Max Rackstraw, I hate to say it but if that motor was broken in with that rust on it? That is your bearing damage. Little bits of rust would flaked off and would get in the rear bearing.
If it were me, this is what "I" would do. I make no claims but have been racing a long time and like to get my moneys worth.

Take the motor completely apart and clean everything.
Get a new set of bearings.
Completely clean off all the rust from the crank. Use a dremel with a fine wire wheel and some type of oil. Maybe the Mugen Seiki assembly lubricant, something that wont attack the silicone in the crank.
Put the engine back together completely clean, rust free, and with the new bearings.Use the assembly oil on everything during reassembly. I bet you will be fine. I have done this several times and the motors ran flawless for the lifespan of the motor, 8-10 gallons.

Good luck.