Hi All.
The work-around we implemented is the following:
- remove all the 'use remote gateway' items from the network peering
- create an Azure Firewall in the hub network
- configure the firewall to ALWAYS use SNAT
- create a route table (UDR) on the gateway subnet, that is forwarding all the internal network addresses to the Firewal
Now all the VPN traffic is forwarded to the firewall. The firewall is now proxying the traffic to the peered network. The answer is sent back to the VPN client by the firewall. We were able to downscale the VPN Gateway back to SKU 1.
Even though we do not know the root cause for this issue, we can work using this work around.