The gifted fly-half, who plays his club rugby for Paris-based Racing 92, was controversially left out from the original squad for the Autumn Nations Series and missed the first two Tests in what appeared to be the latest example of a strained relationship between player and coach.
Adam Hastings, Blair Kinghorn and Ross Thompson were chosen ahead of Russell, with Townsend citing "form and consistency" levels as the key criteria for his selection.
But Russell was called up ahead of the All Blacks clash after Hastings, the son of Scotland great Gavin Hastings, was ruled out through injury following Saturday's 28-12 win over Fiji.
And the 30-year-old has now leapfrogged Kinghorn, with the Edinburgh back on the bench.
Russell walked out on the Scotland squad prior to the 2020 Six Nations after publicly criticising Townsend's methods.
The stand-off was also dropped for last season's Six Nations game against Ireland after it emerged he had breached team protocol by going out drinking in Edinburgh along with five other players.
Russell, in common with several senior players, was rested from the pre-season tour of South America only for former Scotland playmaker Townsend to spark a heated debate when he left him out of his squad for the end-of-year Tests.
But his inclusion for this weekend's match means he joins forces with Ali Price as Scotland field the same half-back partnership they deployed in their last meeting against New Zealand five years ago - an agonising 22-17 loss at Murrayfield.
Sione Tuipulotu has been recalled alongside Chris Harris in midfield while Fraser Brown starts at hooker.
Scotland have yet to defeat New Zealand in more than a hundred years of trying, with the All Blacks having won 29 out of 31 fixtures between the two teams.
The closest the Scots have come to victory was in two contrasting draws at Murrayfield - 0-0 in 1964 and 25-25 in 1983.
As is traditional in rugby union, host nation Scotland will wear their change kit to avoid a clash between their usual dark blue strip and New Zealand's black.
But the Scots' shirt numbers on Sunday will be in the blue and yellow tartan of Doddie Weir as they mark the fifth anniversary of the former Scotland lock's motor neurone disease research foundation.
After being diagnosed with the condition, Weir founded the My Name'5 Doddie Foundation, which has now committed almost £8 million to research projects across the UK.
