Capello announced the move at a news conference in which he acknowledged his inability to speak Russian but said he would work to overcome it.
He replaces Dick Advocaat, who resigned after Russia failed to make it past the group stage at the European Championship last month.
Capello had been unemployed since stepping down as England coach in February after four years in charge to protest against the country's soccer association stripping John Terry of the captaincy.
The 66-year-old Italian has won the league title with every club he has managed, including Real Madrid, AC Milan, Roma and Juventus.
The appointment comes amid turmoil in Russian soccer.
The Russian Football Union still hasn't found a replacement for chairman Sergei Fursenko, who resigned after Euro 2012.
Among other things, Capello will be charged with boosting morale after the disappointing performance at Euro 2012.
Along with a barrage of criticism from Russian soccer analysts, the Russian team also faced the ire of the media and fans who accused the players of a lack of enthusiasm and laziness.
Capello played 32 internationals for Italy as a midfielder.
Copyright 2012 by The Associated Press
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