"The EU doesn't want companies supplying companies that do so." <-- This is what's strange, and new.
Companies supplying companies - it's an order of magnitude beyond the targets of the sanctions.
It becomes impossible to predict which companies and services may be suddenly impacted.
I'm all for the EU sanctions against Russia, and consequences for those entities breaching them. But Microsoft didn't breach the sanctions, and should be used as a tool to punish those that do.
Microsoft isn't doing business with a sanctioned country in this case. That, yet again, is my point. You keep conflating Microsoft with the company actually breaching the EU sanctions.
Microsoft are absolutely being punished - they were forced to make choice between "doing business in the EU" (what exactly the EU threatened is unclear to me) or losing the contract value, plus whatever they may incur in damages though breach of contract.