While previous studies show that the ethnic composition of place of residence and immigrants’ socio-cultural and structural integration correlate, the theoretical linkage and the direction of the hypothesized effect remain debated. In order to explain the relationship, we test classical social capital claims about a mediation effect via social embeddedness and a direct effect via opportunities in ethnic concentrations. To preclude neighborhood-sorting effects, we employ data on refugees who arrived in the middle of the 1990s in Germany, who were randomly assigned to municipalities. We find that a higher share of foreigners in refugees’ first place of residence directly hampers their host language acquisition even long after migration, while it facilitates their chances of being employed. We further find mediation effects of co-ethnic embeddedness in ethnic concentrations hampering refugees’ host language acquisition and interactions with Germans. Thus, residential characteristics affect refugees’ long-term integration differently depending on the dimension examined.