The High Court ruled as valid federal laws passed to reclaim land Russia had leased to build a new embassy in Canberra on national security grounds.
But the Commonwealth was liable to pay a reasonable amount of compensation for the acquisition under the constitution, it said in its judgment on Wednesday.
The Commonwealth will need to pay half of Russia's cost for the case.
In 2023, Australia quickly passed laws to cancel Russia's lease on a plot of land where it planned to build an embassy a few hundred metres from Parliament House.
Russia rejected the cancellation of the 99-year lease, which was granted by the Australian government in 2008, as hostile action amounting to "Russophobic hysteria".
No developments were completed on the plot, but an official squatted on the land after the decision to frustrate any Australian effort to reclaim it.
Russia took the fight to the High Court, arguing the laws were unconstitutional because there was no evidence of a national security threat.
Failing reinstatement, Russia was entitled to compensation, representatives argued.
Top silk Bret Walker SC, representing Russia, previously argued it was offensive to assume people would willingly give up their property without compensation because national security grounds were invoked.
He cited an army barracks as an example, saying the Commonwealth would be within its rights to acquire land around the structure to protect security but would still be expected to pay the owners.
Solicitor-General Stephen Donaghue argued the government had the power and authority to make laws stripping the Russians of their lease.
The Commonwealth also relied on "specific advice" about the nature of the construction that was planned and the capacity the site's location would provide the Russian mission.
The advice from the Australian Security Intelligence Organisation was not detailed in court due to public interest immunity protections.
Compensation should not be paid to a nation "for problems they cause themselves", Mr Donaghue told the High Court previously.
Mr Walker said it was "really disturbing" to propose the taking of land without compensation on pre-emptive national security grounds where no explicit threat had been proven.
He said such a precedent was absurd and would mean "everyone is to be regarded, until proven otherwise, a terrorist threat".
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