"We are happy that such a highly qualified coach as Capello will still be working in Russian football, its president, Nikolai Tolstykh, said.
The 67-year-old Italian said he was grateful for the confidence shown in him by Russia, which will host the 2018 finals.
"I am very pleased to continue working in Russia. We have big plans, and I will do everything I can to make the Russian fans happy.
Capello was taken on by Russia on a two-year contract in July 2012 and has guided them to the 2014 World Cup finals in Brazil, the first time Russia has qualified in 12 years.
Russia were drawn in Group H along with Belgium, South Korea and Algeria.
His new contract ends speculation that the former England, AC Milan and Real Madrid coach would not be offered a new deal because of the Russian Football Union's financial problems.
Capello boasts a remarkable record of success at club level after winning domestic titles with AC Milan, AS Roma, Juventus and Real Madrid and the Champions League with Milan.
He led England to the 2010 World Cup finals and then helped them qualify for Euro 2012 but resigned a few months before the tournament following a dispute with the English FA.
(Reporting by Dmitry Rogovitskiy; editing by Justin Palmer)
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