious challenger to arise to their Top Dog position, but at least, most people say, we’re not going to have a nuclear war, right? The Soviets will never tolerate a new arms race…
 Even more absurd were the rumors as to the identity of the “mystery sub”: after all, rather than return the stolen ship, the Americans had blown it up and sunk it. They had even shown the wreckage to Soviet divers, who reported that it was indeed the Red October.
 Yes, I know this was OTL…
June 17, an unusually large “science package” was launched into orbit from French Guyana. A high orbit, and a geostationary orbit. One that put it in line-of-sight of all but the northernmost parts of the USSR.
This was unprecedented: various agreements between the EC and the USSR meant that each informed the other, in advance, about exactly what they were going to do with those ICBM-type things used to launch objects into space. The Soviets grumbled loudly, and turning telescopes on the science package and finding it unidentifiable, made noises about shooting it down.
The tiny folded piece of paper covered with tiny scribbles made its way by various hands through the Soviet Union, from there to East Germany, and eventually to Western Europe. It arrived in America in February, 1987: too late, for those into whose hands it was finally delivered neither understood it nor believed its brief appeal. By the time it came to those who could confirm its reality, time had run out. Despairing, the original author of the note committed suicide.
The US ambassador to the USSR at this point delivered certain papers to the Soviet government. Papers, he explained, relevant to the current situation.
The scribbles were soon copied more legibly. A small group of scientists in San Francisco studied them. Later a British businessman carried a copy of the paper and their additions back to Europe, where further work would be done. After 2005, the main area of activity would return to America, where the scattered biological components of what had been Sandia Labs returned to the looted shell of what had been one of the world’s primary research institutions. Stark Industries, a highly successful new high-tech startup, would prove a vital technological partner.
By 2015, the only thing needed was a means to put a large payload into orbit. Certain behind the scenes negotiations began.
Soviet scientists examined the papers with care and increasing alarm. An emergency session of the Politburo was called.
European and American scientists had substantially improved upon Ivan Vanko’s 1987 design: any Soviet missile launch would lead to the USSR being knocked back to the 19th century. For better or for worse, MAD was back.