Why is Terraform falling back to Azure CLI authentication instead of using a user-assigned managed identity?

Below is some guidance and pointers on debugging and understanding how Terraform’s Azure provider selects its authentication method with MSI:

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1. Enable Detailed Debug Logging

Set the Terraform log level to debug so you can see which credential chain is being attempted. For example:

BASHCopied
export TF_LOG=DEBUG
terraform init -backend-config="container_name=xyz" \
  -backend-config="key=terraform.tfstate" \
  -backend-config="storage_account_name=xyz" \
  -backend-config="use_msi=true" \
  -backend-config="client_id=***" \
  -backend-config="subscription_id=***" \
  -backend-config="tenant_id=***" \
  -backend-config="msi_endpoint=http://a.b.c.d:8081/msi/token"

Examine the logs to see if Terraform is actually picking up your MSI config or if any environment variable or other configuration is causing it to fall back to CLI auth.

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2. Check Environment and Provider Version

• Environment Variables:
  Verify that there are no conflicting environment variables (like AZURE_AUTH_LOCATION, ARM_USE_MSI, or even an existing Azure CLI login cache) that might trigger CLI authentication. Terraform’s Azure provider prefers credentials in a certain order, and a cached Azure CLI login might take precedence if the MSI configuration isn’t set properly.

• Provider Version:
  Make sure you are using a version of the azurerm provider that supports user-assigned managed identities. More recent provider versions (the documentation you referenced is for v4.17.0) support passing a client ID for a user-assigned identity. Confirm that your configuration syntax is correct for the version you’re using.

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3. Review Backend Configuration

From your posted backend config, note the following:

• The backend block is passing all the required MSI options (use_msi, client_id, etc.)
• Confirm the format is correct (e.g. use_msi should be either a boolean or a string value as expected by the provider).
• When Terraform tries to authenticate to Azure for storage state, it will use these backend options. Double-check that there is no conflict between backend authentication and provider authentication for resource creation. Sometimes the backend config will use a different code path or even default to the CLI if something is missing.

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4. Look into the Authentication Source Code

The logic that determines which authentication method to use is in the AzureRM provider code. In particular:

• Authentication Helpers:
  The functions that build the Azure ARM configuration (including MSI) are implemented in the provider’s internal packages. For example, you can review the functions in the repository file authentication.go (or similarly named files) which contain the logic to:

  • Check for MSI settings (like use_msi and client_id).
  • Fall back to Azure CLI if proper MSI credentials aren’t detected.

• Client Initialization:
  The higher-level function that creates the Azure Resource Manager (ARM) client (often seen in functions like newAzureRMClient()) calls into these authentication helper functions. By setting breakpoints or adding logging in these parts of the source, you can see which branch is taken.

While you might not want to modify the provider code in production, reviewing these sections can help identify if a setting (or environment variable) is being misinterpreted.

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5. Next Steps for Debugging

• Local Test with MSI Credentials:
  Try running Terraform on a machine where you can simulate the MSI token endpoint (if possible) or use the same backend configuration to rule out Azure Functions-specific issues.

• Double-Check MSI Endpoint:
  Confirm that the URL provided in msi_endpoint is accessible and returns tokens in the expected format. A response that doesn’t match the expected schema might cause Terraform to fall through to Azure CLI auth.

• Compare Against Documentation Samples:
  Look at known good examples from the documentation to see if any additional configuration is required in your context, especially around user-assigned identities.

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By following these steps and reviewing the source code referenced above, you should be able to drill down into why Terraform is not using your MSI settings and instead falling back to the CLI credentials method.

If after reviewing the logs and provider source you still run into issues, consider reaching out on the Terraform provider GitHub repository where you can provide debug logs and ask for help with that specific branch of code.

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This should provide several paths to further debug and eventually pinpoint the configuration issue.