I say historical accuracy is best here--there are already gulag challenges, and the Soviet Union was a rich and complex mess that can and should be modeled with dwarves.
Step 1. The nations: set up a regular fortress meant for a king. Then make all noble quarters into overcramped dormitories. Bonus points for putting intelligencia dwarves (jewelers, mechanics, crafters, legendaries) into REALLY cramped quarters with a bunch of haulers and brewers and animal handlers. Then let them engrave the rooms. Topical engravings about Mayors, Guards etc had better be flattering or to the gulag it is.
Step 2. The gulag: megaprojects, and especially power plants should be built with the banished dwarves, these powerplants should not be used to provide any reduction in dwarf labor--in other words, even if you just set up a hydraulic perpetual motion device, it had better be switched on by a dwarf in a pump, not a lever, and it better not be powering any waterfalls. Farms should be made enormous (10x10 plots), then almost everyone assigned to farm should be reassigned to the military.
Step 3. Five year plan: Tell everyone to produce nothing but steel weapons and armor, but refuse to trade for food, if dwarves starve ignore it--as previously suggested only use manager menu to give orders (centralized planning).
When producing weapons, extra soviet points go to making too many, and producing one kind of item at a time--e.g. just as soon as you have metal production going, do not just make a bunch of convenient and desperately needed axes, swords and breastplates--start low--make exactly as many low boots as you'd need to arm all citizens, them move on to leggings (or highboots!). If you ever get to make helms, you've nearly built a socialist paradise!
Step 4. KGB: Anyone who complains to a mayor--toss a coin, if it's heads--off with their heads, if it's tails--they join KGB, give them an office, and temporary bookkeeping duty (I think bookkeeper should be permanently and always reassigned, so you never really know how much of anything you have ever). KGB should be well armed and punish criminals with impunity. Anyone who gets to do their time should consider themselves lucky, serious criminals who make it through an arrest (e.g. murderers and the like), get to join the KGB. Mayor, bureaucrats and nobility should be recruited from KGB ranks, if possible, inducted after promotion otherwise.
Step 5. Culture: Parties are a must (I don't know how Americans simultaneously imagine Soviet Russia as a dreary place of work drones, but Russians themselves as drunk passionate writer-types, but from about 1959 onwards, running a Soviet fortress with "no idlers" and no parties proved impractical (Russian memoirs from the 70's describe how Chinese exchange students surprised everyone by getting up in the morning for the national anthem, while everyone else was still drinking). Good and frequent idling was politically safe and sometimes even the mark of party leadership--Brezhnev did nothing but "idle" (and make insane demands--consider Brezhnev's corn in Siberia, Castro's plan to grow strawberries in the sea, and Mao's campaign to eliminate birds and have people produce steel in their backyards, and your most demanding noble seems easy to please).
Official culture: No less necessary, is a total disregard for the space reserved for parties-if you are not getting the "insufficient space for a party", message something is wrong! To compensate, have massive parade grounds for the military.