Infant Željko spent part of his childhood in Zagreb (SR Croatia) and Pančevo (SR Serbia), before his father's job eventually took the family to the Yugoslav capital of Belgrade (SR Serbia), which is considered his hometown. He grew up with three older sisters in a strict, militaristic patriarchal household with regular physical abuse from his father. In a 1991 interview he recalled: "He didn't really hit me in a classical sense, he'd basically grab me and slam me against the floor."
In late October 1990, Ražnatović traveled to Knin (in Croatia) to meet representatives of the Republic of Serbian Krajina, a Serb break-away region that sought to remain in FR Yugoslavia, as opposed to the Croatian government that seceded. On 29 November, Croatian police arrested him at the Croatian-Bosnian border crossing Dvor na Uni along with local Dušan Carić and Belgraders Dušan Bandić and Zoran Stevanović. Ražnatović's entourage was sent to Sisak and was charged with conspiracy to overthrow the newly formed Croatian state. Ražnatović was sentenced to twenty months in jail. He was released from Zagreb's Remetinec prison on 14 June 1991. It has been claimed that the Croatian and Serbian governments agreed on a DM1 million settlement for his release.
In July 1991, Ražnatović stayed for some time at the Cetinje monastery, with Metropolitan Amfilohije Radović. His group of men, fully armed, were allowed to enter the monastery, where they served as security. Ražnatović's group traveled from Cetinje to the Siege of Dubrovnik. On his return from Dubrovnik, he was again a guest at Cetinje.
When the Croatian War of Independence broke out in 1991, the SDG was active in the Vukovar region. After the Bosnian War broke out in April 1992, the unit moved between the Croatian and Bosnian fronts, engaging in multiple instances of ethnic cleansing by killing and forcefully deporting mostly Bosniak civilians. In Croatia, it fought in various areas in SAO Eastern Slavonia, Baranja and Western Syrmia (Serbian Krajina). Ražnatović reportedly had a dispute over military operations with Krajina leader Milan Martić. In Bosnia, the SDG notably fought in battles in and around Zvornik, Bijeljina and Brčko, mostly against Bosniak and Bosnian Croat paramilitary groups, including killings of civilians.