The government, with the backing of the coalition opposition, rushed legislation through parliament's lower house on Thursday to block the move.
"Today's decision is one taken in the national security interests of Australia," Anthony Albanese told reporters at Parliament House.
"The government has received very clear security advice as to the risks presented by a new Russian presence so close to Parliament House.
"We are acting quickly to ensure the lease site does not become a formal diplomatic presence."
The Federal Court in May overruled a decision by the National Capital Authority to evict Russia from a site within 500 metres of Parliament House.
Home Affairs Minister Clare O'Neil said the government would not allow the land to be used by the Russian Federation.
"The government has received clear national security advice that this would be a threat to our national security," she said.
"That is why the government is acting decisively today to bring this long-standing matter to a close."
Russia's existing embassy in the inner-south suburb of Griffith will not be affected by the decision.
"The Australian government maintains diplomatic relations with the Russian Federation, but we will always, always act in Australia's national interest," Ms O'Neil said.
Opposition defence spokesman Andrew Hastie said the coalition would stand with the government on the issue of national security.
"Russia has not acted in good faith towards its neighbours in recent times ... it continues its campaign (in Ukraine) trashing the principles of territorial and political sovereignty," he said.
"There is a trust deficit, there is a real risk to our national interest here and the security advice is that this lease must be terminated."
The Russian embassy has been contacted for comment.
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