Navalny led mass protests against President Vladimir Putin three years ago, when tens of thousands took to the streets in Moscow and St Petersburg to protest against corruption in Putin's government and inner circle.
The Navalny brothers were accused of stealing 30 million rubles, or around $500,000 under the current exchange rate, from two firms, including an affiliate of the French cosmetics company Yves Rocher, between 2008 and 2012.
Tuesday's ruling will come as a relief for Navalny's supporters after prosecutors asked that he be imprisoned for 10 years. The Kremlin denies allegations that it uses the courts to persecute opponents.
"Aren't you ashamed of what you are doing?" Navalny told the court and judge Yelena Korobchenko.
"Why are you putting him (my brother Oleg) in prison? To punish me even harder?"
Ovanes Oganisyan said that Navalny was expected to be very "energetic and aggressive" in pursuing freedom for his brother.
In addition, Navalny is serving another suspended five-year jail term for a separate conviction last year, which critics also called a sham.