New answers tagged ipsec
http://techblog.newsnow.co.uk/2011/11/simple-udp-esp-encapsulation-nat-t-for.html It appears that the Linux kernel will not decapsulate the packets without some instruction. We need to bind to a socket on the incoming udp port and enable udp encapsulation. Above link has the perl script to do it. After this, my traffic is working without any issues.
You aren't really overlooking anything. There is no built-in way to connect VPCs together across regions. At least, not yet. One other option... if you have a physical data center and an appropriate VPN device there, you can use the hardware VPN capability of VPC to build tunnels from each region into that central device, then hairpin the traffic ...
You are correct, only TCP and UDP connections are allowed to Azure virtual machines; they are also severely limited, as in "you can only open single ports and not whole port ranges", which effectively disallows the use of dynamic protocols. You can work around the latter limitation by using an instance-level public IP, which allows all traffic on all ports ...
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