Illarionov was born on 16 September 1961, in Sestroretsk, Leningrad Oblast, now a municipal town of Saint Petersburg. At seventeen he started working at a communications office (telephone and postal services) in the town of Sestroretsk. He then went on to study economics at the Leningrad State University, graduating in 1983, and receiving a Ph.D. in economics in 1987.
From 1983 to 1984, and again from 1988 to 1990 Illarionov taught for the International Economic Relations Department of Leningrad State University. From 1990 to 1992 he was senior researcher at the Regional Economic Research Department of the Saint Petersburg State University of Economics and Finance. From 1992 he became part-time economic adviser to the Russian Deputy Prime Minister and Acting Prime Minister Yegor Gaidar and (until 1993) the first deputy head of the Economic Reform Centre of the Russian Government. From 1993 to 1994 Illarionov was the head of the Analysis and Planning Group of the Chairman of the Council of Ministers and the Government of Russia, Viktor Chernomyrdin, after which he went on to become the vice-president of the Leontyev International Social and Economic Research Centre, and director of the Moscow division. He has created the Institute for Economic Analysis and was its director from 1994 to 2000. Illarionov had called for a sharp devaluation of the Russian ruble before the August 1998 financial meltdown to prevent it.
On 12 April 2000, Illarionov assumed the office of Vladimir Putin's senior economic adviser within the Russian presidential administration and in May 2000 he became the personal representative of the Russian president (sherpa) in the G8. He played an important role in introducing the low 13% flat income tax in Russia, in repaying the Russian foreign debt, in creation the petroleum revenues-based Stabilization Fund of the Russian Federation and in bringing Russia's full-fledged membership in the political G8.
On 3 January 2005 Illarionov resigned from his position as presidential representative to the G8. On 21 December 2005, Illarionov declared "This year Russia has become a different country. It is no longer a democratic country. It is no longer a free country". The Washington Post reported that he had cited a recent report by the U.S.-based and government sponsored Freedom House. On 27 December 2005, Illarionov offered his resignation in protest against the government course, saying that Russia was no longer politically free, but ran by an authoritarian elite. "It is one thing to work in a country that is partly free. It is another thing when the political system has changed, and the country has stopped being free and democratic," he said. He also claimed that he had no more ability to influence the government's course and that Kremlin put limits on him expressing his point of view. Illarionov was openly critical to such elements of the Russian economic policy as the Yukos affair, increasing influence of government officials on large companies such as Gazprom and Rosneft, and at last the Russia-Ukraine gas dispute and the energy policy of Russia in general. Illarionov has also been a proponent of secession of Chechnya.
In October 2006, Illarionov was appointed senior researcher of the Center for Global Liberty and Prosperity of the US libertarian think tank Cato Institute in Washington, DC. In this position, he has lamented "[Russia's] new corporate state in which state-owned enterprises are governed by personal interests and private corporations have become subject to arbitrary intervention to serve state interests" as well as "new ways in which political, economic and civil liberties are being eliminated."
On 14 April 2007, and 9 June 2007, Illarionov took part in opposition Dissenters' Marches in Moscow and Saint Petersburg, respectively.
Illarionov is one of the 34 first signatories of the online anti-Putin manifesto "Putin must go", published on 10 March 2010.
As a well known opponent to Vladimir Putin and his policies, he criticized former Czech president Václav Klaus' view that the EU and the USA did more to escalate conflict in the Ukraine than did Vladimir Putin. Illarionov was able to end the cooperation between Klaus and the Cato Institute.
Illarionov has questioned the official Russian version of the Russian-Georgian war over Georgia's breakaway South Ossetia and Abkhazia. He has suggested that the war was premeditated by the Russian leadership which had introduced its military into South Ossetia and escalated the situation to provoke the Georgian side.
Illarionov has also stated that Moscow's bellicose rhetoric scared away investors and was in part responsible for the 2008 Russian financial crisis. He has heavily criticized both Western and Russian government plans to ease the credit crunch, saying they amounted to a public bailout of bad decisions made by the private sector.
On 4 February 2014, before the Russian intervention in Crimea, Illarionov predicted that Vladimir Putin was going to implement a military operation to effectively establish political control over Ukraine.
In late March 2014, following the Ukrainian revolution, Crimean crisis, the Crimean referendum, and the annexation of Crimea by Russia, speaking to Svenska Dagbladet, Illarionov suggested that Vladimir Putin would seek to incorporate Finland into the Russian Federation by arguing that the granting of independence to Finland in 1917 was an act of treason against national interests: "It is not on Putin's agenda today or tomorrow. But if Putin is not stopped, the issue will be brought sooner or later. Putin has said several times that the Bolsheviks and Communists made big mistakes. He could well say that the Bolsheviks in 1917 committed treason against Russian national interests by granting Finland's independence". Illarionov also stated that in addition to Finland, there were "other territories where Putin claims to have ownership, namely parts of Georgia, Ukraine, Belarus, and the Baltic states".
On 9 June, he predicted that the beginning of the ceasefire and negotiations between the newly elected Ukrainian president Poroshenko and self-proclaimed authorities of break-away republics at the East of Ukraine would ultimately result in a Russian attempt at occupation or political control over the entire Ukraine