You need to implement the planned change for VM1 to access storage1.

The first step is to enable a system-assigned managed identity on VM1. The scenario requires VM1 to read data from storage1 and also specifies that when VM1 is deleted, the permissions associated with VM1 must effectively cease automatically.

A system-assigned managed identity has a one-to-one lifecycle relationship with the Azure resource to which it belongs. Microsoft explicitly states that when the associated resource is deleted, its system-assigned managed identity is automatically deleted from Microsoft Entra ID. In contrast, a user-assigned identity such as ID1 exists independently and remains after the VM is deleted. Microsoft Learn

After enabling the identity, the appropriate storage data-plane role—such as Storage Blob Data Reader when VM1 requires read access to blobs—can be granted to VM1 ' s managed identity at the required scope. Microsoft documents this exact pattern for a Windows VM accessing Azure Storage: enable its managed identity and assign Storage Blob Data Reader to that identity. Microsoft Learn

Federated credentials are unnecessary for a VM ' s native managed identity. Assigning ID1 would violate the lifecycle requirement because ID1 is user-assigned and survives VM1 deletion. A role assignment cannot be created for VM1 ' s system identity until that identity exists.

Therefore, first enable VM1 ' s system-assigned managed identity.