Williams driver Russell reached Q2 for the third race in a row after an impressive display in qualifying at Silverstone, ending the day 15th overall.
But the stewards said during qualifying they would be investigating Russell for potentially speeding in Q1 under yellow flags that were caused by a spin for Williams teammate Nicholas Latifi.
Russell said over team radio at the time that he "definitely backed off" and was "well in control" when the yellow flags were shown, but nevertheless set his fastest time of the session on the lap.
However, the FIA stewards have deemed him to have breached the regulations, saying that Russell had not been advised by the team to abort the lap, thus ignoring the note sent out by race director Michael Masi earlier in the race weekend about setting times under yellow flags.
It results in a five-place grid penalty that drops Russell to the back of the grid for his home grand prix.
"Russell explained to the Stewards that he only saw the double yellow flag signal at Turn 7 in his peripheral vision and believed it was just a single yellow," the stewards' report reads.
"He lifted slightly earlier than he had on his previous lap, but his speed was not 'significantly' slower than previous laps, although he explained that he was in full control of the car and felt that he would have been able to take avoiding action if needed, and that he was at a similar speed because he was on a faster lap overall.
"The Stewards reviewed the team radio and noted that the team warned him that a yellow was ahead. They did not specify that it was a double yellow flag. Further, they did not advise him that he needed to abort the lap, following the Race Director's notes in this regard that he should not be able to set a meaningful lap time. This was, in fact, his fastest lap of Q1.
"The purpose of the Race Director's note is to emphasise the extreme importance of the necessity to follow the flag signals for safety reasons.
"While the Stewards explored all possible mitigating factors, they ultimately determined that it was the responsibility of the driver to see and follow the double yellow flag signal correctly in a potentially very dangerous situation.
"The team could certainly have helped more in this regard. But ultimately, he could not set a meaningful lap time in this circumstance, and therefore order a five Grid Place Penalty and three penalty points."
The three penalty points are Russell's first of the 12-month period.