It's a good question. It appears to me that the political state was not described by a particular word in this regard. So the idea of "nations," biblically, referred to people grouped by their regions and common culture. "Ethnos" conveys this idea. On the other hand, "laos" has more to do with a race of people, whether in a region or scattered abroad.
So neither ethnos nor laos excludes the idea of a political nation--it really depends on context. However, the way both words are used, in conjunction with Israel and in regard to biblical usage, the idea can easily convey a people defined by their land and by their common culture, which is what we call "nations" today.
To say that "laos" excludes our sense of "nations," as in people defined by their particular regions, seems nonsensical to me, particularly since that is what "Israel" means, a race associated with their land. The implication is pointing towards a common political state, namely a monarchy.
In a practical sense, God made covenant with *all* Israel, and not with just a small select group of people within the nation. I would disagree with you here, if that's what you meant?
The fact is, the passage indicates God made covenant with a great multitude--not select people. That seems wrong in the theological sense that God expressed the desire to save *all,* and not just a select few. But it's a good question for someone more adept than me at the language.
Importantly, the NIV translators, who are language experts, translated the word by context into "nations." That settles it for me. This isn't just a select elite group of people that God chose to make covenant with, but rather, an entire entity, good and bad, to give everyone an equal chance before judging some as successes and others as failures.