So let summarise:
In a world of dragons, werewolfs, vampires, undead, magic, enchanted weapons, trolls, mystical ice-creatures, people that runs around naked when it's -30 (celcius) degrees out and doesn't freeze, no toilets what so ever you find the abscenes of rust unrealistic?
Really??
Might've been Isaac Asimov who said "You can make people believe in impossible things, but not improbable things". People tend to notice stuff that's obviously wrong based on their sphere of experience. Either steel has the properties of steel in Tamriel too, or it wouldn't be used for armor.
(Yes, I know, dwarves aren't dwarves, ebony isn't wood and glass isn't glass. But if it looks like steel and more or less behaves like steel, then it is steel, dammit...)