He will become the justice Secretary, Lord Chancellor and deputy prime minister, in the first Cabinet appointment made by Boris Johnson.
Mr Raab has been in the firing line since staying on holiday in Crete as Afghanistan fell to the Taliban and for criticism of his department's handling of the crisis.
Moments after his demotion was announced, the favourite to replace him - trade secretary Liz Truss - was seen walking into No 10 to meet the prime minister.
Mr Raab, who previously held the title First Secretary of State, is believed to have fought hard for his new title in negotiations with Mr Johnson.
The pair reconvened in Downing Street, after first meeting in the prime minister's Commons office - where the sackings of three Cabinet ministers were carried out.
Both the other two holders of the big offices of state - Chancellor Rishi Sunak and Priti Patel, the home secretary - are believed to be remaining in their posts.
But Amanda Milling, the Conservative party's co-chairman, has been removed, apparently paying the price for the shock Chesham and Amersham by-election defeat earlier this year.
Comment: Do any of these promotions and demotions make any sense? It would appear that some are rewarded for their poor performance and negligence whilst others are penalised. Clearly the criteria for remaining in government isn't what we're led to believe it is.
Mr Raab's future was plunged into doubt when he failed to make a crucial call to help fleeing Afghan interpreters get out of the country while he was on holiday.
The call was delegated to a junior minister, as the Taliban neared Kabul last month - as the foreign secretary reportedly declined to intervene personally from his Crete hotel.
Comment: Was Raab simply enjoying his holiday too much to or was he encouraged to stay away?
He was already under pressure for failing to return from the Greek island until the day after the Afghan capital crumbled, being seen on the beach on that fateful day.
Earlier, the three Cabinet ministers sacked were Gavin Williamson, the education secretary, the justice secretary Robert Buckland, and communities secretary Robert Jenrick.
Mr Williamson's long-expected sacking comes more than a year after the bungled GCSE and A-level exams that first triggered widespread calls for him to go.
Mr Jenrick had survived the scandal of unlawfully approving a planning application in a way that favoured a major Tory donor.
Comment: Whilst maneuvers like this can provide clues as to some of the jockeying behind the scenes and who is the next favorite to become the establishment mouth piece, as we've seen over the past 17+ months of internationally coordinated, nonsensical lockdowns, with much testing of the totalitarian waters and shameless backtracking, the ones making the real decisions aren't in the public eye, and the agenda they're working towards is not guided by a democratic mandate.
Further, judging by politicians' profiteering, brazen deception and hypocrisy, during this manufactured crisis, it would appear that much of the political class suffer from character disorders: