$\newcommand{E}{\text{E}}$First let $R * X = M$ for convenience. Expanding the loss we have
$$
\|y - Mw\|^2 = y^Ty - 2w^TM^Ty + w^TM^TMw.
$$
Taking the expectation w.r.t. $R$ we have
$$
\E_R\left(\|y - Mw\|^2\right) = y^Ty - 2w^T(\E M)^Ty + w^T\E(M^TM)w.
$$
The expected value of a matrix is the matrix of cell-wise expected values, so
$$
(\E_R M)_{ij} = \E_R((R * X)_{ij}) = X_{ij}\E_R(R_{ij}) = p X_{ij}
$$
so
$$
2w^T(\E M)^Ty = 2pw^TX^Ty.
$$
For the last term,
$$
(M^TM)_{ij} = \sum_{k=1}^N M_{ki}M_{kj} = \sum_{k=1}^N R_{ki}R_{kj}X_{ki}X_{kj}
$$
therefore
$$
(\E_R M^TM)_{ij} = \sum_{k=1}^N \E_R(R_{ki}R_{kj})X_{ki}X_{kj}.
$$
If $i \neq j$ then they are independent so the off-diagonal elements result in $p^2 (X^TX)_{ij}$. For the diagonal elements we have
$$
\sum_{k=1}^N \E_R(R_{ki}^2)X_{ki}^2 = p(X^TX)_{ii}.
$$
Finishing this off, we can note that
$$
\|y - pXw\|^2 = y^Ty - 2pw^TX^Ty + p^2w^TX^TXw
$$
and we've found
$$
\E_R\|y - Mw\|^2 = y^Ty - 2pw^TX^Ty + w^T\E_R(M^TM)w \\
= \|y - pXw\|^2 - p^2w^TX^TXw + w^T\E_R(M^TM)w \\
= \|y - pXw\|^2 + w^T\left(\E_R(M^TM) - p^2 X^TX\right)w.
$$
In $\E_R(M^TM) - p^2 X^TX$, I showed that every off-diagonal element is zero so the result is
$$
\E_R(M^TM) - p^2 X^TX = p(1-p)\text{diag}(X^TX).
$$
The paper defines $\Gamma = \text{diag}(X^TX)^{1/2}$ so $\|\Gamma w\|^2 = w^T\text{diag}(X^TX)w$ which means we are done.