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Azure ILB limitation.
The Azure ILB has a limitation described here: https://github.com/Microsoft/azure-docs/blob/master/articles/load-balancer/load-balancer-internal-overview.md#limitations
This keeps the cluster from coming up as bootkube is trying to connect to the api lb address and that is not supported based on this restriction. There may be a way forward by using an application load balancer for this. This would solve the problem by proxying back to the load balanced nodes instead of using SNAT.
Other references: https://github.com/hashicorp/terraform/pull/10413
TF doesn't yet support app_gateway resources?
@robszumski
https://github.com/hashicorp/terraform/pull/14426
For context, ILB's are being experimented with to stand up fully private clusters on Azure. In using them, we hit this limitation.
this is apparently still an issue, though Azure's documentation has changed and is a bit more obscure about the fact. Tested with both Basic and Standard ILBs. Even tried mounting two NICs to a machine, one for incoming from the ILB (subnet 1), one for outgoing to the ILB (subnet 2). Added NIC on subnet 1 to the backend pool, added ILB frontend in subnet 2. Verified routing correctly outbound from the VM. Results: bupkis.