MGK, if I had to guess, your problem is probably the sights; I couldn't shoot my SAR-1 worth crap until I opened up the rear sight notch a little with a sharp V-file, so that I could actually see the entire front sight post. I've gotten 2.5" groups at 50 yards, both with and without optics, though not always consistently.
Having said that, also check your benchresting technique. The AK design is very sensitive to how it's benchrested and it's not an easy rifle to shoot from a rest. A fairly firm rest placed under the handguard will cause the rifle to jump off the rest when fired, when the heavy gas piston gets launched toward the rear while the bullet is still in the barrel. I've had best results with a softer bag (suede bag filled 3/4 full with corncob, sitting on top a benchrest), with the bag placed as far to the rear as possible--ideally touching the front of the magazine--and also using a rear bag under the butt. The further to the rear the rifle is supported, the more stable it will be. Also try to keep the downward pressure consistent from shot to shot.