Hiddink replaces Gadzhi Gadzhiyev, who was fired earlier this year.
He will earn a reported 8 million euros at the Russian side, who train in Moscow but play in the war torn region of Makhachkala.
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Since Guus Hiddink arrived at the helm, Chelsea have improved considerably after a tricky start to the campaign.
Newcastle United are staring down the barrel of relegation to the Championship for the second time in the past eight years.