Despite talk of a defiant 'resistance economy', the consequences may be dire if a nuclear deal with the west does not come soon

At the car repair shop on Soreana Avenue in central Tehran, Homayoon is happy to talk; after all, there is not much else to do. Business is bad, he says, as he wipes his hands with an oily cloth. It's the same for everybody.

"It's not good at all. Petrol is expensive, so people drive less, so they break down less," Homayoon says. Wearing a grubby red T-shirt advertising Axol Lubes, he laughs and shrugs when asked whether American sanctions are to blame for high prices and lack of customers.

"Of course it's sanctions!" interrupts Ali, another mechanic. "The economy is sick. My friends have small businesses like this one. Electricity is up 25%, water up 30%, petrol up 75%, business tax up, VAT up. Interest rates are 25%, so they can't borrow. They can't handle it," he says.

"I don't know about those things," says Homayoon, still smiling. "That's for the government to decide. I like the Americans. They're great. I don't care what they say at Friday prayers."

What they say at Friday prayers is less forgiving. A day earlier, Ayatollah Ahmad Jannati, one of the Islamic Republic's most venerable imams, treated the weekly televised gathering at Tehran University stadium to a stern anti-American diatribe.

With white beard, flowing robe, turban and walking stick, Jannati is every inch the mullah – a Shia fundamentalist cleric of the old school. He preaches under the slogan "Any diversion from the true path will be the path of accursed Satan".

Today, Jannati is treading the path of self-sufficiency and what the supreme leader, Ayatollah Ali Khamenei, calls the resistance economy – Iran's supposed answer to the crushing American-led oil, banking and trade embargoes.

Iran must make what it cannot buy abroad and learn the skills it needs, he says. "Workers and teachers are the backbone of our society. We should be self-sufficient in all areas of the economy and in all fields."

In Egypt and now in Ukraine, the US has toppled elected presidents and installed its "favourites", Jannati says. Fortunately, Russia has foiled America's Kiev plot. But his dire implication is plain: Iran may be next.

Inflation in Iran has come down, but is still running at around 20%. Photograph: Atta Kenare/AFP/Getty Images

At his bidding, up to 10,000 prostrate male worshippers, including Revolutionary Guards, uniformed soldiers, airmen and sailors, and rows and rows of black and white-turbaned clerics rise as one with clenched fists and chant: "Death to America! Death to Israel!" Their massed voices roll like thunder across the open-sided, scaffold-roofed stadium.

Officially speaking, the government of President Hassan Rouhani, which took office last August, maintains that the punitive UN, US and EU sanctions imposed in the row over Iran's nuclear programme, which have steadily intensified since 2006, have had little or no impact.

In particular, it says, sanctions have played no role in forcing Tehran back to the nuclear negotiating table. The talks, which resumed last week without making progress, are expected to continue in June in Vienna.

But on the streets of Tehran, and in the capital's shops, garages, markets, businesses and private homes, the story is very different. Isolated and ostracised to an unusual degree, Iran is a nation under appalling stress. The strains are telling. The ties that bind are fraying. The leadership is feeling the heat.

And if relief, in the form of a comprehensive nuclear deal with the west and a consequent lifting of sanctions, does not come soon, the political and social consequences may be far-reaching. The unique system of Islamic governance created by the late Ayatollah Ruhollah Khomeini, the Islamic Republic's éminence grise, may be tested to breaking point.

Which is why the current guardians of the system, including Khamenei, appear only too happy to let Rouhani play the role of frontman, scapegoat and potential fall-guy.

"In many ways Rouhani faces a similar situation to former president Mohammad Khatami [who was succeeded in 2005 by the hardline populist Mahmoud Ahmadinejad]," a veteran Tehran journalist said.

"Rouhani is a traditionalist, a centrist, not a reformer like Khatami. But like Khatami, he is attempting to enforce change while surrounded by hostile forces – the principlists, the Guardian Council [which safeguards the Islamic constitution], the Revolutionary Guard, conservative media, people like Jannati, even Khamenei … These people don't want a deal with the west. Like Khatami, Rouhani is doomed to fail."

Hassan Rouhani. 'At present Rouhani has the support of the political establishment at large. But if he is not seen as successful, critical voices will be heard more.' Photograph: Mohammad Berno/AP

Even more dramatically, a Tehran businessman predicted Rouhani would be Iran's last elected president if the sanctions negotiations collapsed. The next government could be a military one, he said. "That's why I think the talks will be extended beyond the 20 July deadline. Rouhani can't afford for them to fail."

Such scenarios were too pessimistic, said Mohammad Marandi, a well-connected, pro-establishment commentator and professor in the North American and European studies department of Tehran University. "At present Rouhani has the support of the political establishment at large. But if he is not seen as successful, critical voices will be heard more, and there will be a hardening of attitudes to the west," Marandi said.

"If the Americans push too hard [in the negotiations], they will either force Rouhani to be more negative and sceptical towards the west or he will lose out. To survive he would have to be much tougher."

Much depended on the attitude of Khamenei, said Amir Mohebbian, an influential rightwing writer, government insider and founder of the traditionalist Modern Thinkers party.

"The leader has said he is not optimistic about the outcome of the nuclear talks. But what he really wants is an improvement in the economic situation. The nuclear issue is only a symbol and sign of our self-sufficiency and independence. It is not itself one of the principles of the Islamic Republic of Iran," Mohebbian said.

"Khamenei has a plan A and a plan B. Plan A is a successful negotiation by Rouhani which means we can then tackle our economic problems. If the negotiation is not successful, Plan B is to say that we showed our flexibility and the problem is not on our side."

In those circumstances, Rouhani would have a choice. Accept the blame, which could be politically crippling, or abandon his attempt to normalise relations with the west and move towards closer ties with Russia and China, which is already a leading investor in Iran.

Such an outcome would be a big blow for US and British policy, Mohebbian suggested. The window of opportunity for engagement, apparently opened by Rouhani's election, would close.

High politics aside, the shine has already gone off the Rouhani presidency for many ordinary Iranians, less than a year after he came to power. His attempts to cut subsidies and public spending, which span out of control during Ahmadinejad's two terms in office, are blamed for rising taxes and utility prices.

Rouhani was ridiculed by conservative media for his failed attempt to persuade Iranians to give up a $15 (£8.90) a month per capita cash welfare subsidy introduced by his predecessor. Around 92% rejected his appeal, which was intended to boost the public coffers.

Disappointment has also been expressed at Rouhani's failure, after an initial batch of releases following his election, to free more political prisoners and address other human rights concerns, such as Iran's high rates of capital punishment.

A Guardian survey has estimated that about 800 political prisoners are being held, including opposition reformists, independent journalists, writers and lawyers – people decried as "seditionists" by Jannati. Rouhani's failure to act more decisively is seen by his reformist critics as evidence of a deeper weakness in the face of Iran's entrenched, conservative-dominated power structure.

For most people, however, the economy remains the big issue. Initial, encouraging signs of improvement after Rouhani came to office have given way to renewed gloom.

Price inflation has come down, but is still at around 20%. Unemployment, especially among the young, is around 30%, depending on whose figures are believed. The gulf between rich and poor continues to widen. And the value of the Iranian currency, the rial, has dropped sharply against the dollar, placing imported goods beyond the reach of many consumers.

Little wonder, then, that gold dealers do a roaring trade in a tumultuous haggle of shouting, arm-waving men outside Tehran's central bazaar. In the absence of sound money, they prefer precious metal.

"It all comes down to sanctions," said Majid, who runs a stall selling gold and silver buckles, badges and buttons. "Interest rates are too high, inflation is too high, the economy is depressed. We depend on the production of oil and the income from that, but we cannot get the money.

"Rouhani has made no difference. He is not in charge. He is not powerful enough to run our society or rebuild. But at least he is an improvement on his predecessor [Ahmadinejad]. That was a crazy guy. He nearly ruined Iran."

This is a reference, in part, to the hundreds of billions of dollars in oil and gas revenue that is widely believed to have been lost to corruption and mismanagement during the Ahmadinejad years.

Motjaba, another merchant, sits disconsolately in a small booth in the dark interior of the bazaar, sipping sweet tea, Persian carpets and rugs stacked to the ceilings all around him. He, too, is fed up with the government – not just Rouhani's, but all Iran's governments, dating back to the 1979 Islamic revolution. He is especially cross that rug sales to the US, potentially half his business, are blocked.

"Rouhani hasn't done anything. All these officials are the same. The people do not have any problem with America. It's a problem of government versus government. But when they are ill, they [the governing class] go to London or New York for treatment. They can afford it. We cannot. If they have a wedding, they go to Sheraton in London. We can't get visas," Motjaba said.

"There's a big difference between the rich and the poor compared with the shah's time. It's all worse since the shah's time. We do not have any hope. We are like dead people. You do not see any laughter here. Find me somebody who's laughing and I will give you a free carpet.

"I am a good Muslim. We're all good Muslims here. But I like to live. I like to have a beer. I haven't had a beer since 1979."