The effect of rust on a transformer core
All Insulators are dielectrics and visa versa.  Transformer Steel uses silicate coating as an insulation between layers. 

From what I have found in Distribution Transformers (DT's) &lt; 10MVA and > 10kV is that Dielectric Breakdown Voltage (DBV) is preceded by Partial Discharge (PD) at a lower voltage and all PD is caused by contaminants in gas or liquids and air voids in solids.

Rust is a contaminant.  So rust and any contaminants especially steel burrs and attached silicate dust from the edges is a severe cause of PD. Invisible [ppm] amounts of contaminants are the chief cause of BDV variability in oil during new oil samples.

I suggest any additive to prevent rust is necessary or an air knife.

"Further on, cutting increases the iron loss due to two
phenomena. On the one hand by modifying the magnetization
proﬁle and on the other hand due to the increase of hysteresis
loss through modiﬁcations in the micro-structure and stress
state of the material. "

An Application-Oriented Approach for Consideration of Material Degradation Effects Due to Cutting on Iron Losses and Magnetizability (PDF Download Available). Available from: https://www.researchgate.net/publication/270282285_An_Application-Oriented_Approach_for_Consideration_of_Material_Degradation_Effects_Due_to_Cutting_on_Iron_Losses_and_Magnetizability [accessed Nov 16 2017]."