At which point is this "surrender" just a stubborn pride thing?

Russia could "easily" say: "well, now that this guy has proved that vertical landing is possible, we're going to start doing the same thing and compete on price." They would have the "second mover advantage".

What's stopping them from going this route, other than the embarassement that they were basically bested by one guy?

Was there any "surrendering" really? The only competing launch vehicle was Proton-M. My impression is that Proton-M developer Khrunichev basically collapsed because of reliability issues and poorly thought out production relocation strategy (from Moscow to Omsk). It has little to do with Falcon 9; ILS would have lost the market share to any other company due to Khrunichev's internal issues.