In case anybody else has the problem this is how it got solved for me: leave the watch alone for several hours then keep the upper right button got 12 second to have it reboot. For some reason instead of rebooting in firmware update mode it actually booted normally with all settings factory reset.
No matter how many times and different combination of rebooting the watch, the computer, restarting Suunto link and disconnecting / reconnecting the watch I tried, nothing worked. I always eventually got a network error, sometimes far into the upgrade process, sometimes immediately. I checked the computer logs for USB communication errors and the like and there is nothing. This looked like a server side infrastructure issue or a bug in the Suunto link app. A very bad one.