The Reds were moving their factories and command / control facilities out of Moscow and to the Ural Mountains. Capturing Moscow would have served four goals, boosting German morale, encouraging Japan to strike (a seemingly weakened) Russia in the east (although, I do not think they had plans to help their German allies out), demoralizing the Soviets (unlikely to be effective against Russians, maybe the other Soviet forces) and controlling the railroad hub (as mentioned by Genx87). The Soviets would have likely burned Moscow to the ground (see Napoleonic Wars) and destroyed the railroad hub if the Germans were to capture it. Stalin would have secretly left the city and headed to one of their command / control facilities in the Ural mountains if things got dicey, although they would have claimed he was in the city till the end.
The encirclement campaigns were necessary, you do not want large Soviet armies slipping into the wilderness. Napoleon had trouble with this and they were right to encircle the Reds to keep from making his mistakes. But, the problem with the Eastern Front was no clear objective other than destroying the Soviet Army itself. It seems they could not make up their minds whether or not to take certain cities or to focus on oil fields (a wiser choice, IMO). By the time they seem to be ready to take a target, they change their minds and go for another objective. Oddly enough, this sometimes actually helped at the task of defeating the main Soviet Army as their actions seemed illogical and attacks came in unexpected places. But, tactical victories do not equal strategic victory.
Another issue was the way the Axis treated the Soviet POWs and civilians. They treated Western Europeans far, far better than Eastern Europeans and American / British POWs much, much better than Soviet POWs. Take it, The Soviet Union did not agree to the rules of civilized warfare, but Germany did sign. The Soviets returned the brutality, several fold. Civilians notice that kind of thing.
If Germany had backed the underground Nationalist movements (which were somewhat pro-German till Germany occupied their countries and were shown to be exceedingly cruel) in the Soviet satellite states and went in as liberators, setting up anti-communist republics free of Soviet oppression, they could have held on to territory with much greater ease. But, they treated the Nationalists like Communists and thus like animals. There was a violent suppression of a Polish revolt towards the end of the war that words cannot describe, suffice to say the Nazis executed one of the commanders of the forces sent to put down the revolt for being too cruel...
But, hindsight is 20/20, many analysts were predicting the Soviet Union to fall in only a few months.