Putin nominated civilian Andrei Belousov, a former deputy prime minister who specialises in economics, to replace Shoigu as Russia’s defence secretary.
The president on Sunday evening signed a decree for Shoigu - who has been defence minister since 2012 and is a long-standing Putin ally - to become the secretary of Russia's Security Council replacing incumbent Nikolai Patrushev.
Former MI6 intelligence officer Christopher Steele told Sky News that the move pointed to "serious instability" at the heart of Russian leadership.
He added: "It's important to understand that he (Shoigu) ha been one of Putin's closest allies, former head of the FSB and so on for many years... and was rated by people to be probably the second most powerful man in Russia after Putin himself.
"I think what this indicates is not just a reshuffle along normal governmental lines. It's really quite serious instability right in the heart of this regime."
The reshuffle, announced by the Kremlin on Sunday, comes as Putin starts his fifth presidential term and is the most significant undertaken by the president since his full-scale invasion of Ukraine in February 2022.
The announcement came amid Russia’s renewed armoured push across the border in north-eastern Ukraine, forcing thousands of Ukrainians to flee the Kharkiv area.
Valery Gerasimov, the chief of Russia's General Staff, will remain in his post as will Sergei Lavrov, the country's veteran foreign minister, the Kremlin said.
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Following the announcement Shoigu is expected to be replaced, UK defence secretary Grant Shapps predicted Russia’s next defence minister will be another of Vladimir Putin’s “puppets”.
“Sergei Shoigu has overseen over 355k casualties amongst his own soldiers & mass civilian suffering with an illegal campaign in Ukraine,” he said.
“Russia needs a Defence Minister who would undo that disastrous legacy & end the invasion – but all they’ll get is another of Putin’s puppets.”
