The screenshot shows the Schedule Backup Wizard (Files and Folders), which is the Microsoft Azure Recovery Services (MARS) agent experience. This is file/folder backup to a Recovery Services vault, not an
"Azure VM backup" policy-based backup. In Microsoft's Azure Backup guidance, the MARS agent protects files and folders on a Windows machine by uploading encrypted backup data to the Recovery Services vault.
The encryption is controlled by a customer-managed passphrase, and Azure does not store that passphrase.
Because MARS backups are agent-based, restore is not limited to the original VM or to the VM's region.
Microsoft documentation for MARS restore describes restoring to the original location or to an alternate location, including another server, as long as the target machine is registered to the same vault and you provide the same passphrase used to encrypt the backups. The presence of VM2 in West US does not block restore for MARS-protected files/folders; region coupling is a constraint for Azure VM backup (vault and VM must be in the same region), not for MARS agent file/folder backup.
So, after redeploying or on another VM, you install and register the MARS agent to Vault1, then perform a restore of Folder1 using the correct passphrase-VM2 is a valid restore target.