Outside his clothes shop in the heart of Tehran, Ali rests in a white plastic chair looking down Freedom Street towards a hazy white-marbled monument that can scarcely be recognised through the thick smog – the capital’s iconic Azadi Tower. Freedom Street was the scene of some of the most violent clashes during the shortlived 2009 protests but now one of Tehran’s busiest thoroughfare serves instead as a barometer of the country’s economic woes.

A handsome Azeri who looks younger than his 38 years, Ali sells “women’s street clothes” – outfits on the right side of the Islamic Republic’s strict sartorial laws: headscarves, long-sleeved shirts, billowy linen trousers and chic manteaus for winter. Like almost everything on sale in Tehran nowadays, most of his stock is imported. Ali pays three times what he did for the same products 20 months ago, when “crippling” EU and US sanctions, imposed due to Iran’s disputed nuclear programme, gave rise to a collapse in the local currency, the rial. It’s still one of the world’s least valued currencies.

“I owned three stores but now I just have this one left,” he says. “In the past I imported brands like Zara and H&M from Turkey but now I must buy Chinese clothes with very bad quality.”

These are locust years for Iranian retail. Store owners have fallen victim to the powerful macroeconomic forces that have deeply affected the sanctioned petro-state. An EU oil embargo has cut crude exports by over half, denting the state’s foreign currency reserves and the means by which Iran settles its import bill. Limited or inaccessible foreign reserves means that the government offers artificially deflated dollars to importers or essential goods such as food and medicine. Without government connections, importers of less vital goods make do with the eye-watering market rate. “Handbags are not essential,” Ali acknowledges despondently.

“People aren’t buying. They either can’t afford to or they’re waiting for the economic situation to calm down before they spend,” he explains. “Rich people with connections to the government are still buying but they shop uptown.” He’s referring to the affluent, more liberal area of North Tehran.

Sanctions are only half the trouble. Eight years of maladministration – under the increasingly unpopular government of former president Mahmoud Ahmadinejad – have devastated Iran’s domestic industries and sent inflation soaring. Ahmadinejad came to power in 2005 during the beginning of a steep climb in global oil prices. The price per barrel jumped three-fold under his watch and Iran made more money than during the rest of its century-old crude export history combined.

The populist newly elected president spent this windfall transforming the Iranian economy. “Ahmadinejad flooded the economy with petrodollars. Cheap loans were given out for almost anything… Exotic fruits from places such as Egypt and Latin America were imported for the first time since the Revolution,” says Houman Dolatshahi, managing director of Tehran-based Atieh Bahar Consulting Group. “The domestic sector died, which caused a spike in the unemployment rate and the liquidity also brought inflation,” he explains. Inflation now stands at 44 per cent, year on year. Several experts put the inflation and unemployment figures even higher.

Ahmadinejad changed Iran’s – particularly Tehran’s – consumer market inexorably. Banned or heavily levied products such as iPhones, Western-branded clothes and large, status-symbol cars found their way into the market via importers with access to cheap foreign currency though government connections. But the sharp drop in the rial since the end of 2011 has exposed the folly of Ahmadinejad’s monetary policies during his first six years in office.

The few foreign multinationals operating in Iran such as Nestlé, Unilever and Tetra Pak have significantly cut back on their imports. Technology brands including LG and Samsung are importing even less. Despite the problems they still find a market. While millions of Iranians make do with cheap $10 phone handsets, the well-heeled in North Tehran have enthusiastically embraced the smartphone, particularly the Samsung Galaxy and the iPhone.

A strange sub-group of consumers has emerged out of the chaos – retail speculators. Many richer Iranians are spending money on high-spec gadgets and automobiles, goods that closely track the rial-to-dollar exchange rate, to preserve their wealth.

“Every time prices go up, business gets better,” explains a salesman of iPhones and MacBooks in Tehran’s technology mecca, Paytakht shopping centre. “Since [Iran’s new president, Hassan] Rouhani came in the exchange rate has been flat so we are selling less.” A salesman of white, black and grey Peugeots – the only colours available – says rich Iranians have bought 20 cars at a time because they have appreciated 300 per cent over the past year, giving them a far greater rate of return than investing in stocks and shares.

Speculative purchases have also given a small boost to domestic growth this year in Iran’s most traditional industry – the Persian carpet business. Ahmed, a carpet dealer in Iran’s Grand Bazaar, says the boost is largely due to rising demand domestically as uncertainty in the currency markets has prompted rich Iranians to sink their cash into carpets, a much better store of wealth than the rial.

Surrounded by millions of dollars of woven merchandise, Ahmed hands a yellow 50,000 rial (€3) note to an Afghan tea boy, who places two tiny glasses of chai onto a stool. In the top corner of his glass-panelled shop hangs an old photograph of his moustached paternal grandfather, which was taken in 1925, the same year he opened the shop his grandson now owns.

Retail tends to be a family business in Tehran, not just in the Grand Bazaar. Thousands of shops across the city are family owned. So too were the old department stores, which once attracted visitors from across the Middle East. They are now long gone – few of them survived the economic slump in the 1980s during the eight-year war with Iraq.

“It took two weavers two years to make this,” Ahmed says, briefly disappearing behind the €4,500 rug he holds above his head. “Some carpets are made from memory but detailed ones like this are made using paper maps that show every knot of silk in the design.” With €425m-worth of carpets sold by the country last year, Ahmed trades in the Islamic Republic’s biggest export, save energy. But the industry faces competition from copycats in China, Pakistan and India. “Persian carpets have weft and warp,” says Ahmed proudly, holding open a book on carpet-making to show the tiny horizontal and vertical weaves that comprise each rug. “In China they don’t have warp. They lose shape and colour after two years. It affects our export business but not our domestic business – Iranians know about the quality of carpets and they don’t buy cheap Chinese goods.” Sanctions have cut off Iran’s banking system from most of the world’s big markets, leaving Iranian firms to improvise. “We can’t sell to the US directly so we try and reach US customers by sending rugs to Mexico or to Pakistan, where they mix Iranian carpets with their own carpets,” explains Ahmed. “The biggest problem is getting the money back.”

To circumvent the banking sanctions, Iranian exporters must cut deals using intermediaries, usually Gulf Arabs, sometimes Turks, to get their cash from foreign buyers. In simple terms, Ahmed now runs his export business as follows: the foreign buyer sends money for carpets to the Dubai agent, the Dubai agent owes money in separate business to an Iranian third-party handler and the handler releases money to Ahmed. So no money enters Iran, which keeps the wider economy from growing. Worse still, the foreign agents charge often hefty fees – between 1.5 and 3 per cent – to Iranian companies to transact the deal.

Ahmed dips a sugar cube in his tea, placing it between his teeth before sipping from the glass. Iranians drink tea like this out of a habit formed around a century ago. Bazaaris back then were aghast at the indebted Shah’s decision to grant a sugar concession to colonial Belgium, in effect establishing a monopoly that sent prices rocketing.

Furious traders teamed up with their strong allies in the religious establishment, who issued a fatwa banning sugar consumption in Iran – something, perhaps, of an overreaction. The fatwa was soon overruled by a second one declaring sugar consumption was halal as long as it was not mixed with tea. The episode showed the strength of the union between traders and the clerics when either feels threatened. The Belgian sugar concession did not survive the Shah’s downfall.

That same clerical establishment now runs Iran, and bazaaris are once again putting pressure on them to fix the beleaguered economy. “I voted for Rouhani because he has good ideas for the economy,” says Ahmed. Rouhani won by a landslide in the June presidential election, campaigned on a policy of “hope and prudence”, promising the Iranian electorate that he would pursue sanctions relief, rationalise the economy and invest in domestic production.

Early signs appear promising. Iran’s new technocratic minister of industry, mining and trade, Mohammad Reza Nematzadeh, has signalled that he will seek to revive Iran’s domestic industrial production and curb the profligacy of the past. The country’s economy minister, Ali Tayyebnia, did his PhD thesis at the London School of Economics on structural inflation in Iran, something that one would imagine might help.

Rouhani is seen by many here as Iran’s best chance to get a deal from the so-far intransigent Americans on sanctions relief. His election in itself, and his selection of credible reformists from the Islamic Republic’s so-called “golden years” (1989-2005), have in itself been enough for many Iranians to see the darkest days as finally behind them.

How bazaar

Sprawling across 20 sq km, Tehran’s aptly named Grand Bazaar is the mercantile heartbeat of Iran. Goods from around the world have been traded on its site for a thousand years.

The Grand Bazaar will disappoint the orientalist as much as it will impress the capitalist. Millions of dollars are traded each day on items from fake Gucci plastic bags to $30,000 Persian carpets. Thousands of Iranians cross the country every day to visit Tehran’s bazaar to stock up on staple goods for the year.

Joined-up thinking

If the Iranian economy can be turned around (and it’s a big if) it could become a vital player in the region. Dreams of a united economic zone stretching from Turkey to Afghanistan are a long way off – trade deals don’t tend to be high on the agenda at the moment in Kabul and Baghdad, let alone Damascus. But if it were ever to change, Iran, with its strong trading traditions, would be crucial.

For a sign of what is possible, Tehran need only look west. Before the Arab uprisings Turkey had entered a four-country agreement with Syria, Lebanon and Jordan allowing residents to cross borders freely. It was no EU, but it was the start of something interesting.