Russia will ask Australia's highest court to overturn laws aimed at seizing a piece of land in Canberra earmarked for its new embassy.
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Prime Minister Anthony Albanese on Friday said Australian authorities would be able to take control of the site despite a diplomat squatting at the location, which is within a kilometre of Parliament House.
The High Court has listed a hearing for Monday after Russian officials informed the Australian government of their intent to challenge the validity of laws terminating their lease on the site.
A government spokesman said the constitutional challenge was not unexpected and was "part of the Russian playbook".
A Russian diplomat has been seen living in a shed on the site where his country was blocked from building its embassy.
A Russian embassy spokesman declined to comment.
Australian Federal Police officers are watching the man but have been unable to arrest him because he has diplomatic immunity, The Australian newspaper reported.
Parliament swiftly passed laws to terminate the Russian lease on the site from June 15 after advice on the security risk presented by the embassy.
Mr Albanese brushed off the diplomat's presence and said he was not a threat to national security.
"We are confident of our legal position and our national security committee considered this - we anticipated Russia would not be happy with our response," he said.
"Processes are under way for the Commonwealth to formalise possession of the site.
"A bloke standing in the cold on a bit of grass in Canberra is not a threat to our national security."
But opposition foreign affairs spokesman Simon Birmingham called on the government to take all possible legal steps.
"We shouldn't tolerate anybody seeking to make any type of fool of Australia in relation to the application of Australian law," he said.
"Russia is not welcome to have an embassy on this land and ... they're not welcome to be occupying the land either and it's not within the law for them to be doing so."
It is not clear whether the government has asked the diplomat to leave the site. Senator Birmingham said if a request was made it would need to be adhered to.
"Mr Albanese seemed to think this was something of a humorous or a laughing matter when it's not," he said.
"These are important matters that relate firstly to national security in terms of the embassy on the site, but secondly they go to whether Australian law is being respected and applied equally to all."
Kremlin spokesman Dmitry Peskov last week slammed the decision, accusing Australia of "Russophobic hysteria" and warned of retaliation.
Russia's embassy in the inner-south Canberra suburb of Griffith will not be affected by the decision.
The National Capital Authority granted the lease for the Yarralumla site in December 2008 and building approvals followed in 2011.
Under the lease conditions, Russia had agreed to finish construction within three years, but the embassy remains partially built.
Australian Associated Press
