Mihaly knows he’s being used, but refuses to do anything about it because the Thalmor Belkans are giving him a chance to fly again. In one cutscene, Dr. Schroeder mentions that Mihaly hasn’t taken to the sky in 27(I think, but I know it was a few decades at least) years. Schroeder also mentions that the sky is his home, his Dominion. Mihaly doesn’t give a rats ass about the politics.
As for the Thalmor connection, yeah pretty much. There is one thing though. In TES V (Skyrim), General Tullius comments that the Empire is just readying itself for the next Thalmor war. During the story, he is proactively trying to end the civil war because it’s the Thalmors doing. He recognized the true enemy and is trying to get to that goal. In Strangereal however, Belkans cause a lot of shit, but no one is going out there to stop the wars that Belkans are creating, and no one is hunting the Belkans themselves