Son of the Russian commandant at Pärnu (Pernau), Estonia, Panin entered the Russian army in 1740, was appointed Russia's minister to Denmark in 1747, and was then transferred to Sweden, where he served from 1748 to 1760, officially acting as a major opponent of the pro-French party in Sweden and personally developing liberal political views and an appreciation of constitutional forms of government.

When Russia reversed its foreign policy in 1756 and entered the Seven Years' War as an ally of France and Austria, his position grew more difficult; he was about to retire in 1760 when Empress Elizabeth (reigned 1741–62), finding him one of the most learned and accomplished gentlemen of Russia, recalled him to St. Petersburg to supervise the education of the grand duke Paul, son of her heir, the future Peter III (reigned 1762), and his wife, the future Catherine II (reigned 1762–96).

Though Panin urged that Paul be named emperor and Catherine act only as regent when Peter was overthrown in 1762, he became a trusted adviser to Catherine, particularly in foreign affairs, and was given the formal position of head of the foreign college (department of foreign affairs) in 1763. As such, he developed the concept of the “Northern Accord,” an alliance system involving Russia, Prussia, Poland, Sweden, and, perhaps, Great Britain aimed against the Franco-Austrian bloc, and tried to direct Russia's foreign policy toward forming that alliance system.

In conjunction with that concept, however, Panin advocated the development of Poland into a strong, independent state that would maintain friendly relations with Russia. This position brought him into conflict with Frederick II of Prussia, with whom Panin had cultivated close relations, as well as with Catherine, both of whom preferred that Poland remain weak and subservient. Upon Catherine's insistence, Panin first implemented her plan to place her former lover Stanisław Poniatowski on the Polish throne and effectively subordinate Poland to Russia (1764). He then participated in the negotiations with Prussia and Austria (1770–71) that culminated in the first partition of Poland (1772).

Despite the failure of his grand scheme, Panin continued to urge close Russo-Prussian relations. But Catherine preferred to improve Russia's relations with Austria and, as she succeeded, Panin's position of influence declined. She finally dismissed him in May 1781 after they quarreled over her plan (1780) to organize the protection of neutral shipping against British interference during the American Revolution.

Panin and members of the Vorontsov family were the leaders of a movement to redefine the position of the Russian gentry. Inspired by the concept of the nobility in England and Sweden, the program called for recognizing the gentry's intangible rights and privileges and for securing it from arbitrariness by the government. Only the upper stratum of the nobility was enlisted in support of this movement. It failed because, after Peter III's overthrow, Catherine, backed by her high-ranking nobles, refused to establish the privy council that Panin proposed.