Formal:
* Я понимаю русский язык. (Ya ponimayu russkiy yazyk.) This is the most common and literal translation, meaning "I understand the Russian language."
Informal:
* Я понимаю по-русски. (Ya ponimayu po-russki.) This means "I understand in Russian" and is a more natural way to say it in casual conversation.
* Я понимаю русский. (Ya ponimayu russkiy.) This is a shortened version of the first phrase and is perfectly understandable.
* Я знаю русский. (Ya znayu russkiy.) This means "I know Russian" and implies a higher level of fluency.
You could also use a phrase like:
* Я могу говорить по-русски. (Ya mogu govorit' po-russki.) This means "I can speak Russian," which implies that you can also understand it.
The best way to say it depends on the situation and who you're talking to.